Filing application by Financial Creditor before NCLT under Section 7 of the Insolvency and Bankruptcy Code 2016 (IBC)

CIRP
CIRP Application and withdrawal

Procedure of filing application by Financial Creditor before NCLT under Section 7 of the IBC

On occurrence of default in repayment of financial debt of a company or LLP, the financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government can file an application for initiating corporate insolvency resolution process(CIRP) against the company or LLP (In IBC say, corporate debtor) before the Adjudicating Authority(NCLT).

I. Filing of an application u/s 7

1. Person who can file an application under section 7?

1. A financial creditor either by itself or jointly with other financial creditors.
2. Govt. notified person: Any other person on behalf of the financial creditor, as may be notified by the Central Government. Following persons has been notified who may file an application for initiating CIRP on behalf of the financial creditor: –

(i) a guardian;

(ii) an executor or administrator of an estate of a financial creditor;

(iii) a trustee (including a debenture trustee); and

(iv) a person duly authorised by the Board of Directors of a Company.

3. Depositors: Where a financial debt is in the form of securities or deposits, an application for initiation CIRP shall be filed jointly by not less than 100 of such creditors in the same class or not less than 10% of the total number of such creditors in the same class, whichever is less.
4. Class of Creditors: Where a financial debt is owed to a class of creditors exceeding the number as may be specified, refer Sec. 21(6A)(b), an application for initiation CIRP shall be filed jointly by not less than 100 of such creditors in the same class or not less than 10% of the total number of such creditors in the same class, whichever is less.
5. Home Buyer: The application shall be filed jointly by not less than 100 of such allottees under the same real estate project or not less than 10% of the total number of such allottees under the same real estate project, whichever is less.

In case the application is made jointly by financial creditors, they may nominate one amongst them to act on their behalf.

Hon’ble Supreme Court in the matter of Sunrise 14 A/S Denmark Vs. Ravi Mahajan 61(IBC)01/2018 held that petition filed by an advocate would be maintainable. NCLAT in the matter of Palogix Infrastructure Private Limited Vs. ICICI Bank Limited held that a Power of Attorney holder cannot file any application u/s 7 or Sec. 9 or Sec. 10 of Code.

Gujarat High Court in the matter of Essar Steel India Ltd. Vs. RBI held that RBI is authorised to direct any banking company to initiate insolvency resolution process.

Even without resorting to CIRP against the Principal Borrower it is always open to the Financial Creditor to commence CIRP u/s 7 of the Code against the Guarantor [Bijay Kumar Agarwal vs. State Bank of India and Anr. 149(IBC)114/2020 -NCLAT] but once CIRP initiated, for same set of claim & default application u/s 7 against the Principal Borrower is admitted, the application against the Corporate Guarantor is not maintainable [M/s. SEW Infrastructure Ltd. vs M/s. Mahendra Investment Advisors Pvt. Ltd. 07(IBC)07/2020 -NCLAT]

Right to apply for insolvency does not arise out of a contract between the parties:

Hon’ble Calcutta High Court in Gouri Shankar Jain Vs. Punjab National Bank & Anr. 195(IBC)22/2019 held that right to apply for insolvency does not arise out of a contract between the parties. It is a statutory right. Section 6 of the Code of 2016 specifies the persons who may initiate CIRP in respect of a corporate debtor. In the present case, the first respondent as the secured financial creditor initiated the CIRP in respect of the company before the NCLT, Kolkata.

Further held that In a proceeding under Section 7 of the Code of 2016, the consent of the surety is immaterial when, the creditor is dealing with the principal debtor in terms of the Code of 2016. Therefore, when, the Adjudicating Authority sanctions a Resolution Plan in respect of the corporate debtor in an application under Section 7 of the Code of 2016, then, the action taken by the creditor in a proceeding under Section 7 of the Code of 2016 is involuntary. The Corporate Debtor in a proceeding under Section 7 of the Code of 2016 may stand discharged of its liability to its creditors. Such discharge being had in a proceeding for bankruptcy and insolvency, the same does not absolve the surety of the liability as has been held in Maharashtra State Electricity Board, Bombay.

 

2. Persons not entitled to make application

As per Sec. 11 of the Code, a Financial Creditors shall not entitle to make an application to initiate CIRP who has violated any of the terms of resolution plan which was approved 12 months before the date of making of an application.

 

3. Minimum amount of default

A financial creditor can file application before NCLT against a corporate debtors where the minimum amount of the default is one lakh rupees.[Sec. 4].

Note: Vide Notification No. S.O. 1205(E) dated 24.03.2020, the default limit has been increased to 1 crore rupees.

4. Application to be filed before NCLT

The application for initiation of the CIRP can be filed before NCLT bench in the jurisdiction of the Corporate Debtor’s registered office.

 

II. Application Form and documents

As per Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, an application for initiating the CIRP against a corporate debtor under section 7 of the Code in Form 1, accompanied with following documents and records:

1. record of the default recorded with the information utility or such other record or evidence of default as may be specified;

In Univalue Projects Pvt. Ltd. & Anr. Vs. The Union of India & Ors. [2020] ibclaw.in 25 HC, Calcutta High Court in the matter of order dated 12.05.2020 issued by NCLT, held that Clause (a) of sub-section 3 of Section 7 clearly states that the financial creditor shall furnish along with the application record of the default recorded with the information utility or such other record or evidence of default as may be specified. As is evident, the clause is disjunctive in nature and when the word “or” is used in drafting of positive conditions, the positive conditions separated by “or” are read in the alternative. The three categories of evidence that can be provided are as follows:

(a) record of the default recorded with the information utility;

(b) such other record;

(c) evidence of default as may be specified.

I am of the view that the legislature had no intention to extend the term “as may be specified” to all the three categories. Furthermore, on a plain reading, I do not find this to be a case of casus omissus,2 and therefore do not intend to add any punctuation mark (comma) to change the intent of the legislature. In conclusion, on a plain reading of the above provision, it is immanent that three different categories of documents are available to a financial creditor to prove proof of default by a corporate debtor. (para 46)

In the matter of Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors. [2019] ibclaw.in 03 SC it is held that apart from the record maintained by such utility, Form I appended to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, makes it clear that the following are other sources which evidence a financial debt:

1. Particulars of security held, if any, the date of its creation, its estimated value as per the creditor;
2. Certificate of registration of charge issued by the registrar of companies (if the corporate debtor is a company);
3. Order of a court, tribunal or arbitral panel adjudicating on the default;
4. Record of default with the information utility;
5. Details of succession certificate, or probate of a will, or letter of administration, or court decree (as may be applicable), under the Indian Succession Act, 1925;
6. The latest and complete copy of the financial contract reflecting all amendments and waivers to date;
7. A record of default as available with any credit information company;
8. Copies of entries in a bankers book in accordance with the Bankers Books Evidence Act, 1891. (para 32)

Further the High Court in Univalue Projects Pvt. Ltd. (Supra) held that all eight classes of documents enumerated under Part V of Form-1 appended to the AA Rules, 2016 have been held by the Supreme Court to be ‘other sources which evidence a financial debt’. On a close due diligence of the various provisions above, including section 7 of the IBC, 2016 read with Rule 4 of the AA Rules, 2016 and Form-1 therein, and regulation 8 of the CIRP Regulations, 2016, observations of the Supreme Court in paragraph 32 (provided above), it becomes crystal clear that apart from the financial information of the IU, eight classes of documents can be considered to be sources that evidence a “financial debt”.

2. the name of the resolution professional proposed to act as an interim resolution professional;

3. where the applicant is an assignee or transferee of a financial contract, the application shall be accompanied with a copy of the assignment or transfer agreement and other relevant documentation to demonstrate the assignment or transfer.

The applicant shall dispatch forthwith, a copy of the application filed with the Adjudicating Authority, by registered post or speed post to the registered office of the corporate debtor.

The Adjudicating Authority has no jurisdiction to direct the Corporate Debtor to deposit any amount to certain corpus or with regard to maintenance which may not be a subject matter of application under Section 7 NCLAT in re Vipul Ltd vs M/s. Vipul Greens Residents Welfare Association.

 

III. Acceptance or rejection of the application

The Adjudicating Authority (NCLT) shall, within 14 days of the receipt of the application under Section 7, ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor. Where the Adjudicating Authority is satisfied that:

• a default has occurred and
• the application is complete, and
• there is no disciplinary proceedings pending against the proposed resolution professional,

it may, by order, admit such application;

OR

• default has not occurred or
• the application is incomplete or
• any disciplinary proceeding is pending against the proposed resolution professional,

it may, by order, reject such application.

The Adjudicating Authority shall, before rejecting the application, give a notice to the applicant to rectify the defect in his application within 7 days of receipt of such notice from the Adjudicating Authority.

Hon’ble Supreme Court in re Surendra Trading Company Vs. Juggilal Kamlapat Jute Mills Company Ltd. & Others 57(IBC)03/2017 held that the time limit prescribed in IBC, 2016 for admitting or rejecting a petition or initiation of CIRP under proviso to sub-sec. (5) of Sec. 9, is directory. The same view has been taken by NCLAT under section 7 in the matter of Techno Electric & Engineering Co. Ltd. Vs. McLeod Russel India Ltd. 161(IBC)126/2020.

If the earlier application u/s 7 was dismissed for non-prosecution, it was always open to the Respondent to file fresh application u/s 7-Venus Sugar Ltd. Vs. SASF 02(IBC)02/2020 -NCLAT. If a debt amount is disputed & the amount is more than Rs. 1 Lakh, application u/s 7 is maintainable & exact amount of claim will be considered at the stage of the CIRP- Mr. A. Maheshwaran Vs. Stressed Assets Stabilization Fund & Anr. – NCLAT. NCLAT in the matter of Karan Goel Vs.M/s Pashupati Jewellers & Anr – NCLAT held that merely because a suit has been filed by the Appellant & pending, cannot be a ground to reject the application under Sec. 7 of the Code. Pre-existing dispute cannot be a subject matter of Sec. 7, though it may be relevant u/s 9. In the matter of Mr. Vineet Khosla Shareholders and (ex) Director Margra Industries Ltd. Vs. Edelweiss Asset Reconstruction Company Limited NCLAT held that the AA at the stage of admission of Application u/s 7 is not required to consider if or not Resolution for a given Company would be possible or not & whether or not it would be possible to keep it a going concern–NCLAT.

Forensic Audit

In the matter of Allahabad Bank Vs. Poonam Resorts Limited [2020] ibclaw.in 100 NCLAT, NCLAT held that IBC Code does not envisage a pre-admission enquiry in regard to proof of default by directing a forensic audit of the accounts of the Financial Creditor, Corporate Debtor or any financial institution and noted following points:

• The dictum of law propounded by the Hon’ble Apex Court in Innoventive Industries Limited v. ICICI Bank and Anrr, is loud and clear. The Adjudicating Authority cannot travel beyond the letter of law and the dictum of the Hon’ble Apex Court.
• The satisfaction in regard to occurrence of default has to be drawn by the Adjudicating Authority either from the records of the information utility or other evidence provided by the ‘Financial Creditor’.
• The Adjudicating Authority cannot direct a forensic audit and engage in a long drawn pre-admission exercise which will have the effect of defeating the object of the ‘I&B Code’.
• If the ‘Financial Creditor’ fails to provide evidence as required, the Adjudicating Authority shall be at liberty to take an appropriate decision.
• If the application is incomplete, it can return the same to the ‘Financial Creditor’ for rectifying the defect. This has to be done within 7 days of the receipt of notice from the Adjudicating Authority.
• However, the Code does not envisage a pre-admission enquiry in regard to proof of default by directing a forensic audit of the accounts of the ‘Financial Creditor’, ‘Corporate Debtor’ or any ‘financial institution’. Viewed thus, the impugned order cannot be supported. Application under Section 75 of the Code on behalf of the ‘Corporate Debtors’ cannot be permitted to frustrate the provisions of the Code when the matter is at the stage of admission.
• Section 75 is a penal provision which postulates an enquiry and recording of finding in respect of culpability of the Applicant regarding commission of an offence. The same cannot be allowed to thwart the initiation of CIRP unless in a given case forgery or falsification of documents is patent and prima facie established.

 

 

IV. Initiation & Commencement of CIRP

Initiation date of CIRP means the date on which a financial creditor, corporate applicant or operational creditor, as the case may be, makes an application to the Adjudicating Authority for initiating CIRP[Sec. 5(11)] and the CIRP shall commence from the date of admission of the application.

VI. Communication of the Order

The Adjudicating Authority shall communicate within 7 days of admission or rejection of the application:

• To the financial creditor and the corporate debtor, in case of admission
• to the financial creditor, in case of rejection.

 

VII. Judicial pronouncements

1. Agreement of Consortium is Agreement between the Banks and the Inter-se Agreement between Financial Creditors will not override Section 7-Oriental Bank of Commerce vs. M/s Ruchi Global Limited – NCLAT.

2. The AA under the Code is not a Court of Law & it does not decide money claim or Suit, it can only admit or reject the application filed under IBC – Hardeep Singh Sawhney Vs. Sawhney Builders Pvt. Ltd. – NCLAT.

3. The quantum of payable debt is concerned, same does not fall for consideration of the Adjudicating Authority at the stage of admission of the application u/s 7-Mr. Gouri Prasad Goenka Ex-Chairman of NRC Limited Vs. Punjab National Bank-NCLAT.

4. The Adjudicating Authority is not a Civil Court to decide the breach of the contract between the parties – M/s Saregama India Limited Vs. M/s Home Movie Makers Private Limited – NCLAT.

5. Only because the person receiving notice at the address of the Corporate Debtor does not put designation by itself is no reason to straight away dismiss the application of the Financial Creditor-IL&FS Financial Services Ltd Vs. Emerald Lands (India) Pvt. Ltd.-NCLAT.

6. If any Corporate Guarantee is given against the provisions of the Companies Act, it is not open to any Shareholder, Director or MD to raise such issue in petition u/s 7 of the Code– Padmaiah Vuppu Vs. Reliance Capital AIF Trustee Company Pvt. Ltd. & Ors – NCLAT.

7. Application u/s 7 or 9 or 10 relates to initiation of the CIRP. It is neither a litigation nor a money suit or money claim, the question of additional counter & additional documents does not arise – M/s. Smartron Indian Private Limited Vs. M/s. ZTE Corporation – NCLAT.

8. If application is not dispose off by AA within one year & AA has been allowed for adjournment again and again, appellant can approach NCLAT & NCLAT can direct to AA for pass such order in such time – State Bank of India Vs. Sri Lakshmikantha Spinners Ltd – NCLAT.

9. The Corporate Guarantees given by the Guarantor can be invoked only In the event of a default on the part of the Principal Borrower – Export Import Bank of India Vs. CHL Limited – NCLAT.

10.  Once for same claim the CIRP is initiated against one of the Corporate Guarantor after such initiation, the Financial Creditor cannot trigger CIRP against the other Corporate Guarantor(s), for the same claim amount (debt)-Dr. Vishnu Kumar Agarwal Vs. M/s. Piramal Enterprises Ltd.-NCLAT.

Read more: What is Default, Who is Financial Creditor and what is financial debt.