Section 7 of IBC – Insolvency and Bankruptcy Code, 2016 : Initiation of corporate insolvency resolution process (CIRP) by financial creditor

Section 7 of the Insolvency and Bankruptcy Code, 2016- Section 7: Initiation of corporate insolvency resolution process by financial creditor. Section 7 of IBC, 2016

PDFPrint

The Insolvency and Bankruptcy Code, 2016

Part-II Insolvency Resolution and Liquidation for Corporate Persons

Chapter-II Corporate Insolvency Resolution Process

Section 7: Initiation of corporate insolvency resolution process by financial creditor.

*7. (1) A financial creditorJ1 either by itself or jointlyJ2 with 1[other financial creditors, or any other person on behalf of the financial creditor, as may be notified2 by the Central Government] may fileJ3 an application for initiating corporate insolvency resolution process against a corporate debtorJ4 before the Adjudicating Authority when a default has occurred.

3[Provided that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6A) of section 21, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less:

Provided further that for financial creditors who are allotteesJ5 under a real estate projectJ5, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent. of the total numberJ5 of such allottees under the same real estate project, whichever is less:

Provided also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission.]

Explanation.—For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtorJ2.

(2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed.

(3) The financial creditor shall, along with the application furnish—

(a) record of the default recorded with the information utility or such other record or evidence of defaultJ6 as may be specified;

(b) the name of the resolution professional proposed to act as an interim resolution professional; and

(c) any other informationJ6 as may be specified by the Board.

(4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), ascertainJ7 the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3).

4[Provided that if the Adjudicating Authority has not ascertained the existence of default and passed an order under sub-section (5) within such time, it shall record its reasons in writing for the same.]

(5) Where the Adjudicating Authority is satisfied thatJ7

(a) a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending5 against the proposed resolution professional, it mayJ8, by order, admit such application; or

(b) default has not occurred or the application under sub-section (2) is incompleteJ10 or any disciplinary proceeding is pending5 against the proposed resolution professional, it may, by order, rejectJ8 such application:

Provided that the Adjudicating Authority shallJ9, before rejecting the application under clause (b) of sub-section (5), give a notice to the applicant to rectify the defect in his application within seven daysJ9 of receipt of such notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5).

(7) The Adjudicating Authority shall communicate—

(a) the order under clause (a) of sub-section (5) to the financial creditor and the corporate debtor;

(b) the order under clause (b) of sub-section (5) to the financial creditor, 

within seven days of admission or rejection of such application, as the case may be.


Reference

*Effective from 01.12.2016.

1. Subs. by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, w.e.f. 06.06.2018, for the word “other financial creditors”.

2. Notification -S.O. 1091(E) dated 27th February, 2019, the Central Government notified following persons who may file an application for initiating CIRP against a corporate debtor before the Adjudicating Authority, 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. Ins. by the Insolvency and Bankruptcy Code (Amendment) Act, 2020, w.e.f. 28.12.2019.

4. Ins. by the Insolvency and Bankruptcy Code (Amendment) Act, 2019, w.e.f. 16.08.2019[S.O. 2953(E)].

5. Commencement of Disciplinary Proceeding-LA/010/2018, 23rd April, 2018.


Judicial Pronouncements: 

J1. The definition of Financial Debt in Section 5(8) does not expressly exclude an interest free loan. Financial Debt would have to be construed to include interest free loans advanced to finance the business operations of a corporate body. [Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd. (2021) ibclaw.in 68 SC]. If there are two borrowers or if two corporate bodies fall within the ambit of corporate debtors, there is no reason why proceedings under Section 7 of the IBC cannot be initiated against both the Corporate Debtors. Needless to mention, the same amount cannot be realised from both the Corporate Debtors. If the dues are realised in part from one Corporate Debtor, the balance may be realised from the other Corporate Debtor being the co-borrower. However, once the claim of the Financial Creditor is discharged, there can be no question of recovery of the claim twice over. [Maitreya Doshi v. Anand Rathi Global Finance Ltd. and Anr. (2022) ibclaw.in 114 SC, p37]

J2. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any Financial Creditor of the Corporate Debtor, it need not be a debt owed to the applicant Financial Creditor. [Innoventive Industries Ltd. v. ICICI Bank and Anr. (2017) ibclaw.in 02 SC, p28]

J3. Petition filed by an advocate would be maintainable, as has been held in Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd. (2017) ibclaw.in 14 SC, the said judgment would apply in the case of financial creditors as well. [Sunrise 14 A/S Denmark Vs. Ravi Mahajan (2018) ibclaw.in 28 SC]

J4. Proceedings under Section 7 can also be initiated against a corporate person in respect of guarantee to the loan amount secured by person not being a corporate person. [Laxmi Pat Surana v. Union Bank of India & Anr. (2021) ibclaw.in 53 SC].

J5. For interpretation of allottee, real estate project, threshold under proviso to Section 7(1) of IBC etc., refer Manish Kumar v. Union of India and Anr. (2021) ibclaw.in 16 SC and Pioneer Urban Land and Infrastructure Ltd. and Anr. v. Union of India and Ors. (2019) ibclaw.in 13 SC.

J6. In the case of a Corporate Debtor who commits a default of a financial debt, the Adjudicating Authority has merely to see the records of the information utility or other evidence produced by the Financial Creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is due i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the Adjudicating authority that the Adjudicating authority may reject an application and not otherwise. [Innoventive Industries Ltd. v. ICICI Bank and Anr. (2017) ibclaw.in 02 SC, p30]

J7. It is at the stage of Section 7(5), where the Adjudicating Authority is to be satisfied that a default has occurred, that the Corporate Debtor is entitled to point out that a default has not occurred in the sense that the debt, which may also include a disputed claim, is not due.[Innoventive Industries Ltd. v. ICICI Bank and Anr. (2017) ibclaw.in 02 SC, p28]

J8. Discretion of Adjudicating Authority:

  • The moment the Adjudicating Authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete. [Innoventive Industries Ltd. v. ICICI Bank and Anr. (2017) ibclaw.in 02 SC, p28].
  • The Adjudicating Authority must either admit the application under Clause (a) of sub-Section (5) or it must reject the application under Clause (b) of sub-Section (5). The statute does not provide for the Adjudicating Authority to undertake any other action, but for the two choices available. While the Adjudicating Authority and Appellate Authority can encourage settlements, they cannot direct them by acting as courts of equity. [E S Krishnamurthy & Ors. v. Bharath Hi Tech Builders Pvt. Ltd. (2021) ibclaw.in 173 SC, p24, 29-30].
  • The Adjudicating Authority may in its discretion not admit the application of a Financial Creditor filed u/s 7. Section 9(5)(i) of the IBC is mandatory in case of application filed by Operational Creditor u/s 9 of IBC. [Vidarbha Industries Power Ltd. Vs. Axis Bank Ltd. (2022) ibclaw.in 91 SC].
  • In M. Suresh Kumar Reddy v. Canara Bank & Ors. (2023) ibclaw.in 67 SC, it has been held that once NCLT is satisfied that the default has occurred, there is hardly a discretion left with NCLT to refuse admission of the application under Section 7. If the NCLT finds that there is a debt, but it has not become due and payable, the application under Section 7 can be rejected. Otherwise, there is no ground available to reject the application. The decision in the case of Vidarbha Industries (supra) cannot be read and understood as taking a view which is contrary to the view taken in the cases of Innoventive Industries (supra) and E.S. Krishnamurthy (supra). The view taken in the case of Innoventive Industries (supra) still holds good. (p10&13)

J9. Provision of removing the defects within 7 days under proviso to Section 7(5) or proviso to Section 9(5) or proviso to Section 10(4), is directory and not mandatory in nature. [Surendra Trading Company v. Juggilal Kamlapat Jute Mills Company Ltd. and Ors. [2017] ibclaw.in 08 SC, p26, also refer Pioneer Urban Land and Infrastructure Ltd. and Anr. v. Union of India and Ors. (2019) ibclaw.in 13 SC, p52]

J10. Filing of Additional document: An application to the NCLT under Section 7 cannot be compared with the plaint in a suit, and cannot be judged by the same standards, as a plaint in a suit, or any other pleadings in a Court of law. Documents filed along with the application, or later, and subsequent affidavits and applications would have to be construed as part of the pleadings. There is no bar to the filing of documents at any time until a final order either admitting or dismissing the application has been passed. The Adjudicating Authority may accept the cured application, even after expiry of seven days, for the ends of justice. [Asset Reconstruction Company (India) Ltd. v. Tulip Star Hotels Ltd. & Ors. (2022) ibclaw.in 94 SC, p49,76,62&64]

J11. Interpretation of period of limitation under IBC:



Access complete Bare Act here. To research Section and sub-section wise judgments, visit here.


Follow for daily updates:


Scroll to Top