Introduction
Section 7, 8, 9, and 10 of the Insolvency and Bankruptcy Code, 2016 (“Code”) describe how to start a Corporate Insolvency Resolution Process (“CIRP”) against a company. Each section identifies the kind of creditor that can submit an application: A “Financial Creditor” may start CIRP under Section 7, an operational creditor may submit an application under Section 8, whereas an Operational Creditor may formally start CIRP under Section 9 of the Code, and in the event of a default, the “Corporate Applicant” (the company itself) may start insolvency proceedings against itself under Section 10.
Section 7: Initiation of corporate insolvency resolution process by the financial creditor.
Process of initiation by Financial Creditor -A Financial Creditor may sue a firm alone or in conjunction with other creditors when a corporate debtor defaults. Any other financial creditor may also be affected by the default, as per provisions under Section 7(1) of the Insolvency and Bankruptcy Code of 2016. Prescribed Fees must be paid and applications must be submitted in the prescribed manner. Information concerning the default record and the name of the resolution professional being considered for appointment as an interim resolution professional must be included in the application, under Section 7(3) of the Code. To ascertain if a default has taken place, the Adjudicating Authority (NCLT) may also consult the information utility’s records or any other proof that the financial creditor provides.
Rejection of application –
According to Section 7(5) (b) of the Code, the adjudicating authority may reject the application by issuing an order if it is satisfied that (a) there has not been a default, (b) the application under sub-Section (2) is incomplete, or (c) there is an ongoing disciplinary proceeding against the proposed resolution professional. The applicant will have seven days to correct any error before its application is rejected. The Adjudicating Authority will reject the application and notify the Financial Creditor if the defaults are not fixed.
Admission of application – Section 7(5) (a) of the Code states that the Adjudicating Authority will accept an application if it is convinced that a default has occurred. Financial creditors and corporate debtors shall get an order of admission in accordance with Section 7(7) (a) of the Code.
Commencement of corporate insolvency resolution process initiated by a financial creditor –
According to Sections 7(5) and 7(6) of the Insolvency and Bankruptcy Code of 2016, the corporate insolvency resolution process will start on the day, the application is admitted.
Section 8: Insolvency Resolution by Operational Creditor.
Initiation of Insolvency resolution by operational creditor – Operational creditors are those who provide goods and services. An operational creditor may initiate the insolvency resolution process by delivering a copy of an invoice or a demand notice to the corporate debtor, asking them to pay the amount involved in the default.
According to Section 8(1) of the Code, the operational creditor must provide the corporate debtor with a copy of the invoice and a demand notice of the unpaid operational debt in the appropriate way.
According to Section 8(2) of the Code, a “demand notice” is a notification sent to the corporate debtor by an operational creditor requesting payment of the operational debt for which the default has occurred.
Action to be taken by corporate debtor on receipt of demand notice – After receiving a copy of the invoice, the corporate debtor has ten days to respond. According to Section 8(2) (b) of the Code, he would notify the operational creditor of the electronic transfer or encashment of a cheque issued by the corporate debtor to the operational creditor if he had paid off the outstanding operational debt.
Information of the existence of dispute –
If any dispute arises it must be disclosed, and the status of any pending law suits or arbitration actions must be documented. Given that the word “includes” is used in Section 5(6) to define “dispute,” the disagreement may be based on any issue. The existence of a lawsuit or arbitration process is not required.
Thus an Operational Creditor must first issue to the Operational Debtor a “demand notice” specifying the outstanding amount and providing a deadline for settlement before starting CIRP under Section 9 of the Code
Application for initiation of CIRP by Operational Creditor.
Action on the part of the Operational Creditor
A CIRP may be initiated by an operational creditor applying to the Adjudicating Authority (NCLT) in accordance with Section 9(1) of the Code if no response is received within ten days of the date the demand notice or invoice copy was sent.
The application must be submitted in the format required by Section 9(3) of the Code and include the documents listed.
According to Section 9(4) of the Code, the operational creditor may suggest a resolution professional to act as an interim resolution professional. If there is no operational debtor’s notice of dispute and proof that the money was not received, the application for CIRP will be accepted.
However, such application will not be accepted if a notice of disagreement has been received. According to Section 9(5) (i) of the Code, the application will be accepted if (a) it is complete, (b) the unpaid operational debt has not been paid, (c) a demand notice was delivered, (d) the operational creditor has not sent a notice of dispute, and (e) there is no pending disciplinary action against the proposed resolution professional Section 9(5)(ii) of the Code states that an application shall be denied if any of these conditions are not fulfilled. The operational creditor will be notified prior to the application being rejected.
Commencement of corporate insolvency resolution process initiated by an operational creditor –
According to Sections 9(5) and 9(6) of the Insolvency and Bankruptcy Code, 2016, the corporate insolvency resolution procedure will start on the day the application is admitted.
No admission of application if demand is disputed –
The application will not be accepted at all if the demand is contested. The NCLT, the adjudicating authority, lacks the authority to decide whether a dispute is legitimate or not.
Accordingly, the Operational Creditor may apply under Section 9 of the Code to start CIRP if the company does not pay the debt within the stipulated time period following receipt of the demand notice under Section 8 of the Code.
Initiation of corporate insolvency resolution process by Corporate Debtor
In accordance with Section 10 of the Code, a corporate debtor may submit an application to the Adjudicating Authority to begin the CIRP if corporate debtor has committed a default.
Under sub-section (1), the application must be submitted in the format, with the information, and with the fee that may be specified. Along with the application, the corporate applicant must include information on (a) its books of accounts and any other documents pertaining to the designated period, and (b) the resolution professional who is being sought for appointment as an interim resolution professional.
Within fourteen days of receiving the application, the adjudicating authority must issue an order either (a) admitting the application if it is complete or (b) rejecting it if it is incomplete. With the proviso that the Adjudicating Authority must notify the applicant of any errors in his application within seven days of receiving the notification before rejecting it.
The day the application is admitted under this sub-Section (4) marks the start of the corporate insolvency resolution process.
A company can initiate insolvency proceedings against itself under this section-10 of the Code if it is facing severe financial distress and wants to undergo a corporate insolvency resolution process. This method is normally used when a company is unable to meet its financial obligations and wants to restructure its debt through a controlled process.
Status of Home Buyers under IBC
According to the Insolvency and Bankruptcy Code 2016, creditors are classified into two distinct categories: financial creditors, as delineated in Section 5(7) of the Code, and operational creditors, as specified in Section 5(20) of the Code. Financial creditors are entities that give financial support or extend loans to other firms, whereas operational creditors are those who supply goods and services to a company. Nonetheless, a significant ambiguity remained about the categorization of homeowners under the Code, creating doubt about their designation as either financial creditors or operational creditors. This uncertainty led to misunderstanding over the status of homebuyers under the Code.
Homebuyers’ plight received a lot of attention from the Supreme Court of India, especially after housing projects by Jaypee Infratech Ltd collapsed (Chitra Sharma v. Union of India 2018 SCC Online SC 874). The Hon’ble Supreme Court expressed concern that it would be a grave injustice to the homebuyers if they were put in the last category of the creditors’ list during the insolvency resolution process using the waterfall mechanism.
The Supreme Court in Bikram Chatterji Vs. U.O.I. also delivered a landmark judgment protecting the interest of distraught home buyers of Amrapali Group in Noida and Greater Noida. The Court in strong words observed that they are the victims of collusion of the statutory authorities, bankers, and the developer. The builder was granted land on lease by just paying 10% of the lease amount. The project was financed by the bankers without verifying the status of lease dues. The forensic audit proved diversion of funds by the builder to its other companies and projects. Since the home buyers were not classified into any specific category of creditors under the Code, they had no rights under the law. It was felt by the court that if in the insolvency resolution process, the home buyers are left in the last category of creditors, this would amount to gross injustice to them. The court, therefore, gave relief to the thousands of home buyers by directing NBCC to complete the remaining projects and cancelled the Builder’s registration under RERA.
The concerns of home buyers were recognised through an Amendment Ordinance, 2018 wherein home buyers have been brought within the purview of financial creditors. Being part of financial creditors, made them necessary constituent of committee of creditors (CoC) and will also have voting rights in proportionate to the share of interest in the financial debt owed by the Corporate Debtor. The court in the Jaypee Infratech Ltd’s case gave relief to the thousands of home buyers by recognising their claims under the amended definition of the Financial Creditor.
Conclusion
As the Adjudicating Authority, the National Company Law Tribunal receives all applications submitted under Sections 7, 8, 9, and 10. A CIRP, in which an Interim Resolution Professional (IRP) is designated to oversee the company’s activities and to investigate possible resolution plans, begins when the application is accepted by the NCLT under any of these provisions. The committee of creditors (CoC) chooses the best plan to restructure the company’s debt and restart operations after creditors submit their resolution plans during the CIRP.
References
1. Initiation of corporate insolvency resolution process (CIRP) by financial creditor, https://ibclaw.in/section-7-initiation-of-corporate-insolvency-resolution-process-by-financial-creditor-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corpor/
2. Insolvency resolution by operational creditor, https://ibclaw.in/section-8-insolvency-resolution-by-operational-creditor-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corporate-persons-the-insolvency-and/
3. Application for initiation of corporate insolvency resolution process (CIRP) by operational cred, https://ibclaw.in/section-9-application-for-initiation-of-corporate-insolvency-resolution-process-by-operational-creditor-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liqu/
4. Initiation of corporate insolvency resolution process by corporate applicant, https://ibclaw.in/section-10-initiation-of-corporate-insolvency-resolution-process-by-corporate-applicant-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corp/?print=pdf
https://ibbi.gov.in/uploads/legalframwork/2020-09-23-232605-8ldhg-e942e8ee824aa2c4ba4767b93aad0e5d.pdf
5. Status of Home Buyers under IBC, https://www.hammurabisolomon.in/post/journey-of-home-buyers-under-ibc#:~:text=In%20a%20recent%20ruling%20in,from%20the%20authority%20under%20RERA.
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