Introduction: The Insolvency and Bankruptcy Code, 2016 (IBC, 2016), introduced to address insolvency and bankruptcy issues for corporates and individuals, plays a crucial role in the revival of distressed entities. Part II of the Code specifically focuses on insolvency resolution and liquidation of corporate persons. Financial creditors, operational creditors, and corporate debtors have the right to initiate the Corporate Insolvency Resolution Process (CIRP). In this article, we will explore the process of filing applications by financial creditors, as governed by Section 7 of the Code.
Insolvency and Bankruptcy code, 2016 received the president assent on May 28, 2016 and was made applicable in trances. The code repealed the earlier law i.e., the Provincial Insolvency Act, 1920 and the Presidency Towns Insolvency Act, 1909, and further has forced the amendment in the following enactments including:
1. Securitization and Reconstruction and Enforcement of Security Interests Act, 2002
3. Recovery of Debts due to Banks or Financial Institutions Act, 1993
The main objective of the code is revival of insolvency of various persons in the country in a time bound manner.
The Code is divided into 5 parts:
1. Part I – Preliminary
2. Part II – Insolvency Resolution and Liquidation for Corporate Persons
3. Part III – Insolvency Resolution and Bankruptcy of Individuals and Partnership Firms
4. Part IV – Regulation for Insolvency Professionals, Agencies and Information Utilities
5. Part V – Miscellaneous
Part II of the Code deals with Insolvency resolution and liquidation of corporate persons, wherein right to make an application has been given to the (i) Financial Creditors (Section 7), (ii) Operational Creditors (section 8 and 9) and (iii) Corporate Debtor (section 10).
Wherein Section 7 of the code states the following:
“A 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] may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.
Provided that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6A) of section 21, an application for initiation 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 allottees under a real estate project, 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 number of such allottees under the same real estate project, whichever is less”
Wherein rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 states that
A financial creditor, shall either by itself or jointly, make an application for initiating the CIRP against corporate debtor under section 7 of the IBC,2016 in Form 1, along with records and documents required and as specified under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
Furthermore, the minimum amount of default pertaining to which an application can be filed under IBC, 2016 is INR 1 crore.
Persons who cannot make application
According to section 11 of the Insolvency and Bankruptcy Code, 2016, the following persons are not entitled to make application under the code for initiation of CIRP:
(a) a corporate debtor undergoing a CIRP or a pre-packaged insolvency resolution process; or
(b) a financial or operational creditor of a corporate debtor undergoing a pre-packaged insolvency resolution process; or
(c) a corporate debtor having completed CIRP in the period of last 12 months of making the application; or
(d) a corporate debtor in respect of whom a resolution plan has been approved under Chapter III-A, in the period of last 12 months of making the application; or
(e) a financial creditor or a corporate debtor who has violated any terms of resolution plan which was approved 12 months before the date of making of an application under this Chapter; or
(f) a corporate debtor against whom a liquidation order has been passed.
Who is a financial Creditor?
According to Section 5 (7) of the Insolvency and Bankruptcy Code, 2016, financial creditor means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.
Wherein according to section 5 (8) of the Code,
“Financial debt means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes-
(a) money borrowed against the payment of interest;
(b) any amount raised by acceptance under any acceptance credit facility or its dematerialised equivalent;
(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;
(e) receivables sold or discounted other than any receivables sold on non-recourse basis;
(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;
(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;
(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;
(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clause (a) to (h) of this clause;”
Can homebuyers make application under IBC, 2016?
In the case of Pioneer Urban Land and Infrastructure Limited vs. Union of India the Allottees under Real Estate Project/ home buyers are Financial Creditors u/s 5(7), and hence they can initiate CIRP against the builder under IBC.
Further in case of Nikhil Mehta & Sons (HUF) & Ors. v. AMR Infrastructures Ltd., the NCLAT held that purchaser of a real estate, under ‘assured-return’ plan, would be considered as a ‘Financial Creditor’ for the purposes of IBC, 2016 and is, therefore, entitled to initiate CIRP against the builder, in case of non-payment of such ‘Assured/Committed return’ and non-delivery of unit.
NCLAT further held that the ‘debt’ in this case was disbursed against the consideration for the ‘time value of money’ which is the primary ingredient that is required to be satisfied in order for an arrangement to qualify as ‘Financial Debt’ and for the lender to qualify as a ‘Financial Creditor’, under the scheme of Code.
Timeline for completion of CIRP
According to the provisions of the code, the CIRP shall be completed within a period of 180 days from the date of commencement of CIRP with a maximum one-time extension of 90 days.
Furthermore, the code provides that in all situations including extension of time, or pendency of legal cases the CIRP shall be completed within a period of 330 days from the Insolvency commencement date.
The Supreme Court, in the matter of Arcelormittal India Pvt. Ltd. v. Satish Kumar Gupta & Ors. while held that the time limit for completion of the insolvency resolution process as laid down under Section 12 of the Code is mandatory and it cannot be extended beyond 270 days.
Section 7 of the Insolvency and Bankruptcy Code allows financial creditors to file an application for initiating CIRP against a corporate debtor when a default occurs. Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 specifies the necessary documents and records to be submitted with the application. It is important to note that the minimum default amount required for filing an application under the Code is INR 1 crore.
However, certain persons are excluded from making an application under Section 11 of the Code. These include corporate debtors undergoing CIRP or pre-packaged insolvency resolution process, financial or operational creditors of debtors undergoing pre-packaged insolvency resolution process, debtors who have completed CIRP in the past 12 months, debtors with an approved resolution plan in the past 12 months, debtors who violated terms of a resolution plan approved 12 months prior to the application, and debtors against whom a liquidation order has been passed.
A financial creditor, as defined in Section 5(7) of the Code, refers to any person to whom a financial debt is owed, including those to whom the debt has been legally assigned or transferred. The definition of financial debt in Section 5(8) encompasses various financial transactions.
Additionally, homebuyers can make applications under the Insolvency and Bankruptcy Code. In specific cases, such as assured-return plans or non-delivery of units, homebuyers qualify as financial creditors and have the right to initiate CIRP against builders.
The Code stipulates a timeline for completing the CIRP, which is 180 days from the commencement date, with a one-time extension of 90 days. However, the Supreme Court has ruled that the time limit cannot be extended beyond 270 days. The overall deadline for completing the CIRP, including any extensions or legal cases, is 330 days from the Insolvency commencement date.
Conclusion: Understanding the process of filing applications by financial creditors under the Insolvency and Bankruptcy Code is crucial for effective resolution of insolvency cases. Financial creditors play a significant role in initiating the CIRP and seeking timely resolutions. By following the provisions and timelines specified in the Code, stakeholders can navigate the insolvency resolution process with clarity and efficiency.