Corporate Insolvency Resolution Process (CIRP) under IBC – Key Steps | Requirements

3. Prerequisites for Initiating Insolvency Resolution Process

3.1 By Financial Creditor (Section 7)

A financial creditor is defined under section 5(7) of the IBC as any person to whom a financial debt is owed and includes a legal assignee/transferee. The only prerequisite for initiating insolvency resolution process for the financial creditor under section 7(1) of IBC, 2016, is that a default has occurred in respect of repayment of a financial debt of not less than Rupees one Crore. For the purpose of section 7(1), 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 debtor. A financial creditor can be secured or unsecured. The IBC does not make a distinction between secured and unsecured FCs for the purpose of initiating a CIRP of a CD. The financial creditor has to make an application in the form prescribed under the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 with a fee ` 25,000 as prescribed by Rule 10(3) of the said Rules, with following information and documents:

• particulars or each financial creditor making the application;
• particulars of corporate debtor;
• particulars of proposed interim resolution professional;
• particulars of financial debt;
• particulars of security including certificate of registration of charge or order of any court or tribunal;
• default recorded with information utilities;
• copy of latest financial contract;
• record of default with credit information company;
• copy of entry as per the Bankers Books Evidence Act; and
• consent of interim resolution professional in the form prescribed by the Rules.

Section 7 of the Code, which provides for initiation of CIRP by financial creditors does not stipulate service of any notice on the corporate debtor before initiation of CIRP. The rationale for not providing notice to the corporate debtor is that having borrowed the funds the corporate debtor is aware of repayment schedule and if it is unable to pay on due date, the default committed is to the knowledge of the corporate debtor. However, Rule 4(3) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provides that the Financial Creditor shall dispatch a copy of the application by registered post or speed post or by hand or by electronic means to the registered office of the corporate debtor and to the Board before filing with the Adjudicating Authority . The question of service of notice to the corporate debtor in an application filed under section 7 of the Code was considered by the Calcutta High Court in the case of Sree Metaliks Limited v. Union of India and the High Court held that NCLT and NCLAT are constituted under the provisions of the Companies Act, 2013 and the procedure before the NCLT and NCLAT is guided by section 424 of the Companies Act, 2013. In terms of section 424 the NCLT and NCLAT are required to adhere to the principles of natural justice above anything else and the section allows NCLT and NCLAT to regulate their own procedure. The Court therefore, held that before passing an order for initiation of CIRP, the corporate debtor is entitled to an opportunity of being heard.

3.2 By Operational Creditor (Section 9)

An operational creditor is defined under section 5(20) of the IBC as any person to whom an operational debt is owed and includes a legal assignee/transferee. An “operational debt” is defined in section 5(21) as a claim in respect of the provision/supply of goods or services to the CD including employment or a debt in respect of payment of dues arising under any applicable law and payable to the Central Government, any State Government or any local authority. An operational creditor may on occurrence of default deliver a demand notice or invoice demanding payment of unpaid operational debt with copy of an invoice, demanding payment of the amount involved in the default to the corporate debtor in the form prescribed in Form 3 under Rule 5(1)(a) the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 with a fee of ` 2000 as prescribed by Rule 10(3) of the said Rules. Form 3 for demand notice specified by the Regulations require following particulars of operational debt to be stated in the Notice:

• amount of debt;
• amount of debt which is in default;
• particulars of security held, if any;
• details of retention of title arrangement, if any;
• records of default with information utility;
• provision of law under which debt is due.

The Corporate Debtor has to respond to the Notice within ten days and may deny its liability on account of pendency of any dispute or suit or arbitration proceeding filed before the receipt of such notice or invoice. After expiry of 10 days from the date of delivery of notice if the operational creditor does not receive any payment or notice of dispute the operational creditor may file an application before the adjudicating authority for initiation of corporate insolvency resolution process under section 9 of the IBC Section 8 of the Code provides for Notice of Demand by operational creditors with the copy of unpaid invoice issued to the Corporate Debtor. The form of notice is prescribed by Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Section 8(2)(a) of the Code, provides that the Corporate Debtor shall within a period of 10 days of receipt of Demand Notice or copy of invoice, bring to the notice of the operational creditor, existence of dispute or record of pendency of a suit or arbitration proceedings filed before the receipt of such notice. On plain reading of this section, it appears that dispute is pending and suit or arbitration proceeding in respect of dispute is also pending before the receipt of notice or invoice. In other words, this provision in section 8(2)(a) could be interpreted to mean that if dispute is pending but no arbitration or suit is filed, it is no defense to the notice sent by operational creditor. This view was considered by the Supreme Court in the case of Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. The Supreme Court held that if the application for initiation of CIRP by operational creditor is otherwise complete, the adjudicating authority must reject the application under section 9(5)(ii)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is not necessary that a suit or arbitration proceeding is pending in relation to the dispute before receipt of notice. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application – A “dispute” is said to exist, so long as there is a real dispute as to payment between the parties that would fall within the inclusive definition contained in Section 5(6).

3.3 By Corporate Debtor (Section 10)

A corporate applicant is defined in section 5(5) of the IBC as:

• the CD;
• a member or partner of the CD who is authorized to make an application for a CIRP under the constitutional document of the CD;
• an individual in charge of managing the operations and resources of the CD; or
• a person who has control and supervision over the financial affairs of the CD.

Where a Corporate Debtor has committed a default, the corporate applicant of such Corporate Debtor can voluntarily file an application for initiation of Corporate Insolvency Resolution Process (CIRP) with the adjudicating authority, with following documents:

• the information relating to its books of account and such other documents for such period as may be specified;
• the information relating to the resolution professional proposed to be appointed as an interim resolution professional; and
• the special resolution passed by shareholders of the corporate debtor or the resolution passed by at least three-fourth of the total number of partners of the corporate debtor, as the case may be, approving filing of the application.

The Application has to be made in the form prescribed in Form 6 under Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 with a fee of ` 25,000 as prescribed by Rule 10(3) of the said Rules. The Corporate Applicant has to furnish the documents specified in Form 6 and documents and records specified in the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The adjudicating authority is required to admit the application within 14 days if it is complete and no disciplinary proceeding is pending against the proposed Interim Resolution Professional. The Application is to be rejected if it is incomplete or any disciplinary proceeding is pending against the proposed Interim Resolution Professional. Further, it might be rejected if the resolution process is being triggered to defraud creditors or to exploit the benefit of moratorium. Section 11 of the Code specifies the persons who are not entitled to make the application, as under:

• a corporate debtor undergoing a corporate insolvency resolution process; or
• a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application; or
• a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or
• a corporate debtor in respect of whom a liquidation order has been made.

Explanation– For the purposes of this section, a corporate debtor includes a corporate applicant in respect of such corporate debtor.

6. Relevant Provisions, Rules and Regulations

• Provisions relating to CIRP by financial creditors or operational creditors or the corporate debtor itself are contained in Chapter II of Part II under Sections 6 to 32 of the Code.
• The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provide for the procedure of filing application to adjudication authorities for CIRP. The Forms in which the applications are to be filed including the documents to be attached to the Application are specified by the above Rules.
• The IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 specify the procedural steps to be intaken in a CIRP and for consideration and approval of Resolution Plan submitted for Insolvency Resolution. The Regulations contain the provisions for public announcement, proof of claims, committee of creditors, meetings of the committee, voting by the committee, conduct of corporate insolvency resolution process, insolvency resolution process costs and resolution plan.
• The IBBI has also specified the regulations for other purposes such as regulation of insolvency professionals, agencies and information utilities.

7. Application to Adjudicating Authority – Formats for Application

The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, prescribes various forms for application as under:

• Form 1 (Sub-rule (1) of Rule 4) – Application by financial creditor to initiate corporate insolvency resolution process under the Code (Annexure I).
• Form 2 (Sub-rule (1) of Rule 9) – Written communication by proposed interim resolution professional (Annexure II).
• Form 3 [Clause (a) of rule 5(1)] – Form of Demand Notice/invoice/demanding payment under the IBC 2016. (Annexure III).
• Form 4 [Rule 5(1)(b)] – Form of Notice with which invoice demanding payment (Annexure IV).
• Form 5 [Rule 6(1)] – Application by operational creditors to initiate corporate insolvency resolution process under the Code (Annexure V).
• Form 6 [Rule 7(1)] – Application by corporate applicant to initiate corporate insolvency resolution process under the Code (Annexure VI).