Initiation of CIRP by Operational Creditor u/s 9 of IBC, 2016

In case where, Corporate Debtor defaults in making payments to its creditors the process of Corporate Insolvency Resolution Process (CIRP) can be initiated against it by its creditors. The Insolvency and Bankruptcy Code, 2016 provides the process for Insolvency Resolution Process (IRP) and for that purpose the government also enacted the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

Operational Creditor:

Section 5(20) of the Code defines Operational Creditor as- an operational creditor include all person or corporation who are legally owed operational debt and include those to whom such debt has been legally assigned or transferred.

Operational debt is defined under section 5(21) of the Code which includes debts with respect to the exchange of goods or services. It also includes dues to an employee or a debt in respect of repayment of dues arising under any law, payable to the Central or State Government or any other authority.

Procedure of CIRP:

On March 24, 2020 the Central Government has notified that the minimum threshold under section 4 of the Code to initiate any proceeding of insolvency against a Corporate Debtor shall be not less than one crore rupees.

Upon a default by a Corporate debtor, the Operational Creditor while initiating the CIRP shall first send the demand notice under Section 8 of the Code. Also the Rule 5 of the Rules state that the operational creditor shall send a notice as prescribed under Form 3 of the Rules and a copy of invoice demanding payment as prescribed under Form 4 of the Rules.

The demand notice may be delivered to the Corporate Debtor at the registered office either by hand or post with acknowledgement or electronic mail service. The debtor, within 10 days from receiving the demand notice, shall bring to the notice of the operational creditor attested copy of repayment details or existence of any dispute.

The NCLAT in M/s Krystal Integrated Services Pvt. Ltd. v. M/s Indiaontime Express Pvt. Ltd, held that in the absence of demand notice provided to the corporate debtor, the operational creditor cannot seek to receive admissibility of his application for CIRP under Section 9 of the Code. Thus, section 8 of the Code is the first step for filing an application for CIRP by an operational creditor.

If After the expiry of 10 days the Corporate Debtor fails to take necessary actions, then the operational creditor shall file an application for initiating a CIRP as per section 9 of the Code as under:

Rule 6 of the Rules specify that the CIRP against the Corporate Debtor shall be initiated as specified under From 5 of the Rules. Under the said form the operational creditor shall mention all relevant details in relation to the dispute such as Particulars of debtor i.e. name, identification number, address, capital structure as per the article of association of the debtor;

Particulars of the proposed interim resolution professional (if proposed);

Particulars of the operational debt such as total debt amount, date from which it is due, amount of debt in default, date on which default occurred;

Additionally attach all relevant documents in support of the claims.

Before filing with the Adjudicating Authority, a copy of the application shall be served to the registered office of the Corporate Debtor. The Adjudicating Authority shall, within 14 days of the receipt of the CIRP application, by an order admit the application and communicate such decision to the operational creditor and the Corporate Debtor if,-

  • the application made is complete;
  • there is no repayment payment of the unpaid operational debt;
  • the invoice or notice for payment to the Corporate Debtor has been delivered by the operational creditor;
  • no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility;

Reject the application and communicate such decision of rejection to the operational creditor and the Corporate Debtor, if-

  • the application made under is incomplete;
  • there has been repayment payment of the unpaid operational debt;
  • the creditor has not delivered the invoice or notice for payment to the Corporate Debtor;
  • notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility;

Before rejecting an application, the Adjudicating Authority shall give a notice to the applicant to rectify the defect within 7 days from the date of receipt of such notice.

The Corporate Insolvency Resolution Process shall commence from the date of admission of the application under sub-section 9 (5) of the Code. Thereafter, all the communication shall take place from the adjudicating authority’s end only. Once the petition under is admitted by NCLT against the Corporate Debtor, the moratorium period starts. Moratorium means a period wherein no judicial proceedings for recovery, enforcement of security of interest, sale or transfer of assets or termination of essential contracts can be instituted  against the Corporate Debtor.   

The next step is appointment of Insolvency Resolution Professional (section 16). Powers of an IRP is given under Section 17 of the Code. He acts as a mediator who is managing this process. Then, NCLT shall make a public announcement of the initiation of the CIRP. As per Section 13 (2) such public announcement must be made immediately after the appointment of the interim resolution professional.

Then there is the formation of the Committee of Creditors (CoC). The IRP is entitled to select claimants for the formation of CoC. The claims against debtors are submitted by filing applications on behalf of the creditors. Financial creditors are bestowed with the right to vote in the CoC. Every voter’s count shall be in proportion to its share in the company.

Next step is the preparation of information memorandum by IRP. The relevant information either in physical or in electronic form is given in the information memorandum. This also determines the financial position of the corporate debtor.

Then resolution plan is made by creditor and submitted to IRP. Resolution Plan will then be examined and costing will be ascertained. After examining the resolution plan, approval will be taken by the CoC and such plan will then have to be passed by majority not less than 66% of the voting shares. The process till here will have to be concluded in 180 days extendable up to further 90 days.

After the approval of plan by COC it will be submitted to the adjudicating Authority by meeting all the necessary requirements. The approval of adjudicating authority is as important as the approval by CoC. With this said, as per section 14 (4) of the Code, the moratorium period will come to an end.

Further appeal can be made in the NCLAT or simply the process of liquidation shall be undergone then.

References:

Insolvency and Bankruptcy Code, 2016

https://www.mondaq.com/india/insolvencybankruptcy/1046556/initiation-of-cirp-by-operational-creditor

https://www.lexology.com/library/detail.aspx?g=2fd4a113-778a-41b6-a987-e870120199a3

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