INITIATION OF CORPORATE INSOLVENCY RESOLUTION PROCESS BY FINANCIAL CREDITOR(S)

[Mr. M. GOVINDARAJAN]

Financial Creditor

Section 5(7) of the Code defines the expression ‘financial creditor’ as   any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.

Financial debt

Section 5(8) of the Code defines the expression ‘financial debt’ as a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes-

• money borrowed against the payment of interest;
• any amount raised by acceptance under any acceptance credit facility or its de-materialized equivalent;
• any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
• 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;
• receivables sold or discounted other than any receivables sold on non-recourse basis;
• any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;
• 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;
•  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;
• the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause.

Initiation date

Initiation date is the date on which a financial creditor, makes an application to the Adjudicating Authority for initiating corporate insolvency resolution process.

Initiation of CIRP by Financial Creditor

Section 6 provides that where any corporate debtor commits a default, a financial creditor may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under Chapter - II of the Code.

Filing of application

Section 7 of the Code provides that 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.  In case the application is made jointly by financial creditors, they may nominate one amongst them to act on their behalf.

Same class of creditors

An application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than 100 of such creditors in the same class or not less than 10% of the total number of such creditors in the same class, whichever is less. 

Allottees

Allottees under a real estate project are considered as financial creditors.  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 10% of the total number of such allottees under the same real estate project, whichever is less.

 The financial creditor shall make an application for initiating the corporate insolvency resolution process against a corporate debtor under section 7 of the Code in Form 1.  The financial creditor shall, along with the application furnish-

• record of the default recorded with the information utility or such other record or evidence of default as may be specified;
•  the name of the resolution professional proposed to act as an interim resolution professional; and
• any other information as may be specified by the Board.

Regulation 2A of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides that the financial creditor may furnish any of the following record or evidence of default-

• certified copy of entries in the relevant account in the bankers’ book as defined in clause (3) of section 2 of the Bankers’ Books Evidence Act, 1891;
• an order of a court or tribunal that has adjudicated upon the non-payment of a debt, where the period of appeal against such order has expired.

If the applicant is an assignee or transferee of a financial contract, the application shall be accompanied with a copy of the assignment or transfer agreement and other relevant documentation to demonstrate the assignment or transfer.

Proposal for amendment to Section 7

The Board issued a consultation paper for amendment of the Code to some extent.  It is proposed to amend the Code to provide that while considering an application filed under Section 7 the Adjudicating Authority will only rely on the record of the default available with the Information Utility to determine if a default has taken place.  Such a record will be conclusive proof about the occurrence of a default.   In such limited cases, the Adjudicating Authority, on genuine reasons to be shown, may consider other evidence.

It is further proposed to amend Section 7 of the Code to clarify that while considering an application for initiation of the CIRP by the financial creditors, the Adjudicating Authority is only required to be satisfied about the occurrence of a default and fulfillment of procedural requirements for this specific purpose (and nothing more). Where a default is established, it is mandatory for the Adjudicating Authority to admit the application and initiate the CIRP.

If the above procedure is adopted the 14 days timeline is not at all required for admission of application. It is, therefore, proposed that a suitable amendment may be made to clarify the applicability of the timeline to that provision as well.

Application fee

The fee payable by the applicant under Section 7 is Rs.25,000/-. 

Form 1

Form 1 is addressed to the National Company Law Tribunal having jurisdiction to entertain the application.  The application has 5 parts-

• Part I - Particulars of Financial Creditor-

• Name of Financial Creditor;
• Date of incorporation of financial creditor;
• Identification number of financial creditor;
• Address of the Registered Office of the financial creditor;
• Name and address of the authorized person to submit its application on its behalf (proper authorization to be enclosed);
• Name and address of the person resident in India authorized to accept the service of process on its behalf (enclose authorization).

• Part II - Particulars of Corporate Debtor-

• Name of the Corporate Debtor;
• Identification Number of the Corporate Debtor;
• Date of incorporation of Corporate Debtor;
• Nominal Share Capital and paid up share capital of the Corporate Debtor and/or details of guarantee clause as per Memorandum of Application (As applicable);
• Address of the Registered office of Corporate Debtor;

• Part III - Particulars of proposed Interim Resolution Professional-

• Name, address, email address and the Registration Number of the proposed Interim Resolution Professional.

• Part IV - Particulars of Financial Debt-

• Total amount of debt granted; dates of disbursement;
• Amount claimed to be in default and the date on which the default occurred (The workings for computation of amount and days of default in tabular form)

• Part V - Particulars of Financial Debt [Documents, records and evidence of default]

• Particulars of security held, if any, the date of its creation, its estimated value as per the creditor (a copy of a certificate of registration of charge issued by the Registrar of Companies (if the corporate debtor is a company) is to be attached.
• Particulars of an order of a Court, Tribunal or Arbitral Panel, Adjudication on the default, if any (Copy of the order is to be attached)
• Record of default with the Information Utility, if any ( a copy of such report is to be attached);
• Details of succession certificate or probate or a will or letter of administration or Court decree (as may be applicable) under the Indian Succession Act 1925 (a copy should be attached);
• The latest and complete copy of the financial contract reflecting all amendments  and waivers to date (a copy is to be attached);
• A record of default as available with any Credit Information Company (a copy is to be attached);
• Copy of entries in bankers book in accordance with the Bankers Books Evidence Act, 1891 ( a copy is to be attached);
• List of other documents attached in this application in order to prove the existence of financial debt, the amount and dates of default.

Attachments to Form 1

The following documents are to be attached along with the application-

• Copies of documents referred to in the application;
• Written communication from the proposed Interim Resolution Professional as set out in Form 2;
• Proof that the specified application fees has been paid;
• Where the application is made jointly, the particulars specified in this form shall be furnished in respect of all the joint applicants along with a copy of authorization to the financial creditor to file and act on this application on behalf of all the applicants;
• Proofs of serving a copy of the application (a) to the corporate debtor, and (b) to the Board.

Copy of application to Corporate Debtor

The applicant shall serve a copy of the application to the registered office of the corporate debtor and to the Board, by registered post or speed post or by hand or by electronic means, before filing with the Adjudicating Authority.

Ascertainment of default

The Adjudicating Authority shall, within 14 days of the receipt of the application ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor.

Admission of application

If the Adjudicating Authority is satisfied that a default has occurred and the application is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application.    If the Adjudicating Authority has not ascertained the existence of default and passed an order within such time, it shall record its reasons in writing for the same

Rejection of application

If the Adjudicating Authority is satisfied that the default has not occurred or the application is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application.  The Adjudicating Authority shall, before rejecting the application, give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.

In STCI FINANCE LIMITED VERSUS MAN INFRAPROJECTS LIMITED - 2023 (3) TMI 242 - NATIONAL COMPANY LAW TRIBUNAL MUMBAI BENCH, the NCLT, Mumbai Bench - IV observed that the application has been filed on 30.03.2021 and the date of NPA and date of default is stated to be 31.03.2017 and 02.12.2016 in Part - IV of the petition. Further the date of default as per record of information utility is 31.03.2017.  In view of the present application having been filed on 30.03.2021 the NCLT held that the application is barred by limitation and reject the application.

In INNOVA PREMISES CO-OPERATIVE SOCIETY LIMITED VERSUS MARATHON NEXTGEN REALTY LIMITED - 2023 (3) TMI 241 - NATIONAL COMPANY LAW TRIBUNAL MUMBAI BENCH the Adjudicating Authority rejected the application under Section 7 since the amount claim is an operational debt and not financial debt.

Commencement date

The corporate insolvency resolution process shall commence from the date of admission of the application.

Communication of order

The Adjudicating Authority shall communicate the order admitting the application to the financial creditor and the corporate debtor.  The Adjudicating Authority shall communicate the order rejecting the application to the financial creditor.  Such order shall be communicated within 7 days or admission or rejection of application.

Declaration of Moratorium

The Adjudicating Authority on admission of application under Section 7 shall, by an order-

•  declare a moratorium for the purposes referred to in section 14;
• cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims under section 15; and
• appoint an interim resolution professional in the manner as laid down in section 16.

The public announcement shall be made immediately (within 3 days from the commencement date) after the appointment of the interim resolution professional.