SECTION 7

INITIATION OF CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP) BY FINANCIAL CREDITOR.  

SUB-SECTION (1)

States that a person or group of people who have lent money to a company (financial creditors) can apply to the Adjudicating Authority i.e. the National Company Law Tribunal (NCLT) to start a Corporate Insolvency Resolution Process (CIRP) if the company has not repaid the borrowed money as agreed (defaulted).

NOTE:

The term 'default' needs to be understood in the context of Section 4 of the Insolvency and Bankruptcy Code. According to Section 4, which is read together with Gazette Notification S.O. 1205(E), the provisions of Part II of the Code only apply to defaults where the minimum amount of default is one crore rupees or more. Hence, to initiate a CIRP under this section, one firstly needs to approach the NCLT and the company must have defaulted on a debt of more than one crore rupees.

?Proviso No.1: says that in certain cases, where the financial creditors fall under Sections 21(6A) (a) and

21(6A) (b), the application to start a CIRP can be filed in two of the following ways:

1. Either by at least one hundred creditors in the same category, or
2. By at least 10% of the total number of creditors in that category (whichever is lesser).

Proviso No.2: adds some conditions to the application thereby stating that for financial creditors who are allottees  under a real estate project, the same application shall be filed jointly against the corporate debtor by:

1. At least one hundred people who have been allotted properties under the same project, or
2. At least ten per cent of the total number of people who have been allotted properties, whichever is smaller

?Proviso No.3: states that if an application under Section 7 of the Code is filed before the Insolvency and Bankruptcy Code (Amendment) Act, 2020 comes into effect and that application is not accepted by the

?Adjudicating Authority, needs to be changed and aligned according to Proviso no. 1 and 2 within thirty days after the Amendment Act starts (which happened on March 13, 2020) or else the application shall be deemed withdrawn

Illustration for section 7(1): A, a corporate debtor, owes financial debts to three financial creditors B, C, D and E for 40 lakhs, 34 lakhs, 22 lakhs and 12 lakhs respectively. ‘A’ made a default in payments to financial creditor ‘B’ who in turn moved an application to the Adjudicating Authority i.e. National Company Law Tribunal (NCLT) under Section 7 for initiating CIRP against ‘A’. ‘B’s’ application will not be rejected on the ground that the individual debt owed to him does not meet the default threshold under Section 4, since the total financial debt owed by ‘A’ to all three financial creditors does meet that threshold (Rs.1.08 Crore).

Sub-section (2) provides that an application by a financial creditor under Section 7 shall be by FORM 1 as prescribed under Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

Sub-section (3) lays down that along with the application, the financial creditor is required to furnish the following –

Record of the default with information utility or any other such record as the Board may specify the name of the proposed resolution professional to act as an Interim Resolution Professional and any other information that the Board may specify.

Sub-section (4) states that on the receipt of the application for CIRP by a Financial Creditor, the Adjudicating Authority, shall within fourteen days of its receipt, ascertain the existence of a debt, whether from the records of an information utility or based on other evidence as furnished by the financial creditor;

Proviso No. 1. If the existence of such debt is not ascertained and an order under sub-section (5) is passed by the Adjudicating Authority, the reasons for the same are to be recorded in writing.

Sub-section (5) (a) provides that where an Adjudicating Authority is satisfied that –

?A default has occurred;

?The application for CIRP is complete in all respects; and;

? No disciplinary proceedings are pending against the proposed resolution professional, It may by order admit the application for CIRP under Section 7.

Sub-section (5) (b) states that in the absence of any of the above three, the Adjudicating Authority may reject the application for CIRP. However, before making such an order, the Adjudicating Authority must give notice to the applicant’s financial creditor to rectify such defect within seven days of the receipt of that notice.

Sub-section (6) states that the CIRP of the corporate debtor commences from the date when the Adjudicating Authority admits the application under sub-section (5).

Sub-section (7) states that the Adjudicating Authority must communicate the order within seven days of accepting or rejecting a Section 7 application: If the application is accepted under Section 7(5)(a), the order must be communicated to both, the financial creditor as well as the corporate debtor, If the application is rejected under Section 7(5)(b), the order must be communicated to the financial creditor.

The Supreme Court of India in VIDARBHA INDUSTRIES POWER LIMITED V. AXIS BANK LIMITED,

Question of Law: Whether Section 7(5)(a) of the Insolvency and Bankruptcy Code, 2016 (“Code”), is mandatory or discretionary.

Section 7(5) (a) of the Code states that: The National Company Law Tribunal (NCLT) “may” admit an Application filed under Section 7 of the Code (“Application”), if a default has occurred; the Application is complete; and there is no disciplinary proceeding pending against the proposed resolution professional.

Supreme Court held that: Section 7(5) (a) of the Code allows the NCLT to reject an Application even if the financial creditor establishes ‘debt’ and ‘default’ on the part of the corporate debtor. That the existence of debt and default merely gives the financial creditor a right to initiate the Corporate Insolvency Resolution Process (“CIRP”) and, if ‘reasons’ are provided and justified, the NCLT has the discretion to reject such Application.

CAN A CORPORATE DEBTOR INITIATE INSOLVENCY PROCEEDINGS AGAINST ITSELF?

Yes, a corporate debtor can initiate insolvency proceedings against itself only when the Corporate Debtor has committed a “DEFAULT”.

WHO CAN FILE FOR CORPORATE INSOLVENCY?

?The Corporate Debtor himself can file for Corporate insolvency.

?A member or partner of the Corporate Debtor authorized to make an application in this regard.

?An individual who is in charge of managing the operations and resources of the Corporate Debtor.

?A person who has control and supervision over the financial affairs of the Corporate Debtor.