The Insolvency and Bankruptcy Code was enacted by the Indian legislature, to bring uniformity in the scattered bankruptcy laws of India. It is an umbrella law, which not only deals with the bankruptcy of corporations but also that of partnerships and individuals. The adjudicating power for individuals and partnerships has been given to DRT (Debts Recovery Tribunal), while that of corporations and LLPs (Limited Liability Partnerships) have been given to NCLT (National Company Law Tribunal).

Who Can File Application under IBC?

• Financial Creditor
• Operational Creditor
• Corporate Debtor

1. Financial Creditors

Under Section 5(7) of the IBC, a financial creditor is a person to whom a financial debt is owed to. Financial debt is a debt along with interest which is disbursed against the consideration for the time value of money, like a loan.

What may be considered as a financial debt?

• Money borrowed against repayment of interest.
• Money raised against any accepted credit facility.
• Money raised through instruments like bonds, notes, debentures or similar instruments.
• Any amount raised through transactions like a forward sale or purchase agreements.

It may also be noted that through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, home buyers have also been included in the definition of financial creditors.

1. Operational Creditors

Section 5(20) defines an operational creditor as any person to whom an operational debt is owed or to whom such debt has been assigned. Such debt has been defined under IBC as a claim in respect of the provision of goods or services, including employment or dues payable to any governmental authority.

Thus the difference between a financial creditor and an operational creditor is that a financial creditor is an individual whose relationship with the entity is solely based on financial contracts, such as a loan or debt security. Whereas, an operational creditor is an individual whose liabilities from the entity comes in the form of future payments in exchange for goods or services already delivered.

Application by a financial creditor

When a company or LLP defaults in repayment, the 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 can apply for initiating corporate insolvency resolution process(CIRP) against the company or LLP (In IBC say, corporate debtor) before the Adjudicating Authority(NCLT).

The following entities may be allowed to file an application

• A financial creditor, himself or jointly with other such creditors
• A govt.-notified person (any person on behalf of the financial creditor, as may be notified by the govt., like- a guardian, an executor or administrator of an estate of the creditor, a trustee, or a person duly authorised by the Board of Directors of a Company)
• Depositors (where debt is in the form of securities or deposit, an application for initiation CIRP shall be filed jointly by not less than 100 or 10% of such creditors in the same class, whichever is less)
• Class of creditors (where debt is owed to a class of creditors exceeding the number as may be specified, refer Sec. 21(6A)(b), an application for initiation CIRP shall be filed jointly by not less than 100 or 10% of such creditors in the same class, whichever is less)
• Homebuyer (application shall be filed jointly by not less than 100 of such allottees or 10% of the total number of such allottees under the same real estate project, whichever is less)

In case the application is made jointly by financial creditors, they may nominate one amongst them to act on their behalf.

Application by an operational creditor

Upon default in repayment of an operational debt, the operational creditor can apply for initiating corporate insolvency resolution process (CIRP) against the corporate debtor before the Adjudicating Authority (NCLT).

These two steps of filling of the application:

1. Issue Demand Notice to Corporate Debtor (Sec. 8): A demand notice refers to a notice delivered to a debtor by the creditor as an instrument of demanding the defaulted amount concerning the operational debt.
2. Filing of Application before NCLT (Sec. 9): After 10 days from the delivery of Demand Notice, if the creditor does not receive payment, he may file an application before the Adjudicating Authority (NCLT) for initiating a CIRP.

A minimum amount of default (for both)

According to Section 4 of the IBC, a financial creditor can apply to NCLT against a corporate debtor where the minimum amount of the default is Rs. One Lakh. However, through a notification dated 23rd March 2020, this amount was increased to Rs. One Crore.

The application for initiation of the CIRP (Corporate Insolvency Resolution Process) can be filed before NCLT bench in the jurisdiction of the Corporate Debtor’s registered office.

Application by Corporate Debtor:

Under Section 10 of IBC, a Corporate Debtor can file Application for initiation of CIRP against itself if it has committed default of Rs. 1 Lakh. 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 is required for applying Section 10.