Initiation of corporate insolvency resolution process by financial creditor [ Section 7 ] - Insolvency Resolution And Liquidation For Corporate Persons - IBC

Initiation of corporate insolvency resolution process by financial creditor Filling of application before adjudicating authority (AA) Section 7(1) 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. Vide Notification S.O.1091(E) dated 27th February, 2019, the Central government had notified following persons, who may file an application for initiating CIRP against a corporate debtor before the Adjudicating Authority, on behalf of the Financial Creditor:- a guardian; an executor or administrator of an estate of a financial creditor; a trustee (including a debenture trustee); and a person duly authorized by the Board of Directors of a Company. The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Application by financial creditor Rule 4 . (1) A financial creditor, either by itself or jointly, shall make an application for initiating the CIRP against a corporate debtor under section 7 of the Code in Form 1, accompanied with documents and records required therein and as specified in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. (2) Where 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. (3) 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. (4) In case the application is made jointly by financial creditors, they may nominate one amongst them to act on their behalf. Relevant Case Law MANISH KUMAR VERSUS UNION OF INDIA AND ANOTHER 2021 (1) TMI 802 - SC Dated 19.01.2021 The Supreme Court held that- The term allotment under second proviso to section 7 means allotment in the sense of documented booking as mentioned in section 11(1)(b) of the Real Estate (Regulation and Development) Act, 2016. A person to whom allotment of a plot, apartment, or a building has been made is an allottee. The allottee would also include a person who acquires the allotment either through sale, transfer or otherwise. What is required is allotment qua apartments, and not promised flats as per a brochure. The default under section 7 need not be qua the applicant or applicants. Any number of applicants, without any amount being due to them, could move an application under section 7, if they are financial creditors (FCs) and there is a default, even if such default is owed to none of the applicants but to any other FC. It does not matter whether a person has one or more allotments in his name or in the name of his family members. As long as there are independent allotments made to him or his family members, all of them would qualify as separate allottees. Where the financial debt is in form of securities or deposits The First proviso of section 7(1) Provided that for the financial creditors, referred to section 21(6A) (a) and (b) , 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 Allottee under Real Estate project The Second proviso of section 7(1) Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than 1000 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 Application not admitted by the AA before insolvency and Bankruptcy code amendment Act, 2020 The Third proviso of section 7(1) Provided also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission. Explanation - For the purposes of this sub-section, 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. Filling application [ Section 7(2) ] The financial creditor shall make an application under section 7(1) in such form and manner and accompanied with such fee as may be prescribed. Encloser requirement with application [ Section 7(3) ] The financial creditor shall, along with the application furnish - (a) record of the default recorded with the information utility or such other record or evidence of default as may be specified; (b) the name of the resolution professional proposed to act as an interim resolution professional; and (c) any other information as may be specified by the Board. Record or evidence of default by financial creditor. For the purposes of section 7(3)(a) of the Code, the financial creditor may furnish any of the following record or evidence of default, namely:- (a) 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; (b) 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. Relevant Case Law SUNRISE 14 A/S DENMARK VERSUS MR. RAVI MAHAJAN 2018 (9) TMI 430 - SC dated 03.08.2018 The Supreme court held that, t h e order of admission by NCLT, which was set-aside by the NCLAT, was restored stating that FC being a foreign company need not observe the requirement of section 7(3)(a) for filing of statutory form and that the application can be filed by an advocate. Time period doe ascertainment of default by adjudicating authority [ Section 7(4) ] The Adjudicating Authority shall, within 14 days of the receipt of the application under section 7(2) , 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 under section 7(3). Provided that if the Adjudicating Authority has not ascertained the existence of default and passed an order under section 7(5) within such time, it shall record its reasons in writing for the same. Admission or Rejection application by Adjudicating Authority [ Section 7(5) ] Where the Adjudicating Authority is satisfied that- (a) a default has occurred and the application under section 7(2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application ; or (b) default has not occurred or the application under section 7(2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application: Notice to rectify the defect in the application Provided that the Adjudicating Authority shall, before rejecting the application under section 7(5)(b) , 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. Relevant Case Law M/S. SURENDRA TRADING COMPANY VERSUS M/S. JUGGILAL KAMLAPAT JUTE MILLS COMPANY LIMITED AND OTHERS 2017 (9) TMI 1566 - SUPREME COURT Dated 19.09.2017 The Supreme Court held that , th e time limit of 7 days for removal of defects in the application as provided in proviso to section 7(5), is directory and not mandatory in nature Acceptance Date will be the date of commencemnt of CIRP [ Section 7(6) ] The corporate insolvency resolution process shall commence from the date of admission of the application under section 7(5). Communication by the Adjudicating authority [ Section 7(7) ] The Adjudicating Authority shall communicate- (a) the order under section 7(5)(a) to the financial creditor and the corporate debtor; (b) the order under section 7(5)(b) to the financial creditor, within seven days of admission or rejection of such application, as the case may be. Relevant case Law FORECH INDIA LTD. VERSUS EDELWEISS ASSETS RECONSTRUCTION CO. LTD. 2019 (1) TMI 1442 - SUPREME COURT dated 22.01.2019 The Supreme Court held that under Section 7 application filed under the Code is an independent proceeding and must run its entire course, which has nothing to do with the pendency of winding up proceedings before the HC.