Insolvency and Bankruptcy Code, 2016 (the Code) is enacted to consolidate and amend laws pertaining to insolvency and resolution. Part II of the Code deals with the Insolvency Resolution and Liquidation for 'Corporate persons'. Under this part of the code; financial creditors, operational creditors and corporate debtors can initiate corporate insolvency process.
financial creditor includes a person to whom a financial debt is owed1. And corporate person has been defined under sub section 7 of section 3 and it stipulates that corporate person includes company, limited liability partnership or any other person incorporated with limited liability. And corporate debtor means a person who owes a debt to any person2.
Section 7 gives power to financial creditor to file an application against corporate debtor. This research note will basically be discussing the grounds on the basis of which an application under section 7 can be accepted.
Financial creditor can file application against corporate debtor only when the amount of default is not less than one lakh rupees. However, the threshold limit of one lakh rupees can be increased to one crore rupees3.
There are three important ingredients to attract section 7 of the Code:
This is the most important element for initiating corporate insolvency resolution process against corporate debtor. Once the default crosses the threshold limit, an application may be filed by financial creditor(s) under section 7. Default is explained under section 3(12) of the Code and it stipulates the following:- "default means non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be".
In the case of Bank of India v. Tirupati Infra projects Ltd.4, it was held that the adjudicating authority just needs to determine whether default has occurred or not and it does not need to determine the exact amount of default. It must be noted that the said case has been challenged before the NCLAT and the same is pending.
Application under section 7(2) is complete
It is important to file a complete application. Adjudicating authority may reject the application if the application is incomplete. An applicant needs to file the application in accordance with Form 1 of the Code.
Under section 8, operational creditor needs to send notice to the other party before filing application for initiating insolvency process against corporate debtor. In the landmark case of Era Infra Engineering Ltd. v. Prideco Commercial Projects Pvt. Ltd.5, NCLAT dismissed the application because operational creditor didn't serve notice to the other party under section 8 of the Code.
On the aforementioned lines, it can be said that statutory requirements are sine qua non for initiating insolvency process. Thus, for taking recourse under section 7, application must be complete.
No disciplinary proceedings against the proposed resolution professional
There should not be any disciplinary proceedings pending against the proposed resolution professional.
NOTICE UNDER SECTION 7
The Code does not ask the applicant to provide any notice to the debtor. However, in the case of M/s Innoventive Industries Ltd. v. ICICI Bank and Anr.6, the tribunal said that it is the duty of the adjudicating authority to provide notice to the other party before admitting a case.
GROUNDS FOR REJECTION
There are various grounds on the basis of which adjudication authority is empowered to reject an application under section 7 and the same are mentioned below.
- The default has not occurred; or
- Application under section 7(2) is incomplete; Or
- Any disciplinary proceeding is pending against the proposed resolution professional.
Moreover in case of Innoventive Industries Ltd7 it was held that if the records enclosed are misleading, the application has to be rejected.
Section 7 gives liberty to financial creditor to file application against corporate debtor where default has occurred. Surprisingly, the amount of default is not very high and thus it can be said that in few scenarios, the same provision unnecessarily put threat of winding up onto the corporate debtor. Moreover, it has been observed that the compliances of the procedural requirements have been taken up very seriously by the adjudicating authority. And in few cases, application got rejected due to non compliance of the said requirements. Thus, procedural formalities must be kept in mind while filing application under section 7 of the Code.
1 Section 5(7) of the Code
2 Ibid; Section 3(8)
3 Ibid; section
4 NCLT, New Delhi Principal Bench, C.P. No. IB – 104(PB)/2017
5 Company Appeals (AT) (Ins) 31 of 2017
6 Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.