Who is a Financial Creditor?

A "Financial Creditor" is defined under Section 5(7) of the IBC ;

"a person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred".

What is a Financial Debt under IBC?

In order to ascertain whether a person is a financial creditor, the debt owed to such a person must fall within the ambit of 'Financial Debt' as defined under Section 5(8) of the IBC, as below:

"a debt along with interest, if any, which is disbursed against the consideration for time value of money and includes-

a. Money borrowed against payment of interest;

b. Any amount raised by acceptance under any acceptance credit facility or its de-materialized equivalent;

c. Any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

d. 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;

e. Receivable sold or discounted other than any receivable sold on non-recourse basis;

f. Any amount raised under any other transaction, including, any forward sale or purchase agreement, having the commercial effect of borrowing;

g. 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;

h. 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."

Procedure of CIRP

The Process for Initiating the Corporate Insolvency Resolution Process (CIRP) by a Financial Creditor has been defined under Section 7 of the IBC:

"SECTION 7: Initiation of corporate insolvency resolution process by financial creditor.

(1) A financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred. 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.

(2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed.

(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.

(4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (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 sub-section (3).

(5) Where the Adjudicating Authority is satisfied that— (a) a default has occurred and the application under sub-section (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 sub-section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application: Provided that the Adjudicating Authority shall, before rejecting the application under clause (b) of sub-section (5), 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.

(6) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5).

(7) The Adjudicating Authority shall communicate— (a) the order under clause (a) of sub-section (5) to the financial creditor and the corporate debtor; (b) the order under clause (b) of sub-section (5) to the financial creditor, within seven days of admission or rejection of such application, as the case may be."

Application in NCLT

As per Section 7, a Financial Creditor can initiate proceeding against a Corporate Debtor. The process under Section 7 is reproduced herein below for kind perusal:

The Financial Creditor is required to file an application before the National Company Law Tribunal (NCLT) , along with the Demand Draft of Rs. 25,000/- in the favour of "Pay and Accounts Officer, Ministry of Corporate Affairs" payable at Delhi.

The matter after being listed and on admission will be taken for Corporate Insolvency Resolution Process (CIRP).

The Financial Creditor needs to propose an Interim Resolution Professional (IRP) in an application filed with NCLT.

Once the IRP is confirmed by the NCLT then he will act as Resolution Professional (RP). The fees payable to the IRP is initially payable by the Company (Financial Creditor). Once the IRP becomes the RP on the onset of the Resolution Process, i.e. within approximately 1-2 month of his appointment, that amount is paid back to the Financial Creditor.

Stages of CIRP

The various stages of Resolution Process are as below:

a. Publication of Notice - The RP will publish a notice in newspapers to call for filing claims against the Corporate Debtor by a stipulated deadline.

b. Processing of Claim – The RP after receiving all the claims will verify the same from the books of the Corporate Debtor.

c. Information Memorandum – Once the claims have been verified, a Memorandum containing all the information of the Corporate Debtor regarding his Assets and Liabilities will be prepared by the RP. This Memorandum will be sent out to all the Financial Creditors of the Corporate Debtor, whose claims have been accepted.

d. Meetings of COC – After sending out such memorandum, meeting of COC will be held which includes the financial creditors only of the Corporate Debtor, to decide whether the information memorandum has been correctly prepared or not.

e. Calling for Resolution Plan – The RP after formation of information memorandum will call/invite, by an advertisement in newspaper, for the resolution plans for the Corporate Debtor by the Resolution Applicants.

f. Acceptance or Rejection of Resolution Plan – After receiving the resolution plan, the RP will conduct a meeting of COC to check the Resolution plan resulting in its acceptation or rejection. If 66% of voting is done in favour of a resolution process then it will be adopted by COC.

This is then submitted before NCLT for final consent.

g. Extension if any – The time duration for the completion of the CIRP is 180 days, however, If the Resolution Plan is not accepted by the COC within 180 days then they can extend the time duration for a period of not less than 90 days.

h. Liquidation – In case where a resolution plan is neither to the satisfaction of COC nor even voted with majority voting of 66% in favour of a resolution plan coupled with the fact of lapse of CIRP period to a maximum period of 270 days then COC will opt for liquidation of such a Corporate debtor.

The liquidation process will be followed with recognition of Liquidation Estate as per the Code.

The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.