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INITIATION OF CIRP BY OPERATIONAL CREDITOR

March 2, 2021

By Nihit Nagpal and Anuj Jhawar

When the Corporate Debtor defaults in making payments to its creditors the process of Corporate Insolvency Resolution Process (CIRP) can be initiated against it by its creditors. The Insolvency and Bankruptcy Code, 2016 (hereafter “the Code”) provides the process for insolvency resolution process (IRP). For this purpose the government also enacted the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and  Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (hereafter “the Rules”). The Central government on March 24, 2020 notified that the minimum threshold under section 4 of the Code to initiate any proceeding of insolvency against a Corporate Debtor shall be not less than one crore rupees.[1]

Who is an Operational Creditor?

As defined in section 5(20) of the Code, an operational creditor include all person/corporation who are legally owed operational debt and include those to whom such debt has been legally assigned or transferred. Operational debt, as defined under section 5(21) of the Code, includes debts with respect to the exchange of goods or services. It also includes dues to an employee or a debt in respect of repayment of dues arising under any law, payable to the Central or State Government or any other authority.

Procedure to initiate a CIRP

Where a Corporate Debtor commits a default, an operational creditor itself may initiate CIRP with respect to such Corporate Debtor by following the steps as under:

Upon a default by the debtor the operational creditor shall send a demand notice under section 8 of the Code. Rule 5 of the Rules state that the operational creditor shall send:

  • a notice as prescribed under Form 3 of the Rules and,
  • copy of invoice demanding payment as prescribed under Form 4 of the Rules

The demand notice may be delivered to the Corporate Debtor at the registered office by hand or post with acknowledgement or electronic mail service.

Within 10 days from receiving the demand notice, the debtor shall bring to the notice of the operational creditor attested copy of repayment details or existence of any dispute.

After the expiry of 10 days if the Corporate Debtor fails to take necessary actions, then the operational creditor shall file an application for initiating a CIRP as per section 9 of the Code as under:

  • Rule 6 of the Rules specify that the CIRP against the Corporate Debtor shall be initiated as specified under From 5 of the Rules.

Under the said Form, the operational creditor shall mention all relevant details in relation to the dispute which are:

  • Particulars of the Corporate Debtor such as name, identification number, address, capital structure as per the article of association of the debtor;
  • Particulars of the proposed interim resolution professional (if proposed);
  • Particulars of the operational debt such as total debt amount, date from which it is due, amount of debt in default, date on which default occurred;
  • Additionally attach all relevant documents in support of the claims.

Before filing with the Adjudicating Authority, a copy of the application shall be served to the registered office of the Corporate Debtor.

The Adjudicating Authority shall, within 14 days of the receipt of the CIRP application, by an order—

Admit the application and communicate such decision to the operational creditor and the Corporate Debtor if,—

  • the application made is complete;
  • there is no repayment payment of the unpaid operational debt;
  • the invoice or notice for payment to the Corporate Debtor has been delivered by the operational creditor;
  • no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility;

Reject the application and communicate such decision to the operational creditor and the Corporate Debtor, if—

  • the application made under is incomplete;
  • there has been repayment payment of the unpaid operational debt;
  • the creditor has not delivered the invoice or notice for payment to the Corporate Debtor;
  • notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility;

Before rejecting an application, the Adjudicating Authority shall give a notice to the applicant to rectify the defect within 7 days from the date of receipt of such notice

The Corporate Insolvency Resolution Process shall commence from the date of admission of the application under sub-section 9 (5) of the Code.

CONCLUSION

The Operational Creditors are eligible to initiate the Corporate Insolvency Resolution Process against a Corporate Debtor when there is nonpayment of debt owed by the Corporate Debtor. The sections and rules have clearly defined the complete procedure and requirement of filing a case before NCLT under the Code for speedy resolutions.

[1] Ministry of Corporate Affairs, India, S.0. 1205(E).

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