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Procedure for filing an application as a creditor before the Hon’ble National Company Law Tribunal

Diganth Raj Sehgal

May 18, 2021

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This article is written by Madhu Ayachit who is pursuing a Certificate Course in National Company Law Tribunal (NCLT) Litigation from LawSikho.

Introduction

A creditor plays a very important role in the business of a borrower or debtor and helps it in expanding its business or carrying on its affairs. In ordinary circumstances, a creditor would advance credit in the form of cash, credit facilities, goods, or services, and the debtor would repay the credit along with interest, if any, after the debt becomes due. However, often the debtor is unable or becomes incapable to repay the dues to its creditors. When this happens, the creditor has to take legal recourse to get back its credit.

Before the enactment of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”/“Code”), the debt recovery mechanism was very much in favour of the debtors and provided only a little relief to the debtors. However, the enactment of the Code has brought a paradigm shift in the earlier mechanism of “debtor in possession” to a new mechanism of “creditor in control”.

The Code has entitled the creditors to approach the Hon’ble National Company Law Tribunal (hereinafter referred to as “Adjudicating Authorities”/“NCLT”) and file an application to initiate the corporate insolvency resolution process (hereinafter referred to as “CIRP”). As per the code, the financial creditors and operational creditors can file applications under Section 7 and Section 9, respectively, to initiate the CIRP of their corporate debtors subject to some prescribed statutory and legal requirements.

The Code exhaustively lays down a procedure, the prerequisites of the application, the appropriate form and format of the application, and additional requirements that need to be followed and fulfilled before the filing of such applications.

Who is a creditor?

A creditor is a person or an entity that advances credit in the form of a specified amount, services, or supplies to another entity. Section 3(10) of the Code defines “creditor” as a person to whom a debt is owed. The term “creditor” includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor, and a decree-holder.

The enactment of the IBC has substituted the earlier mechanism of “debtor in possession” to “creditor in control”. Therefore, a creditor can take legal recourse if it does not receive the debt amount that has become due.

For eg., ‘A Ltd.’ advances INR 30,000 to ‘B Pvt. Ltd.’ and asks it to repay the amount after 12 months. Herein, ‘A’ holds the position of a creditor and ‘B’ holds the position of the corporate debtor. Now, if ‘B’ is unable to pay the debt to ‘A’ after it has become due, ‘A’ can file an appeal to the Adjudicating Authority.

The Code enables the following creditors to file an application before the Adjudicating Authority if the corporate debtor fails to repay the debt that has become due:

(a) Financial creditor

A financial creditor is an entity whose relationship with the corporate debtor arises as a result of a financial debt. Therefore, if a debt owed by the corporate debtor falls within the ambit of “financial debt”, the person or entity to whom such debt is owed will be called a financial creditor. Section 5(7) of the Code defines a financial creditor as any entity to whom a financial debt is owed. It also includes a person to whom the financial debt has been legally assigned or transferred to.

Furthermore, financial creditors can be divided into secured and unsecured creditors.

(b) Operational creditor

An operational creditor is an entity whose relationship with the corporate debtor arises as a result of operational debt. Therefore, if a debt owed by the corporate debtor falls within the ambit of “operational debt”, the person or entity to whom such debt is owed will be called an operational creditor. Section 5(20) of the Code defines an operational creditor as a person to whom an operational debt is owed or to whom such debt is legally assigned or transferred.

Moreover, operational creditors can also be defined as creditors whose liabilities arise from the transactions related to the daily running of the business such as vendors, suppliers, employees, etc.

Application by a financial creditor (s.7)

As per Section 7 of the IBC, a financial creditor may initiate the CIRP against the corporate debtor if the corporate debtor is unable or has become incapable to pay the financial debt owed to the financial creditor.

Prerequisite(s) for a financial creditor to initiate CIRP

Following are the prerequisites for a financial creditor that need to be fulfilled before filing an application under Section 7 of the Code:

(i) Financial debt

Section 5(8) of the Code defines the term “financial debt” as a debt along with the interest that is disbursed to the debtor against the time value of money. The section also enlists the types of debts that will be included in the definition. Following are the essential components that constitute a financial debt:

(a) There should be a disbursement of the debt;

(b) The disbursement should be on the time value of money. It means that there should be some return for the debt over a period of time.

The existence of the financial debt is the first requirement for a financial creditor to file an application under Section 7 of the Code before the Adjudicating Authority.

(ii) Default

The next and the most important requirement for a financial creditor to file an application before the Adjudicating Authority is that the corporate debtor must have defaulted in the payment of the financial creditor.

Section 3(12) of the Code defines “default” as the non-payment of the whole or any part or installment of debt that has become due but has not been repaid by the Corporate Debtor. Therefore, default arises on the ground of non-payment of any installment of the principal amount as well as interest accrued thereon.

In order to ascertain the existence of a default on part of the Corporate Debtor, the Adjudicating Authority is empowered to go through the records of the information utility or any other evidence produced by the financial creditor in its favour.

The Hon’ble Apex Court in the case of Innovative Industries Ltd. v. ICIC Bank Ltd.¸ while giving a detailed description of the process for filing an application by a financial creditor observed that the default in respect of a financial creditor need not be a debt owed to the applicant financial creditor and can be in owed to any financial creditor of the Corporate Debtor.

Threshold of default

As per Section 4 of the Code, the minimum amount of default for initiating the CIRP is one lakh rupees, provided that the Central Government may specify the minimum amount of default of higher value which shall not be more than one crore rupees.

Accordingly, the Union Government vide notification dated 24.03.2020 increased the threshold of default under IBC to one crore rupees.

Therefore, a minimum default of one crore rupees is required on part of the corporate debtor for the financial creditor to file an application under Section 7 of the Code.

Form and format of the application

The Insolvency and Bankruptcy Board of India (Application to Adjudicating Authority Rules, 2016) (hereinafter referred to as “Adjudicating Authority Rules”) prescribes the format for filing an application under Section 7 of the Code.

As per Rule 4 of the Adjudicating Authority Rules, Form 1 is the prescribed form for a financial creditor to file an application before the adjudicating authority. The form has the following 5 parts:

(a) Part-I: Particulars of the applicant

(b) Part-II: Particulars of the corporate debtor

(d) Part-IV: Particulars of financial debt

(e) Part-V: Particulars of financial debt (Documents, records, and evidence of default)

Supporting documents to the application

Apart from the above Form 1, the following supporting documents and information need to be gathered and filed along with the application:

(i) The proof for the existence of the financial debt as recorded by an information utility or such other record.

(ii) The proof for the existence of the default in respect of the said financial debt as recorded by an information utility or such other record.

(iii) A written communication from the insolvency professional proposed to be appointed as the interim resolution professional (hereinafter referred to as “IRP”) in accordance with Form 2 of the Adjudicating Authority Rules.

(iv) Proof of payment of the court fee as mentioned in the Schedule of the Adjudicating Authority Rules.

(v) Demand notices or letters of communication, if any exchanged.

(vi) The document stating the authorization of the applicant if the application is being filed on behalf of the financial creditor.

(v) The document stating the authorization of the nominee if the application is being filed by more than one financial creditor.

(v) Documents showing the particulars of security held and the certificate of registration of charge.

(vi) Affidavit in support of the application in accordance with the Adjudicating Authority Rules.

(vii) Banker’s book entries and evidence under Section 2A of the Banker’s Book Evidence Act, 1891.

(viii) Master data of the corporate debtor

Additional requirements

Apart from the aforementioned requirements, the following additional requirements are also laid down under the Adjudicating Authority Rules that need to be fulfilled by the applicant:

(i) A nominee has to be selected in case of a joint application by two or more financial creditors;

(ii) A copy of the assignee or transferee agreement needs to be provided before the Adjudicating Authority in case the assignee or transferee is filing the application

(iii) The applicant has to serve the Corporate Debtor the notice regarding the filing of the application through registered or speed post.

(iv) It is favorable to file the bulky documents in electronic form.

(v) Lastly, before filing the application, the applicable provisions of the National Company Law Tribunal Rules, 2016 (hereinafter referred to as “NCLT rules”) must be duly checked and followed.

Court fee

As per the Schedule to the Rules, the financial creditor is required to pay INR 25,000 (rupees twenty-five thousand only) for the purpose of filing the application under Section 7 of the Code.

Application by an operational creditor (s.9)

As per Section 9 of the Code, an operational creditor can file an application to initiate the CIRP of the corporate debtor if the corporate debtor is unable or becomes incapable to repay the dues of the operational creditor.

Prerequisites for an operational creditor to file an application

Following are the prerequisites for an operational creditor that need to be fulfilled before filing an application before the Adjudicating Authority:

(i) Operational debt

According to Section 5(21) of the Code, an operational debt means a claim in respect of the provision of goods or services. It also includes employment or a debt in respect of the repayment of the dues arising under any law for the time being in force and payable to the Central Government, any State Government, or any local authority.

Therefore, operational debt is confined to the following four categories:

(a) Goods;

(b) Services;

(d) Government dues

(ii) Default

Accordingly, the Union Government vide notification dated 24.03.2020 increased the threshold of default under IBC to one crore rupees.

Therefore, a minimum default of one crore rupees is required on part of the corporate debtor for the operational creditor to file an application under Section 9 of the Code.

(iii) Non-existence of a dispute

The third prerequisite that needs to be fulfilled by the operational creditor before filing an application is the non-existence of a dispute between the parties to the application. It is pertinent to note that such a dispute must not be an illusory dispute but an actual one.

The Hon’ble Apex Court in the case of Mobilox Innovations Private Ltd. v. Kirusa Software Pvt. Ltd., observed that for the Adjudicating Authority to reject an application filed under Section 9 of the Code, there must be pre-existing dispute before the receipt of the demand notice or invoice. Moreover, it was also held that it does not matter whether or not there is any pending suit or arbitration proceeding in respect of the dispute. The existing dispute need not necessarily be in the form of a pending suit or arbitration proceeding.

Further, the Hon’ble NCLT, Ahmedabad in the case of Raghuvir Buildcon Pvt. Ltd. v. Ketan Construction Ltd., opined that the dispute in question should prima facie be bona fide and exist naturally. Moreover, the grounds for the existence of a dispute should not be hypothetical and misconceived.

The Hon’ble Supreme Court in the case of K.Kishan v. M/s. Vijay Nirman Co. Pvt. Ltd., held that the Adjudicating Authority is empowered to reject the application filed by an operational creditor under Section 9 of the Code.

(iv) Demand notice (S.8)

One of the important requirements for an operational creditor to file an application against the corporate debtor is the communication of demand notice. The said requirement is prescribed under Section 8 of the Code. As per Section 8(1), before filing an application under Section 9, the operational creditor has to serve the corporate debtor with a demand notice, in Form 3 of the Adjudicating Authority Rules, 2016, asking the corporate debtor to pay back the dues within 10 days.

The Hon’ble Apex Court in the case of Macquarie Bank Ltd. v. Uttam Galva Metallics Ltd., has observed that even the lawyers and advocates can issue a demand notice to the corporate debtor on behalf of the operational creditor.

The Hon’ble NCLAT in the case of M/s Krystal Integrated Services Pvt. Ltd. v. M/s Indiaontime Express, opined that if the demand notice is not served upon the corporate debtor, the operational creditor cannot file an application to initiate the CIRP against the corporate debtor.

Form and format of the application

The Adjudicating Authority Rules, 2016 prescribe the format for filing an application under Section 9 of the Code. Form 5 provided by the said rules is the prescribed form for an operational creditor to file an application before the adjudicating authority.

The form has the following 5 parts:

(a) Part-I: Particulars of the applicant.

(b) Part-II: Particulars of the corporate debtor.

(d) Part-IV: Particulars of operational debt.

(e) Part-V: Particulars of operational debt (Documents, records, and evidence of default).

Additional requirements and supporting documents for the application

Apart from the particulars mentioned in Form 5, the following documents need to be annexed to the application:

(i) A copy of the invoice or demand notice in Form 3 of the Adjudicating Authority Rules.

(ii) An affidavit stating that there is no the operational debtor has not received any notice relating to a dispute from the corporate debtor

(iii) A copy of any record with information utility which confirms that the corporate debtor has not paid the operational debt.

(iv) A copy of the certificate from the financial institutions maintaining accounts of the operational creditor which confirms that the corporate debtor has not paid the operational debt.

However, the Hon’ble Apex Court in the case of Macquarie Bank Ltd. v. Shilpi Cable Technologies, has observed that the requirement provided under Section 9(3) of the Code regarding the certificate from financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor, is not a mandatory requirement for filing the application under Section 9 of the Code.

(v) Any proof which confirms that there is no payment of operational debt by the corporate debtor; and

(vi) Written communication from the proposed insolvency professional to be appointed as the IRP in Form 2 of the Adjudicating Authority Rules. However, proposing the name of the IRP is optional and not mandatory.

[5.4] Court fee

As per the Schedule to the Rules, the operational creditor is required to pay INR 2,000 (rupees two thousand only) for the purpose of filing the application under Section 9 of the Code.

Powers of the national company law tribunal

(i) In case of an application filed by a financial creditor

As per Section 7(5) of the Code, the Adjudicating Authority is empowered to admit or reject the application after the application has been filed by the financial creditor.

However, before admitting or rejecting the application, the Adjudicating Authority is required to ensure that the application is fulfilling the following requirements within 14 days of the receipt of the application:

(i) The application must be in an appropriate form and in accordance with the additional requirements prescribed by the Code;

(ii) There is sufficient proof for the existence of a financial debt;

(iii) There is sufficient proof for the existence of a default in respect of the said financial debt on the part of the Corporate Debtor;

(iv) There are no disciplinary proceedings pending against the proposed IRP.

(ii) In case of an application filed by an operational creditor

As per Section 9(5) of the Code, the Adjudicating Authority is empowered to admit or reject the application filed by an operational creditor. However, before admitting or rejecting the application, the Adjudicating Authority is required to ensure the following things within 14 days of the receipt of the said application:

(i) The application must be in an appropriate form and in accordance with the additional requirements prescribed by the Code;

(ii) There is sufficient proof for the existence of an operational debt;

(iii) There is sufficient proof for the existence of a default in respect of an operational debt in respect of the Corporate Debtor;

(iv) The operational creditor has delivered the notice or invoice for payment to the Corporate Debtor;

(v) The operational creditor has not received any notice of dispute from the corporate debtor;

(v) There are no disciplinary proceedings pending against the proposed IRP.

Conclusion

The enactment and implementation of the Insolvency and Bankruptcy Code, 2016 has not only been beneficial to the corporate debtors but also to their creditors. Though the main objective behind its enactment was the revival and rehabilitation of the corporate debtors, the code has also provided an effective debt recovery mechanism for the financial and operational creditors as a paradigm shift can be seen in the earlier mechanism of “debtor in possession” to a new mechanism of “creditor in possession”.

References

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