This article is written by Shivank Verma, a final-year student of law at Hidayatullah National Law University. The author gives an overview of Section 7 of the Insolvency and Bankruptcy Code, 2016 and its various aspects.

This article has been published by Sneha Mahawar.​​ 

Introduction

Section 7 of the Insolvency and Bankruptcy Code, 2016 is located in Chapter II of Part II which deals with the Insolvency Resolution Process for Corporate Persons (hereinafter “CIRP”). CIRP proceedings against a corporate debtor can be initiated either by a Financial Creditor (Section 7), Operational Creditor (Section 9), or a Corporate Applicant (Section 10). Section 7 deals with the requirements and procedures to be followed by a Financial Creditor while initiating CIRP against a corporate debtor.

Who is a Financial Creditor

A financial creditor is defined in Section 5(7) of the Code to mean a “person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.” Financial debt is further defined in Section 5(8) of the Code to mean a debt along with interest, if any, which is disbursed against the consideration for the time value of money. The sub-section also provides an illustrative and non-exhaustive list of examples that constitute a financial debt, however, for the purposes of this article, it is not necessary for us to go into each of them.

Overview of Section 7

Sub-section (1)

Section 7(1) provides that a financial creditor, either by itself or jointly with other financial creditors, can file an application for CIRP against a corporate debtor before the Adjudicating Authority when a default has occurred.

Before we dwell into the provisos of this sub-section, two minor points may be clarified. First is that the Adjudicating Authority being referred to here is the National Company Law Tribunal constituted under Section 408 of the Companies Act, 2013. Second is that the term ‘default’ has to be interpreted in light of Section 4 of the Code. Section 4 [read with notification Gazette Notification S.O. 1205(E)] of the Code clarifies that Part II of the Code applies in relation to only those defaults where the minimum amount of default is one crore rupees. Therefore, it is necessary for initiating a CIRP under this section that the corporate debtor has committed a default of more than one crore rupees.

Application by a class of creditors

The first proviso to the sub-section provides that for the financial creditors that are referred to in Sections 21(6A)(a) and 21)(6A)(b), an application for CIRP shall be filed either by –

1. at least one hundred creditors in the same class or 
2. at least ten percent, whichever is less, of the total number of creditors in that class.

Sections 21(6A)(a) and 21(6A)(b) talk about those financial creditors where the financial debt owed to them is in the form of securities or deposits in whose respect a trustee or agent is authorised to act as a representative of such financial creditors, or is where the financial debt is owed to a class of creditors exceeding the number as may be specified except in cases where such debt is extended as part of a consortium arrangement or syndicated facility.

Application by allottees under a real estate project

By virtue of the Insolvency and Bankruptcy Code (Amendment) Act, 2018, an explanation was added to clause (f) of Section 5(8) of the Code, which had the effect of bestowing upon the allottees under a real estate project the status of financial creditors. Such allottees, therefore, are also entitled to file an application under section 7 to initiate CIRP against the corporate debtor. However, the second proviso lays down certain restrictions with respect to their application. It specifies that such an application is to be filed only either by –

1. at least one hundred allottees under the same project or
2. At least ten percent of the total number of allottees, whichever is less.

The third proviso states that where an application under Section 7 of the Code is filed before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020 and such application is not admitted by the Adjudicating Authority, the same is to be modified within thirty days of the commencement of the said Act (Note – the amendment Act came into force on March 13, 2020) to comply with the first and second provisos failing which the application will be deemed to be withdrawn.

Explanation to Sub-section (1) – ascertaining default

The explanation clarifies that default under this sub-section includes a default in respect of a financial debt owed not only to the financial creditor who is making the application under Section 7 but also to other financial creditors.

To understand this, let us take an example. Assume that X, a corporate debtor, owes financial debts to three financial creditors A (to the tune of Rs. 20 lakhs), B (to the tune of Rs. 35 lakhs) and C (to the tune of Rs. 48 lakhs). A makes an application to the National Company Law Tribunal under Section 7 for initiating CIRP against X. His application will not be rejected on the ground that the individual debt owed to him does not meet the default threshold under Section 4, since the total financial debt owed by X to all the three financial creditors does meet that threshold (Rs. 1.03 crore).

At this point, it is also pertinent to mention that while this explanation allows the financial creditors to include the defaults of other financial creditors while making a Section 7 application, he cannot include the debts owed to the operational creditors within the default amount. One of the reasons for the same is that with respect to operational debts, there are other requirements that need to be fulfilled, including sending a demand notice or an invoice to the corporate debtor while also ensuring that there is no dispute as to the existence of such debt. These requirements do not exist with respect to an application under Section 7.

Sub-section (2)

Sub-section (2) provides that an application by a financial creditor under Section 7 shall be in such form and manner as may be prescribed.

In respect of this, the Central Government has notified the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 prescribing the form and manner in which an application under Section 7 is to be made. Specifically, Rule 4 provides that a financial creditor shall make an application under Section 7 of the Code in Form 1, accompanied by such documents and records that are required therein. Form 1 of the Rules prescribes the manners and particulars to be given along with the application –

“APPLICATION BY FINANCIAL CREDITOR TO INITIATE CORPORATE INSOLVENCY RESOLUTION UNDER CHAPTER II OF PART II

[Date]

To,

The National Company Law Tribunal

[Address]

From,

[Names and addresses of the registered offices of the financial creditors]

In the matter of [name of the corporate debtor]

Subject: Application to initiate corporate insolvency resolution process in the matter of [name of the corporate debtor] under the Insolvency and Bankruptcy Code, 2016

Madam/Sir,

[Names of the financial creditor(s)], hereby submit this application to initiate a corporate insolvency resolution process in the matter of [name of corporate debtor]. The details for the purpose of this application are set out below:

Part-I

Particulars of Applicant

1. Name of the Financial Creditor
2. Date of Incorporation of Financial Creditor
3. Identification Number of Financial Creditor
4. Address of the Registered Office of the Financial Creditor
5. Name and Address of the person authorised to submit an application on its behalf (authorisation to be enclosed)
6. Name and Address of person resident in India authorised to accept the service of process on its behalf (authorisation to be enclosed)

Part II

Particulars of the Corporate Debtor

1. Name of the Corporate Debtor
2. Identification Number of Corporate Debtor
3. Date of Incorporation of Corporate Debtor
4. Nominal share capital and the paid-up share capital of the corporate debtor and/or details of guarantee clause as per Memorandum of Association
5. Address of the Registered Office of the Corporate Debtor

Part III

Particulars of the Proposed Interim Resolution Professional

1. Name, Address, Email Address and the Registration Number of the Proposed Interim Resolution Professional

Part IV

Particulars of Financial Debt

1. Total Amount of Debt granted and the date of disbursement
2. Amount claimed to be in default and the date on which the default occurred (the workings for computation of such amount and days of default to be attached in tabular form)

Part V

Particulars of Financial Debt [Documents, Records and Evidence of Default]

1. Particulars of security held, if any, the date of its creation, and its estimated value as per the financial creditor. If the Corporate Debtor is a company, the certification of registration of charge issued by the Registrar of Companies is also to be attached
2. Particulars of an order of a court, tribunal, or arbitral panel adjudicating on the default, if any (copy of such order to be attached)
3. Record of default with the Information Utility, if any (copy of such record to be attached)
4. Details of succession certificate, the probate of a will, letter of administration or court decree (as is applicable), under the Indian Succession Act, 1925 (copy to be attached)
5. The latest and complete copy of the financial contract reflecting all amendments and waivers to date (copy to be attached)
6. A record of default as available with any credit information company (copy to be attached)
7. Copies of entries in a Bankers Book in accordance with the Bankers Book Evidence Act, 1891 (copy to be attached)
8. List of other documents attached to the application in order to prove the existence of a financial debt, the amount, and the date of default

I, hereby certify that, to the best of my knowledge, [name of proposed insolvency professional], is fully qualified and permitted as an insolvency professional in accordance with the Insolvency and Bankruptcy Code, 2016 and the associated rules and regulations.

[Name of the financial creditor] has paid the requisite fee for this application through [state means of payment] on [date] and served a copy of this application by registered post/speed post/by hand/electronic means to the registered office of the corporate debtor and to the Board.

Yours sincerely,”

Sub-section (3)

Sub-section (3) lays down that along with the application, the financial creditor is required to furnish the following –

1. Record of the default with information utility or any other such record as the Board may specify
2. The name of the proposed resolution professional to act as an Interim Resolution Professional
3. Any other information that the Board may specify

Apart from this Rule 4(2) of the Insolvency and Bankruptcy (Adjudicating Authority) Rules, 2016 mandates that where the applicant is an assignee or transferee of a financial contract, the applicant is required to attach the copy of such assignment or transfer contract which demonstrates the existence of such assignment or transfer

Regulation 2A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 (hereinafter “CIRP Regulations”) states that for the purpose of furnishing the record of the default under Section 7(3)(a), any one of the following –

1. Copies of entries (certified) in the relevant account in the bankers’ books (as defined in Section 2(3) of the Bankers’ Books Evidence Act, 1891
2. An order of the court or tribunal that has adjudicated upon the non-payment of a debt, where against such order, the appeal period has expired

Further, as Regulation 2C specifies, the Financial Creditor is also required to furnish along with the application, the details of his/its –

1. Permanent Account Number
2. Email-ID

Proposal of Interim Resolution Professional

There is one other point here that may be noted – while it is mandatory for the Financial Creditor to propose an Interim Resolution Professional for CIRP, this is not so for the Operational Creditor; Sub-section (3) uses the word ‘shall’ which in effect mandates the financial creditor to furnish the name of Resolution Professional to act as an Interim Resolution Professional. However, Section 9, which deals with the application by an Operational Creditor, specifically mentions in clause (4) that it is optional for him to make such a proposal.

Rule 9 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 further mandates that while making a proposal to appoint an Interim Resolution Professional, the financial creditor is required to obtain a written communication from the Insolvency Professional sought to be appointed as such in the manner as laid down in Form 2, which is as follows –

“WRITTEN COMMUNICATION BY PROPOSED INTERIM RESOLUTION PROFESSIONAL

[Date]

To,

The National Company Law Tribunal

[Address]

From,

[Name and address of the registered office of the proposed interim resolution professional]

In the matter of [name of the corporate debtor]

Subject: Written communication in connection with an application to initiate corporate insolvency resolution process in respect of [name of the corporate debtor]

Madam/Sir,

I, [name of proposed interim resolution professional], an insolvency professional registered with [name of insolvency professional agency] having registration number [registration number] have been proposed as the interim resolution professional by [name of applicant financial creditor] in connection with the proposed corporate insolvency resolution process of [name of the corporate debtor].

In accordance with rule 9 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, I hereby:

(i) agree to accept appointment as the interim resolution professional if an order admitting the present application is passed;

(ii) state that the registration number allotted to me by the Board is [insert registration number] and that I am currently qualified to practice as an insolvency professional;

(iii) [disclose that I am currently having the following assignments in hand:

Sl. No.	Assignment as	Number of Assignment(s)	No.	Name of the Corporate Debtor	Date of commencement of process	Expected date of closure of process
Corporate Processes
1	IRP		1
2
3
2	RP		1
2
3
3	Liquidator (including voluntary liquidations)		1
2
3
4	Authorised Representative		1
2
3
Individual Processes
5	Resolution Professional
6	Bankruptcy Trustee
7	Any other.

(iv) certify that there are no disciplinary proceedings pending against me with the Board or [name of the insolvency professional agency he is a member of];

(v) affirm that I am eligible to be appointed as a resolution professional in respect of the corporate debtor in accordance with the provisions of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016;

(vi) make the following disclosures in accordance with the code of conduct for insolvency professionals as set out in the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016;

(Signature of the insolvency professional)

(Name in Block letters)”

Sub-section (4)

Sub-section (4) states that on the receipt of the application for CIRP by a Financial Creditor, the Adjudicating Authority within fourteen days of its receipt shall –

1. Ascertain the existence of a debt, whether from the records of an information utility or on the basis of other evidence as furnished by the financial creditor;
2. If the existence of the such debt is not ascertained and an order under sub-section (5) is passed by the Adjudicating Authority, the reasons for the same are to be recorded in writing.

Sub-section (5)

Sub-section (5) provides that where an Adjudicating Authority is satisfied that –

1. A default has occurred;
2. The application for CIRP is complete in all respects; and
3. There are no disciplinary proceedings pending against the proposed resolution professional

It may by order admit the application for CIRP under Section 7.

Section 7(5)(b) states that in absence of any of the above three, the Adjudicating Authority may reject the application for CIRP. However, before making such an order, the Adjudicating Authority must give notice to the applicant’s financial creditor to rectify such defect within seven days of the receipt of that notice.

It may be noted that the usage of the word ‘may’ does suggest that despite the fact that the default exists and all the requirements of the application are fulfilled, the Adjudicating Authority may still choose not to admit the application. This is further corroborated by the fact that the word may is not used with respect to a Section 9 application by an Operational Creditor, where the word shall is used for the admission of application. In fact, the same was held by the Supreme Court in Vidarbha Industries Power Ltd. v. Axis Bank Ltd (2022), where it stated that –

“The fact that Legislature used ‘may’ in Section 7(5)(a) of the IBC but a different word, that is, ‘shall’ in the otherwise almost identical provision of Section 9(5)(a) shows that ‘may’ and ‘shall’ in the two provisions are intended to convey a different meaning. It is apparent that Legislature intended Section 9(5)(a) of the IBC to be mandatory and Section 7(5)(a) of the IBC to be discretionary. An application of an Operational Creditor for initiation of CIRP under Section 9(2) of the IBC is mandatorily required to be admitted if the application is complete in all respects…

On the other hand, in the case of an application by a Financial Creditor who might even initiate proceedings in a representative capacity on behalf of all financial creditors, the Adjudicating Authority might examine the expedience of initiation of CIRP, taking into account all relevant facts and circumstances, including the overall financial health and viability of the Corporate Debtor. The Adjudicating Authority may in its discretion not admit the application of a Financial Creditor.”

There is however one other anomaly that arises in acceptance of this interpretation. If the Adjudicating Authority may reject the application despite the fulfillment of all requirements, then Section 7(5)(b) seems to be conferring a discretion to the Adjudicating Authority to accept such an application where the requirements are not fulfilled thus pushing the corporate debtor to CIRP and possibly even liquidation where the financial creditor itself has not made a full and defect free application, since the said clause also uses the phrase “may, by order, reject such application”. Such interpretation would defeat the purposes of the Code and hence requires further relook by the Parliament.

Sub-section (6)

Sub-section (6) lays down that the CIRP of the corporate debtor commences from the date when Adjudicating Authority admits the application under sub-section (5).

Sub-section (7)

Sub-section (7) states that within seven days of admission or rejection of a Section 7 application, the Adjudicating Authority is required to communicate the order –

1. In case where the application has been admitted under Section 7(5)(a), to the financial creditor and the corporate debtor;
2. In case where the application has been rejected under Section 7(5)(b), to the financial creditor

Such communication must be made within seven days of the date of admission or rejection of the application.

Frequently Asked Questions

What is the default threshold to initiate an application under Section 7 of the Insolvency and Bankruptcy Code 2016?

Section 4 of the Insolvency and Bankruptcy Code, 2016 provides that the minimum amount of default for the purposes of Part II of the Code (where Section 7 is located) is one lakh rupees, but the Central Government can increase this minimum amount. Through Gazette Notification S.O. 1205(E), the minimum threshold has been extended to one crore rupees.

Whether the default amount of one crore rupees should be met by the applicant’s financial creditor alone?

The explanation to Section 7(1) clarifies that default means default not only in respect of the debts owed to the applicant’s financial creditor but also includes the debts owed to other financial creditors as well. However, this does mean that the default amount must not include the debts owed to the operational or other creditors.

Is it binding upon the Adjudicating Authority to appoint the insolvency professional proposed by the financial creditor in its Section 7 application as the interim resolution professional?

Yes. Under Section 16(2) of the Code, the Adjudicating Authority must appoint the proposed insolvency professional as the interim resolution professional if no disciplinary proceedings are pending against him.

---

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.