Who is a financial creditor, the proof of default, the minimum threshold, how the tribunal decides admission and the risk of misuse under Section 65.
Section 7 of the Insolvency and Bankruptcy Code, 2016 allows a financial creditor to begin the corporate insolvency resolution process against a company that has defaulted. It is the route lenders most often use. The application is short on its face, but the tribunal will look closely at the proof of the debt, the proof of default and the standing of the applicant. This note sets out what must be shown. It is general information, not advice on a particular claim.
Who may apply
A financial creditor, or a group of financial creditors acting jointly, may apply when a default has occurred. A financial debt is, broadly, a debt together with interest that is disbursed against the consideration for the time value of money (Section 5(8)). Banks and lenders qualify; so do holders of debentures and, by statute, allottees of real estate projects. For allottees and certain classes of creditor, a first proviso requires the application to be filed jointly by at least one hundred such creditors or ten per cent of their number, whichever is less.
Default and its threshold
Default means non-payment of a debt when it has become due and payable and has not been paid by the debtor (Section 3(12)). Section 4 sets a minimum amount of default for the Code to apply. The figure has been fixed by notification at one crore rupees since March 2020, and a creditor should confirm the current notification before filing. The default must be within the period of limitation. Article 137 of the Limitation Act, 1963 has been applied to such applications, so the usual three years from the date of default applies, subject to acknowledgments under Section 18. Where an account was classified as a non-performing asset, the date of the classification is commonly treated as the date of default.
What the application contains
- The parties and the debt, with the facility documents, the amount in default and the date of default, in the prescribed form (Form 1 under the Adjudicating Authority Rules).
- Evidence of default. A record of the default from an information utility is the primary evidence. In its absence the creditor may rely on other documents, such as the bank's statement of account certified under the Bankers' Books Evidence Act, 1891, the loan documents and the notice of recall.
- The proposed interim resolution professional, with a written consent and a confirmation that no disciplinary proceedings are pending against that person.
- Proof of authority. Whoever signs for a company or bank must be authorised to do so, and the authority should be filed.
How the tribunal decides
Under Section 7(5), where the tribunal is satisfied that a default has occurred and the application is complete, and no disciplinary proceedings are pending against the proposed professional, it admits the application. It must decide within fourteen days of receipt, though the Supreme Court has treated that period as directory. In Innoventive Industries Ltd. v. ICICI Bank (2017) the Court held that once the existence of a financial debt and a default is established, the application must be admitted, and that the debtor cannot resist it on the ground that it is solvent. In Vidarbha Industries Power Ltd. v. Axis Bank Ltd. (2022), the Court clarified that admission is not wholly automatic and that the tribunal retains a discretion, to be exercised on sound reasons. A creditor should prepare for the question whether admission is appropriate in the circumstances, and not rely only on the fact of default.
Consequences of admission
On admission, a moratorium under Section 14 begins, an interim resolution professional takes charge of the company and its board's powers are suspended, and a public announcement invites claims. The process is meant to be completed in the period set by Section 12. A creditor should apply only when it is prepared to take part in the process, since the creditor cannot withdraw the application after admission except with the committee's approval under Section 12A.
Use with care
Section 65 penalises initiation of the process fraudulently or with malicious intent, for a purpose other than the resolution of insolvency. The Code is not a tool for recovering a disputed sum. A financial creditor with a genuine, documented and undisputed default has a strong application. A creditor with a contested claim has an ordinary recovery suit to bring instead.
This note is general information on the law at the date of publication. It is not legal advice, and it should not be relied on without advice on the facts of a particular matter.
