PROCEEDINGS UNDER INSOLVENCY AND BANKRUPTCY CODE 2016 (IBC)
Author: Utkarsh Srivastava
Advocate-on-Record, Supreme Court of India
INTRODUCTION
Proceedings under Insolvency and Bankruptcy Code 2016 (“IBC”) are called Corporate Insolvency Resolution Proceedings (“CIRP”). There are 3 ways under which CIRP can be invoked.
- By a Financial Creditor under Section 7 of the IBC.
- By an Operational Creditor under Section 9 of the IBC.
- By the Corporate Debtor itself under Section 10.
Financial Creditor has been defined under Section 5 (7) of IBC as any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.
Similarly, Operational Credito means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. (Section 5(20) of IBC).
Whereas Corporate Debtor means a corporate person who owes a debt to any person. (Section 3(8) of IBC).
Insolvency Proceedings are initiated on the date when any of the above 3 entities make an application before National Company Law Tribunal (“NCLT / Adjudicating Authority”). The date on which such application is filed is called “Initiation Date”. (Section 5(11) of IBC)
After the application has been filed, the Adjudicating Authority decides as to whether the application ought to be admitted or not. It is upon the Applicant/Creditor to satisfy the Adjudicating Authority regarding alleged default by the Corporate Debtor to pay the debt due to Applicant/Creditor.
Similarly, Corporate Debtor is entitled to point out that alleged debt is not due to Applicant/Creditor. Therefore, it is upon the Corporate Debtor to satisfy the NCLT that there is no such default.
The Adjudicating Authority can reject the application at threshold, if it is not satisfied that there is default on the part of the Corporate Debtor to pay the debt. However, in case, the Applicant/Creditor is able to satisfy the NCLT, then the application is admitted, and insolvency proceedings are said to have commenced. The date of admission of the application is called “Commencement Date”. (Section 5(12) of IBC)
Therefore, the initiation date and commencement date are different and should not be confused with each other.
- CHANGE IN NATURE OF THE PROCEEDINGS
Admission of an application is a significant event. It alters the nature of the CIRP as well as it changes stakeholders involved in the proceedings.
It is very necessary to understand that prior to commencement date and post the initiation date, i.e., the period between filing and admission of an application, the proceedings are in personam. Till the commencement date, the CIRP process is totally between the Applicant/Creditor and the Corporate Debtor.
Whereas, post commencement date significant changes take place because once an application is admitted NCLT declares moratorium and issues public pronouncement calling for submissions of claims from other creditors of the Corporate Debtor.
NCLT also appoints an Interim Resolution Professional (“IRP”). Once an IRP is appointed, the affairs of the Corporate Debtor are managed by the IRP. IRP also collates all the claims received from creditors pursuant to public announcement. After collation and determination of financial position of Corporate Debtor, IRP constitutes a Committee of Creditors (“COC”).
COC consists of all financial creditors. Thereafter, COC appoints a Resolution Professional and CIRP continues as per IBC.
Therefore, post commencement date, the nature proceedings change to in rem by including all the creditors of corporate debtor in addition to original applicant.
- THE TRIGGER POINT
Hon’ble Supreme Court of India in Indus Biotech (P.) Ltd. v. Kotak India Venture (Offshore) Fund & Ors. 2021 INSC 216 observed that the trigger point is not the filing of the application but the admission of the application. It was held that,
“17. The procedure contemplated will indicate that before the Adjudicating Authority is satisfied as to whether the default has occurred or not, in addition to the material placed by the financial creditor, the corporate debtor is entitled to point out that the default has not occurred and that the debt is not due, consequently, to satisfy the Adjudicating Authority that there is no default. In such exercise undertaken by the Adjudicating Authority if it is found that there is default, the process as contemplated under sub-Section (5) of Section 7 of IB Code is to be followed as provided under sub-Section 5(a); or if there is no default the Adjudicating Authority shall reject the application as provided under sub-Section 5(b) to Section 7 of IB Code. In that circumstance if the finding of default is recorded and the Adjudicating Authority proceeds to admit the application, the Corporate Insolvency Resolution Process commences as provided under sub-section (6) and is required to be processed further. In such event, it becomes a proceeding in rem on the date of admission and from that point onwards the matter would not be arbitrable. The only course to be followed thereafter is the resolution process under IB Code. Therefore, the trigger point is not the filing of the application under Section 7 of IB Code but admission of the same on determining default.
…
- …On admission, third party right is created in all the creditors of the corporate debtors and will have erga omnes effect. The mere filing of the petition and its pendency before admission, therefore, cannot be construed as the triggering of a proceeding in rem. Hence, the admission of the petition for consideration of the Corporate Insolvency Resolution Process is the relevant stage which would decide the status and the nature of the pendency of the proceedings and the mere filing cannot be taken as the triggering of the insolvency process.”
…Emphasis Supplied
CONCLUSION:
Therefore, it can be conveniently concluded that the CIRP process has two stages, one after the initiation date, i.e. filing of the application and the other after commencement date, i.e. admission of the application.
Once the petition is admitted, the proceedings become in rem and all creditors of the corporate debtor become stakeholders in the process, as well as the management of the affairs of the Corporate Debtor gets vested in the IRP and eventually, in the RP.
The admission of the application is the trigger point and thus, the period between initiation date and commencement date is very crucial for both the applicant/creditor as well as the Corporate Debtor. Especially, the Corporate Debtor because if it is not successful in satisfying the NCLT / Adjudicating Authority, about the absence of any default on its part to pay the debt due to Applicant/Creditor, then the application will be admitted.
And once the application is admitted it changes the nature of the proceedings. The proceedings are not reserved between the Applicant / Creditor and the Corporate Debtor but the entire set of creditors whose debt is due. The question as whether Corporate Debtor has defaulted in paying all such dues to all these claimants/creditors is of no significance.
Thus, post admission, the Corporate Debtor no longer exists in the form that it did before the Commencement Date. As has been observed by the Hon’ble Supreme Court of India in Glas Trust Company LLC v. BYJU Raveendran & Ors. 2024 INSC 811, that post admission, the interests of the erstwhile management of the Corporate Debtor are also to be distinguished from the interests of the Corporate Debtor.
You can also check out our Article titled “Purpose Behind Enactment of Insolvency and Bankruptcy Code 2016 (IBC)”.