What Is the Procedure to Initiate an Insolvency Resolution Process by Operational Creditors?

What Is the Procedure to Initiate an Insolvency Resolution Process by Operational Creditors?

The operational creditors under the new amendment get an opportunity to seek a speedy resolution under Corporate Insolvency Resolution Process (CIRP) when there is a non-payment of the debt owed by the corporate debtor

The Insolvency and Bankruptcy Code 2016 (Code) is one of the biggest economic reform that gives financial flexibility as well as the flexibility to the operational creditors to initiate an insolvency resolution process (IRP) against the companies who have defaulted in making a payment of a minimum of Rs. 1 lakh, towards the operational or financial creditors. The entire process received an update eliminating the old legislation which was called 'The Sick Industrial Companies (Special provisions) Act 1985 (SICA)'.

As per the new Code, when the corporate debtor makes default payments to its creditors the process of the Corporate Insolvency Resolution Process (CIRP) is eligible to initiated against the defaulter by the creditors.

Who are operational creditors?

Sec. 5(20) of the Insolvency and Bankruptcy Code defines an operational creditor. An operational creditor includes all the persons or corporations who are legally owed operational debts and include those whom such debt has been legally assigned or transferred.

Sec. 5(21) of the Code defines an operational debt, in respect to the exchange of goods or services that 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.

How can an operational creditor file an application?

To file for a judicial proceeding to initiate a CIRP, the following steps are followed:

Step 1: Send a notice

A notice is sent to the debtor by the operational creditors under the provision of Section 8 of the Code. The format of the notice is prescribed under Form 3 of the Rules.

Moreover, the copy of the invoice demanding payment which should be attached with the notice must be in the prescribed format under Form 4 of the Rules.

The notice demanding the payment shall be delive3red to the corporate debtor at the address of his registered office by courier, electronic means or by hand.

The debtor on receiving the demand notice, within 10 days must bring the notice of the operational creditor attested copy of repayment details or existence of any dispute.

In case, no or unsatisfactory response is received from the debtor, the operational creditor may proceed to file an application initiation CIRP following the provisions of Sec. 9 of the Code.

Step 2: Filing the CIRP

The procedure of file a CIRP is specified under Rule 6, by following the prescribed procedure under Form 5 of the Rules.

The details that must be mentioned on the application 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, the date on which default occurred;

• Also, attach all relevant documents in support of the claims.

Before taking it to the National Company Law Tribunal (NCLT) (which serves as the Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons), the copy of the application shall be served to the registered office of the Corporate debtor. The Adjudicating Authority, within 14 days of filing, shall admit or reject the CIRP application by order.

Step 3: Acceptance or Rejection of the CIRP application

The Adjudicating Authority shall accept the application, subject to the following conditions:

• 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.

The CIRP application can be rejected if:

• The application made under is incomplete;

• There have been repayment payment of the operational debt that was unpaid;

• The creditor failed to deliver the invoice or notice for payment to the Corporate Debtor;

• The notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility.

Before proceeding with rejection, the Adjudicating Authority shall be giving notice to the applicant to rectify the mistakes within seven days from the receipt of the notice stating the missing factors.

Is the provision of the CIRP application absolute for the operational creditor?

The provision of CIRP is for speedy trials and resolution. It is to be noted that the operational creditors can proceed for initiation of CIRP against a corporate debtor, only when there is a non-payment of the debt owed by the corporate debtor.

Time limit within which the CIRP should be completed

As per section 12(1) of the Code, the CIRP shall be completed within a period of 180 days from the date of admission of the application to initiate such process. The Adjudicating Authority may grant a one-time extension of 90 days. The maximum time within which CIRP has to be mandatorily completed, including any extension or litigation period, is 330 days.