What is the Insolvency and Bankruptcy Code?

The insolvency and bankruptcy code 2016 was enacted with an aim to consolidate the existing framework on insolvency and bankruptcy. The IBC 2016 applies to companies, partnerships, limited liability partnerships, individuals, and any other body as specified by the central government. The insolvency resolution process for company and LLPs is different from that of individuals or of a partnership firm. The application for initiating the insolvency proceedings against an individual or a partnership firm lies before the Debt Recovery Tribunal and an appeal thereto lies before the Debt Recovery Appellate Tribunal. Whereas in case of insolvency proceedings against a company or an LLPs, the application lies before the National Company Law Tribunal and appeal from their lies to National Company Law Appellate Tribunal.

The rationale behind the separate law for Insolvency and bankruptcy is that a company which has gone insolvent should go through the Corporate Insolvency Resolution Process (CIRP). The liquidation process should not be started at the primary stage until and unless it has gone through the process of CIRP. Under the said resolution process, options for the revival of the company are looked into, and if the said resolution process fails then only the company goes into liquidation.

Therefore, in case of default, the following persons can initiate the Corporate Insolvency Resolution Process (CIRP) by making an application to the NCLT by:

  1. The Financial Creditors under Section 7,
  2. The Operational Creditors under Section 9, and
  3. The Corporate Debtor under Section 10 of the IBC, 2016.

Who is Financial Creditor?

The Financial Creditor is defined in section 5(7) 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.’ Whereas the financial debt is defined under section 5 (8) as a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes:

  1. Money borrowed against the payment of interest;
  2. Any amount raised by acceptance under any acceptance credit facility or its de-materialized equivalent;
  3. Any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock, or any similar instrument;
  4. The amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;
  5. Receivables sold or discounted other than receivables sold on a non-recourse basis;
  6. Any amount raised under any other transaction including any forward sale or purchase agreement, having the commercial effect of a borrowing;

The procedure for initiation of the corporate insolvency resolution process by a financial creditor is embodied in Section 7 of the above-mentioned code. It says that a financial creditor either by itself or jointly with other financial creditors or any other person on behalf of the financial creditor may file an application for initiation of CIRP against the corporate debtor.

Who is an Operational creditor?

An ‘operational creditor’ is defined under section 2(20) as ‘a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.’ Whereas the Operational Debt is defined under section 2(21) as a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the central government, any state government or any other local authority.

Section 8 of the Insolvency and Bankruptcy Code, 2016 lays down the procedure for the initiation of the corporate insolvency resolution process by an operational creditor. It says, ‘an operational creditor may, on the occurrence of s default, deliver a demand notice of unpaid operational debtor copy invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.’

After the expiry of the period of 10 days from the date of delivery of the notice or invoice demanding payment, if the operation creditor does not receive payment from the corporate debtor or notice of dispute, the operational creditor may file an application under section 9 of IBC 2016, before the adjudicating authority for initiating a corporate insolvency process.


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