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Updated by CA S. Badri Narayanan (CS, LLB, M.Com)
Vetted by Mr. Prasad Barje, Former Director, State Bank Institute of Learning & Development, Pune
Edition : 2025
Price : ` 630
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CHAPTER 3
CHAPTER 4
MODULE C: CORPORATE
CHAPTER 5
CHAPTER 6
CHAPTER 7
CHAPTER 8
CATALYSING SUCCESSFUL RESOLUTION PLAN
CHAPTER 9
CHAPTER 9A
CHAPTER 10
CHAPTER 11
MODULE E: OTHER IMPORTANT PROVISIONS/MATTERS
CHAPTER 12
ADJUDICATION,
CHAPTER
CHAPTER 14
IMPORTANT CASE LAWS AND LESSONS
Initiation of Corporate Insolvency Resolution Process (CIRP)
5.1 Objectives
This chapter deals with the definition of Financial Creditor, Operational Creditor and other creditors; the prerequisites for initiating insolvency by financial creditor/operational creditor/or corporate debtor; characteristic features of financial debt, operational debt and other debt; legal process and procedure for making application to Adjudicating Authority; Grounds for rejection of application etc.
Prior to enactment of IBC 2016, criteria for initiating steps for revival of any Business Enterprise or Resolution of Financial Assets was erosion of net-worth as reflected in the Balance Sheet or Classification of Borrowers’ Account as Non-Performing Asset (NPA). The major transformation brought out by IBC 2016, is to change this trigger to any default in repayment of a debt or other liability of Rupees one lakh and above (Now one crore and above), without waiting for expiry of 90 days and classification of the account as Non-Performing Asset. The object of this provision is to maximize the value of assets of the debtor. Unlike SICA and the other regulatory guidelines, the provisions of IBC 2016, apply to all Business Enterprises irrespective of whether they are industrial undertakings or engaged in any other business.
5.2 Who Can Initiate CIRP?
Section 6 of the Code, provides that where any corporate debtor commits a default, a financial creditor, an operational creditor or corporate debtor itself may initiate corporate insolvency resolution process. Home buyers are also financial creditors under the Code. Section 5(8) which was amended by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, to treat home buyers as financial creditors was upheld by Hon’ble Supreme Court in the case of Pioneer Urban Land Infrastructure Limited v. Union of India.
5.3 Prerequisites for Initiating Insolvency Resolution Process
5.3.1
By Financial Creditor (Section 7)
A financial creditor is defined under section 5(7) of the IBC as any person to whom a financial debt is owed and includes a legal assignee/ transferee. The only prerequisite for initiating insolvency resolution process for the financial creditor under section 7(1) of IBC, 2016, is that a default has occurred in respect of repayment of a financial debt of not less than Rupees one Crore. For the purpose of section 7(1), a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor. A financial creditor can be secured or unsecured. The IBC does not make a distinction between secured and unsecured FCs for the purpose of initiating a CIRP of a CD. The financial creditor has to make an application in the form prescribed under the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 with a fee ` 25,000 as prescribed by Rule 10(3) of the said Rules, with following information and documents:
(a) particulars or each financial creditor making the application;
(b) particulars of corporate debtor;
(
c) particulars of proposed interim resolution professional;
(d) particulars of financial debt;
(
e) particulars of security including certificate of registration of charge or order of any court or tribunal;
(
f) default recorded with information utilities;
(
g) copy of latest financial contract;
(
h) record of default with credit information company;
(i) copy of entry as per the Bankers Books Evidence Act; and
(
j) consent of interim resolution professional in the form prescribed by the Rules.
Section 7 of the Code, which provides for initiation of CIRP by financial creditors does not stipulate service of any notice on the corporate debtor before initiation of CIRP. The rationale for not providing notice to the corporate debtor is that having borrowed the funds the corporate debtor is aware of repayment schedule and if it is unable to pay on due date, the default committed is to the knowledge of the corporate debtor. However, Rule 4(3) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provides that the Financial Creditor shall dispatch a copy of the application by registered post or speed post or by hand or by electronic means to the registered office of the corporate debtor and to the Board before filing with the Adjudicating Authority . The question of service of notice to the corporate debtor in an application filed under section 7 of the Code was considered by the Calcutta High Court in the case of Sree Metaliks Limited v. Union of India and the High Court held that NCLT and NCLAT are constituted under the provisions of the Companies Act, 2013 and the procedure before the NCLT and NCLAT is guided by section 424 of the Companies Act, 2013. In terms of section 424 the NCLT and NCLAT are required to adhere to the principles of natural justice above anything else and the section allows NCLT and NCLAT to regulate their own procedure. The Court therefore, held that before passing an order for initiation of CIRP, the corporate debtor is entitled to an opportunity of being heard.
5.3.2 By Operational Creditor (Section 9)
An operational creditor is defined under section 5(20) of the IBC as any person to whom an operational debt is owed and includes a legal assignee/transferee. An “operational debt” is defined in section 5(21) as a claim in respect of the provision/supply of goods or services to the CD including employment or a debt in respect of payment of dues arising under any applicable law and payable to the Central Government, any State Government or any local authority. An operational creditor may on occurrence of default deliver a demand notice or invoice demanding payment of unpaid operational debt with copy of an invoice, demanding payment of the amount involved in the default to the corporate debtor in the form prescribed in Form 3 under Rule 5(1)(a) the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 with a fee of ` 2000 as prescribed by Rule 10(3) of the said Rules. Form 3 for demand notice specified by the Regulations require following particulars of operational debt to be stated in the Notice:
(a) amount of debt;
(b) amount of debt which is in default;
(c) particulars of security held, if any;
(d) details of retention of title arrangement, if any;
(e) records of default with information utility;
(f) provision of law under which debt is due.
The Corporate Debtor has to respond to the Notice within ten days and may deny its liability on account of pendency of any dispute or suit or arbitration proceeding filed before the receipt of such notice or invoice. After expiry of 10 days from the date of delivery of notice if the operational creditor does not receive any payment or notice of dispute the operational creditor may file an application before the adjudicating authority for initiation of corporate insolvency resolution process under section 9 of the IBC Section 8 of the Code provides for Notice of Demand by operational creditors with the copy of unpaid invoice issued to the Corporate Debtor. The form of notice is prescribed by Insolvency and Bankruptcy (Application to Adjudicating
Authority) Rules, 2016. Section 8(2)(a) of the Code, provides that the Corporate Debtor shall within a period of 10 days of receipt of Demand Notice or copy of invoice, bring to the notice of the operational creditor, existence of dispute or record of pendency of a suit or arbitration proceedings filed before the receipt of such notice. On plain reading of this section, it appears that dispute is pending and suit or arbitration proceeding in respect of dispute is also pending before the receipt of notice or invoice. In other words, this provision in section 8(2)(a) could be interpreted to mean that if dispute is pending but no arbitration or suit is filed, it is no defense to the notice sent by operational creditor. This view was considered by the Supreme Court in the case of Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. The Supreme Court held that if the application for initiation of CIRP by operational creditor is otherwise complete, the adjudicating authority must reject the application under section 9(5)(ii)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is not necessary that a suit or arbitration proceeding is pending in relation to the dispute before receipt of notice. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application - A “dispute” is said to exist, so long as there is a real dispute as to payment between the parties that would fall within the inclusive definition contained in Section 5(6).
5.3.3 By Corporate Debtor (Section 10)
A corporate applicant is defined in section 5(5) of the IBC as:
(a) the CD;
(
b) a member or partner of the CD who is authorized to make an application for a CIRP under the constitutional document of the CD;
(
c) an individual in charge of managing the operations and resources of the CD; or
(
d) a person who has control and supervision over the financial affairs of the CD.
Where a Corporate Debtor has committed a default, the corporate applicant of such Corporate Debtor can voluntarily file an application for initiation of Corporate Insolvency Resolution Process (CIRP) with the adjudicating authority, with following documents:
(a) the information relating to its books of account and such other documents for such period as may be specified;
(b) the information relating to the resolution professional proposed to be appointed as an interim resolution professional; and
(
c) the special resolution passed by shareholders of the corporate debtor or the resolution passed by at least three-fourth of the total number of partners of the corporate debtor, as the case may be, approving filing of the application.
The Application has to be made in the form prescribed in Form 6 under Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 with a fee of ` 25,000 as prescribed by Rule 10(3) of the said Rules. The Corporate Applicant has to furnish the documents specified in Form 6 and documents and records specified in the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The adjudicating authority is required to admit the application within 14 days if it is complete and no disciplinary proceeding is pending against the proposed Interim Resolution Professional. The Application is to be rejected if it is incomplete or any disciplinary proceeding is pending against the proposed Interim Resolution Professional. Further, it might be rejected if the resolution process is being triggered to defraud creditors or to exploit the benefit of moratorium. Section 11 of the Code specifies the persons who are not entitled to make the application, as under:
(
a) a corporate debtor undergoing a corporate insolvency resolution process; or
(
b) a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application; or
(
c) a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or
(d) a corporate debtor in respect of whom a liquidation order has been made.
Explanation– For the purposes of this section, a corporate debtor includes a corporate applicant in respect of such corporate debtor.
5.4 Who is a Financial Creditor, Operational Creditor and Other Creditor?
(
i) Section 5(7) defines the expression ‘financial creditor’ 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 Section 5(8) defines the expression ‘financial debt’ which is disbursed against the consideration for time value of money and includes:
(a) money borrowed against the payment of interest.
(b) any amount raised by acceptance under any acceptance credit facility or its dematerialized equivalent.
(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument.
(d) 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.
(e) receivables sold or discounted other than any receivables sold on non-recourse basis.
(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing.
(
Explanation – For the purposes of this sub-clause, –
(i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and
(ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016).
(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account.
(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution.
(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause.
ii) Section 5(20) defines operational creditor as a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. Sub-section (21) of the said section 5 defines operational debt 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 local authority.
(iii) The expression ‘other creditors’ has not been specifically defined under the Code. But section 3(11) defines debt as a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.
Further, section 3(6) defines claim as under:
“claim” means –
(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured.
(b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured.
Section 3(12) defines ‘default’ as under: “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be.
Section 3(10) defines ‘creditor’ means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder.
Reading the above definitions together it is clear that any person having the claim against the corporate debtor which has become due and payable will be creditor covered by the definition of financial creditor and can file an application for initiation of corporate insolvency resolution process under section 7 as financial creditor.
5.5 What Constitutes a Financial Debt, Operational Debt and Other Debt?
The definition of various categories of debts and of creditors are linked to each other and a person who has a right to recover a debt is the creditor and person liable to pay is the debtor. In the case of Swiss Ribbons Pvt. Ltd v. Union of India, the Supreme Court considered whether classification of creditors as financial creditors and operational creditors is discriminatory or arbitrary or violate Article 14 of the Constitution of India. The Apex Court observed that “claim” gives rise to debt only when it is due and default occurs when debt becomes due and payable and is not paid by the debtor. This is why financial
creditors prove default and operational creditor claims right to payment of liability. When this is kept in mind, the differentiation in triggering of insolvency resolution process by financial creditor and operational creditor becomes clear. The Court therefore held the provisions to be valid. The Supreme Court also considered validity of resolution plan containing separate treatment of financial creditor and operational creditors in the case of Essar Steel Limited and has held that ultimate discretion on distribution of funds lies with the Committee of Creditors and also recognised rights of secured and unsecured financial creditors are different when it comes to payment claimed on resolution proceeds. The Apex Court therefore recognised that final authority to decide the manner of distribution of resolution proceeds is Committee of Creditors (CoC) and NCLT or NCLAT has no power to interfere with commercial wisdom of the Committee of Creditors.
5.6 Relevant Provisions, Rules and Regulations
(a) Provisions relating to CIRP by financial creditors or operational creditors or the corporate debtor itself are contained in Chapter II of Part II under Sections 6 to 32 of the Code.
(b) The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provide for the procedure of filing application to adjudication authorities for CIRP. The Forms in which the applications are to be filed including the documents to be attached to the Application are specified by the above Rules.
(c) The IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 specify the procedural steps to be intaken in a CIRP and for consideration and approval of Resolution Plan submitted for Insolvency Resolution. The Regulations contain the provisions for public announcement, proof of claims, committee of creditors, meetings of the committee, voting by the committee, conduct of corporate insolvency resolution process, insolvency resolution process costs and resolution plan.
(d) The IBBI has also specified the regulations for other purposes such as regulation of insolvency professionals, agencies and information utilities.
5.7 Application to Adjudicating Authority: Formats for Application
The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, prescribes various forms for application as under:
Form 1 (Sub-rule (1) of Rule 4)
Application by financial creditor to initiate corporate insolvency resolution process under the Code (Annexure I).
Form 2 (Sub-rule (1) of Rule 9)
Written communication by proposed interim resolution professional (Annexure II).
Form 3 [Clause (a) of rule 5(1)]
Form of Demand Notice/invoice/demanding payment under the IBC 2016. (Annexure III).
Form 4 [Rule 5(1)(b)]
Form of Notice with which invoice demanding payment (Annexure IV).
Form 5 [Rule 6(1)]
Application by operational creditors to initiate corporate insolvency resolution process under the Code (Annexure V).
Form 6 [Rule 7(1)]
Application by corporate applicant to initiate corporate insolvency resolution process under the Code (Annexure VI).
5.8 Adjudication Process and Grounds for Rejection of Application
(a) For financial creditors sub-sections (4) and (5) of section 7, provide the procedure for adjudicating the claim. The adjudicating authority within 14 days of the receipt of application, ascertain the existence of the default from the records of the information utilities or on
630/-
RESOLUTION OF STRESSED ASSETS WITH SPECIAL EMPHASIS ON INSOLVENCY & BANKRUPTCY CODE 2016 FOR BANKERS
AUTHOR : INDIAN INSTITUTE OF BANKING & FINANCE
PUBLISHER : Taxmann
DATE OF PUBLICATION : FEBRUARY 2025
EDITION : 2025 EDITION
ISBN NO : 9789364551953
NO. OF PAGES : 400
BINDING TYPE : Paperback
DESCRIPTION
Resolution of Stressed Assets with Special Emphasis on Insolvency & Bankruptcy Code 2016 for Bankers is a succinct guide to stressed asset management and the IBC framework. This edition reflects the latest legislative, regulatory, and judicial developments impacting corporate and non-corporate insolvency. Emphasising a ‘resolve over liquidation’ approach, it offers clarity on the roles of Insolvency Professionals (IPs), the Insolvency and Bankruptcy Board of India (IBBI), Information Utilities (IUs), and other stakeholders, highlighting how India’s resolution landscape has evolved.
This book is intended for the following audience:
• Bankers & Finance Professionals
• Legal Practitioners & Insolvency Professionals
• Corporate Executives & Entrepreneurs
• Academics & Students
The Present Publication is the 2025 Edition, authored by M.R. Umarji (former Executive Director – RBI & former Chief Advisor – Legal | IBA). It is updated by CA. S. Badri Narayanan (CS, LL.B., M.Com.) and vetted Prasad Barje (Former Director – State Bank Institute of Learning & Development, Pune). Taxmann exclusively publishes this book for the Indian Institute of Banking and Finance with the following noteworthy features:
• [Comprehensive Coverage] Encompasses foundational credit recovery laws (RDDB & FI Act, SARFAESI) and contemporary IBC processes for corporate and noncorporate entities
• [Updated Content] Reflects amendments, recent RBI circulars (e.g., Prudential Framework), and landmark case laws shaping stressed asset resolution
• [Practical Insights] Provides practical applications, from initiating CIRP to Fast Track CIRP and Pre-Packaged Insolvency Resolution Process
• [Expert Guidance] Reviewed by seasoned bankers and refined by an insolvency specialist, ensuring relevance and reliability
• [Structured Learning Aids] Features module-wise chapters, ‘Check Your Progress’ sections, and keywords for clarity and self-paced study
• [Easy Reference] Includes templates for applications to Adjudicating Authorities and appendices on RBI circulars/regulations
