Recover by Financial Creditors by Filing Application Under Section 7 of The Insolvency and Bankruptcy Code, 2016

INTRODUCTION

The Insolvency and Bankruptcy Code (IBC), 2016, was enacted to consolidate and amend the laws relating to insolvency resolution in India. It was introduced to provide a streamlined and time-bound process for resolving insolvency among corporate entities, individuals, and partnership firms. One of the significant provisions of this Code is Section 7, which deals with the initiation of the corporate insolvency resolution process (CIRP) by financial creditors. It provides financial creditors with a structured legal mechanism to recover their dues when a corporate debtor defaults on payments. The primary objective of Section 7 is to ensure quick and efficient resolution of financial distress, thereby fostering an improved credit environment and strengthening India’s financial sector.

REQUIREMENTS FOR FILING UNDER SECTION 7

For a financial creditor to initiate CIRP under Section 7, certain requirements must be fulfilled. These include:

1. Existence of Default: The corporate debtor must have defaulted in the repayment of a financial debt. A default occurs when the debtor fails to pay the debt on the due date.
2. Debt Classification: The debt in question must be classified as a financial debt under Section 5(8) of the IBC. A financial debt refers to a debt that is disbursed against the consideration for the time value of money, including loans, debentures, bonds, and other credit facilities.
3. Supporting Evidence: The financial creditor must provide documentary proof of the default, such as loan agreements, financial statements, credit records, or any other relevant documentation that establishes the corporate debtor’s failure to repay the debt.

WHO CAN FILE AN APPLICATION?

Under Section 7, only financial creditors are eligible to file an application for initiating CIRP against a corporate debtor. Financial creditors are defined under Section 5(7) of the IBC and typically include:

• Banks and Financial Institutions: These include commercial banks, non-banking financial companies (NBFCs), and other lending institutions that provide financial credit to businesses.
• Debenture Holders and Bondholders: Investors who hold debt instruments issued by corporations, such as bonds or debentures, can also initiate CIRP if the company defaults on repayment.
• Homebuyers: After the 2018 amendment to the IBC, homebuyers were granted the status of financial creditors, enabling them to file applications under Section 7 against defaulting real estate developers.

STEPS IN THE PROCESS OF FILING UNDER SECTION 7

The process of filing for insolvency resolution under Section 7 involves the following key steps:

1. Application to NCLT: The financial creditor must submit an application before the National Company Law Tribunal (NCLT). This application should include details of the default, supporting documents, and proof of the financial debt owed by the corporate debtor.
2. Review by NCLT: The tribunal examines the submitted application to ensure that it meets the legal and procedural requirements. It reviews the evidence of default and verifies the eligibility of the financial creditor to file the application.
3. Admission or Rejection: The NCLT must decide within 14 days whether to admit or reject the application. If admitted, the CIRP process begins; if rejected, the creditor may appeal the decision or rectify any deficiencies in the application.
4. Appointment of Resolution Professional (RP): Upon admission of the application, an interim resolution professional (IRP) is appointed to take charge of the corporate debtor’s affairs and oversee the insolvency resolution process.
5. Moratorium Period: A moratorium is declared by the NCLT, which prohibits all legal proceedings, enforcement of security interests, and recovery actions against the corporate debtor during the CIRP.
6. Formation of Committee of Creditors (CoC): The financial creditors constitute a Committee of Creditors (CoC), which plays a key role in evaluating and approving the resolution plan for the corporate debtor.
7. Resolution Plan or Liquidation: The CoC reviews resolution plans proposed by potential investors or bidders. If a resolution plan is approved within 180 days (extendable by 90 days), the corporate debtor is revived. If no resolution plan is approved, the company proceeds toward liquidation.

ADVANTAGES OF FILING UNDER SECTION 7

Section 7 provides several benefits to financial creditors seeking to recover their dues:

• Speedy Recovery Mechanism: The IBC ensures a time-bound process for insolvency resolution, reducing delays and improving creditor confidence.
• Legal Protection: Creditors are provided with a legally structured method for recovering their debts, minimizing the risks associated with prolonged litigation.
• Prevention of Asset Dilution: The moratorium imposed during the CIRP prevents the corporate debtor from transferring or misusing its assets, protecting the interests of the creditors.
• Encourages Fair Negotiations: The CoC and resolution professional facilitate fair negotiations among creditors and stakeholders, ensuring transparency in the insolvency resolution process.
• Improved Credit Environment: By providing a structured insolvency resolution mechanism, Section 7 strengthens financial discipline and promotes a more stable business environment.

CONCLUSION

Section 7 of the IBC, 2016, plays a crucial role in India’s insolvency and bankruptcy framework by allowing financial creditors to initiate insolvency proceedings against corporate debtors in default. It ensures financial stability by offering creditors a well-defined, time-bound process for debt recovery. Additionally, the provision prevents corporate mismanagement and promotes responsible lending practices. However, its effectiveness depends on proper implementation and adherence to procedural requirements. With continuous amendments and judicial interpretations, Section 7 continues to evolve as a key tool in strengthening India’s insolvency resolution ecosystem.

-Article by Akhila Bolla and Khushi Khandelwal