Corporate insolvency
before the NCLT.

A financial creditor applies under Section 7 of the Insolvency and Bankruptcy Code, 2016 on a default by the corporate debtor, supported by evidence of the default and of the debt itself. The strongest applications rest on a record of default filed with an information utility, though account statements, sanction and facility documents and a clear acknowledgement of the debt will also serve. The default must be of an amount not less than the minimum notified under Section 4, which has been revised since the Code came into force. An operational creditor takes an extra step: a demand notice under Section 8 setting out the unpaid operational debt, and an application under Section 9 may follow only where the debtor neither pays nor brings a notice of dispute within the period Section 8(2) allows, supported by the affidavit Section 9(3) requires. A corporate debtor may also start the process itself under Section 10, which needs a special resolution of its members or a resolution passed by the proportion of its partners that section specifies, and Section 11 bars specified persons from applying at all. Filing can be a sensible decision for a debtor, because a moratorium is sometimes the only way to stop enforcement for long enough to organise a restructuring.

The debtor’s usual answers are that no default occurred, that the debt is time-barred, or that the applicant is not a financial creditor at all. Limitation is a frequent ground on which applications fail. The character of the debt, and the date it fell due, are assessed before an application is drafted.

For operational creditors, this issue is frequently determinative. If the corporate debtor shows a dispute that existed before the demand notice, pleaded in correspondence, in a pending suit or arbitration, or in a quality or deficiency complaint on the record, the tribunal does not resolve that dispute. It declines to admit the application and leaves the parties to the proper forum. The threshold is that the contention must be plausible and require further investigation, and not be a patently feeble assertion unsupported by evidence. That is a low bar for a debtor, but the assertion still has to be anchored in something written at the time. The correspondence exchanged during the commercial relationship therefore decides the petition, and it is usually written by people who had no tribunal in mind. A supplier who never answered a complaint about defective delivery, and a customer who raised one only after receiving the notice, will each find their own record used against them. What the tribunal has found persuasive on the creditor’s side is a complaint answered in writing and closed out at the time, and an acknowledgement of the balance obtained while the relationship still worked.

A dispute raised for the first time after the notice carries little weight. A dispute genuinely raised beforehand can defeat the application.

On admission the tribunal declares a moratorium under Section 14. Suits and proceedings against the corporate debtor are barred or stayed, disposal of its assets is prohibited, enforcement of security interest is halted including action under the SARFAESI Act, 2002, and an owner or lessor cannot recover property the debtor occupies. Supply of goods and services treated as essential by the CIRP Regulations may not be terminated or suspended while the moratorium runs, subject to payment of dues arising during that period, and under Section 14(2A) the resolution professional may require continued supply of goods or services he considers critical, again subject to payment of current dues. The moratorium protects the corporate debtor alone, and Section 14(3)(b) excludes a surety in a contract of guarantee.

Management vests in the interim resolution professional, who makes a public announcement calling for claims and stating the last date for submission, and who verifies the claims that come in. Whether a claim is financial or operational is not a formality. Classification settles who has influence over everything that follows. Financial debt under Section 5(8) is a debt disbursed against the consideration for the time value of money, including the forms that section lists. Operational debt under Section 5(21) is a claim in respect of goods or services, and it includes employment dues and dues payable to the Central Government, a State Government or a local authority.

The committee is constituted from financial creditors, with voting share by value of admitted debt, and related party financial creditors are excluded. Where there are no financial creditors, the CIRP Regulations provide for a committee constituted of operational creditors, and an operational creditor holding the share of the debt Section 24(3)(c) specifies is entitled to notice of meetings without a vote. Ordinary decisions are taken by the voting share Section 21(8) requires, and approval of a resolution plan by the higher voting share Section 30(4) requires.

Section 29A disqualifies categories of persons from submitting a resolution plan, among them an undischarged insolvent, a wilful defaulter, a person whose account has been classified as non-performing for the period that section specifies and who has not paid the overdue amounts before submission of the plan, and a person in respect of whom the tribunal has made an order in relation to a preferential, undervalued, extortionate or fraudulent transaction. The disqualification extends to connected persons, which is a frequent source of eligibility difficulty. Section 240A relaxes specified limbs for corporate debtors classified as micro, small and medium enterprises.

The tribunal checks that a plan approved by the committee complies with the Code and can be implemented. It does not review the commercial merits of the bargain. Objections are therefore best framed as non-compliance. An appeal lies to the National Company Law Appellate Tribunal within the period Section 61(2) allows.