CIRP Petitioners: Corporate Debtors, Financial & Operational Creditors

Insolvency and Bankruptcy Code, 2016 [1] (hereinafter referred to as “The Code”) was introduced to streamline the insolvency regime. Before the Parliament passed the Bill for The Code, insolvency cases depended largely on other legislations. The Code provides for specific definitions and procedures that have to be followed by the parties concerned. Broadly speaking, there are two parties involved in an insolvency and bankruptcy petition; the petitioner and the corporate debtor. The insolvency process is initiated by the petitioner when a payment of over INR 1 lakh (now INR 1 Cr.) [2] is defaulted by the corporate debtor. This article will discuss who can be the petitioners, in detail. Essentially, the Code provides for three categories of petitioners who can initiate an insolvency process:

Financial Creditor

A financial creditor is defined u/s 5(7) of The Code. The provision defines financial creditor as any person to whom the corporate debtor owes a financial debt [3]. The scope of financial debt is discussed in detail in The Code. Section 8 defines the specifics of transactions that are considered as financial debts. The following is included in the definition of financial debt:

1. Borrowed funds against interest payment;
2. Funds in the form of an acceptance credit;
3. Amount raised in the form of bond, debentures, notes, note purchase facility etc.;
4. Monies owed in terms of liability generating from a hire purchase or a lease;
5. Funds yielded from discounted or sold receivables;
6. Financial transaction arising from the commercial effect of a borrowing, purchase or sale agreement etc.;
7. Transaction surfacing to yield benefit from or protection against dynamic pricing and rates (considering the market value of the transaction);
8. Instrument issued by any financial institution or bank concerning indemnity, guarantee etc; or
9. Liability arising out of guarantee or indemnity of the abovementioned clauses

If the financial debt falls in one of the categories mentioned above, the financial creditor can apply for insolvency application before the adjudicating authority.

Amendments to definition of financial creditor

The Code was recently amended in 2018 [4], wherein among other amendments, the scope of financial creditor was widened. An explanation was added to section 5 (8) (f). This explanation clarified that monies invested by allottees in a real estate project measure to have a commercial effect of a borrowing. This means that, by extension, allottees of a real estate project or home-buyers, can be classified as financial creditors. The home-buyers, in turn, would have a right to file an insolvency petition u/s 7 of The Code. This explanation, along with the 2018 amendment ordinance, was challenged in the case of Pioneer Urban Land and Infrastructure v Union of India [5]. The court, in this case, upheld the constitutionality of the amendment ordinance and the position of home-buyers was maintained as financial creditors. Then in 2019, the code underwent another amendment [6]. Among other changes, an amendment was made to Section 7 of The Code. The provision lays down the process for initiation of a Corporate Insolvency Resolution Process (CIRP). The provision states that a financial creditor can file an application for insolvency before the adjudicating authority at an individual level or jointly with other financial creditors. However, the amendment added a condition to the said provision. The condition required the financial creditors and allottees alike, to apply jointly. Either one hundred creditors could file the application jointly or one-tenth of the total number of creditors could file. This fundamentally means that a financial creditor cannot apply for insolvency application independently anymore. Once filed, the financial creditor has to follow the procedure [7] as devised under The Code.

Operational Creditor

An operational creditor is defined u/s 5 (20) of The Code. The provision defines operational creditor as any person to whom the corporate debtor owes an operational debt. The Code also defines the scope of operational debt u/s 5 (21). The provision states that an operational debt is;

1. A debt which arises when the operational debtor provides any goods or services which also extends to employment to the corporate debtor; or
2. Dues arising from repayment of a debt already owed by the corporate debtor which is payable to any appropriate authority according to the prevailing laws.

The minimum threshold of debt owed to an operational creditor to file an application for insolvency remains INR 1 Cr.

Demand notice

There exists a fundamental difference in the application procedure for a financial creditor and operational creditor. A financial creditor can directly file an application for insolvency before the adjudicating authority u/s 7 of The Code. However, an operational creditor cannot directly apply for insolvency application. An operational creditor has to first send a demand notice to the corporate debtor as per section 8 of the Code. Section 8 of The Code states that the operational debtor has to send an invoice of the payment owed to it in the form of a demand notice. The corporate debtor then, in this case, has two options, one of which has to be communicated to the operational debtor;

1. Notice, if the payment is disputed, a suit or an arbitration proceeding is pending; or
2. The payment;

• • Successfully cleared, then receipt of the same has to be provided; or
  • Receipt of cheque encashed by the operational debtor.

The corporate debtor is required to respond within ten days of the receipt of the demand notice. It is probable, that the corporate debtor would not respond to the demand notice issued by the operational creditor within ten days. In this case, the operational creditor can move an application before the adjudicating authority, as prescribed u/s 9, and follow the due process.

Corporate Debtor

The Code provides for a corporate debtor to move an application for insolvency before the adjudicating authority against itself. The Code incorporated this provision to safeguard the interest of the corporate debtor when it foresees a breakdown in its mechanism. Breakdown essentially means that the corporate debtor concludes that its business is being affected. The impact of business would be such, that it would bring the company in loss and lead to defaulted payments. This conclusion is drawn only after making a complete analysis of the market forces and the shortage of liquid working capital. A corporate debtor is defined u/s 3(8) of The Code. The provision states that a corporate debtor is any person that owes a debt to another. A corporate debtor can file an application for insolvency before the adjudicating authority u/s 10 of The Code. In order to file an application, the corporate debtor is required to submit the following;

1. Provide books of account along with the application.
2. Propose name of a resolution professional who could be a potential interim resolution professional [8].
3. Resolution passed in favour of insolvency proceeding. In the case of a company, a resolution passed by the shareholders with a special resolution. In case of a partnership firm, a resolution passed with three-fourth majority.

Amendment 

A provision of the Code, Section 11, defines conditions for the persons unauthorized to file an insolvency application. However, the Parliament amended the said provision in 2019 by an amendment ordinance which observed some changes. The amendment added an explanation to the provision which permitted a corporate debtor to apply for insolvency against another corporate debtor [9]. For the petitioners mentioned above i.e. financial creditor, operational creditor and corporate debtor, once the application is filed, the procedure remains the same. Although the Code defines the procedure in immense detail i, several questions and concerns arise time and again. It is either the Judiciary or the Parliament, by means of an amendment, that deals with the concerns.