Who Can Initiate Insolvency Proceedings Under the IBC?

The Insolvency and Bankruptcy Code (IBC), 2016 provides a structured mechanism for resolving insolvency issues of various debtors in India. It lays out clear provisions for who can initiate insolvency proceedings. The process can be initiated by different parties, including creditors, debtors, and individuals, each with specific eligibility criteria.

Who Can Initiate Insolvency Proceedings Under the IBC?

1. Financial Creditors:

Definition:

A financial creditor is any person to whom a financial debt is owed. This typically includes banks, financial institutions, and other lenders.

Eligibility to File:

• A financial creditor can file for insolvency proceedings if the corporate debtor has defaulted on a debt.
• The default must be ₹1 lakh or more in case of a corporate debtor.
• Documentation: The financial creditor must submit proof of the default and the amount owed to initiate proceedings before the National Company Law Tribunal (NCLT).
• Process: Once the application is filed, the NCLT will admit the petition if it finds that the requirements are met.

2. Operational Creditors:

Definition:

An operational creditor is a person to whom an operational debt is owed. This includes suppliers, service providers, and any other person who has provided goods or services.

Eligibility to File:

• Operational creditors can initiate insolvency proceedings if they have a debt that is due and payable and if the corporate debtor has failed to make payment for more than 10 days after receiving a demand notice.
• The debt must be ₹1 lakh or more.
• The operational creditor must send a demand notice (within 10 days) and wait for response or non-payment. If there is no satisfactory response, they can file an application for insolvency.

Process:

The application is filed before the NCLT, and the debtor is required to respond within 10 days.

3. Corporate Debtors (Voluntary Initiation):

Definition:

A corporate debtor is a company or LLP (Limited Liability Partnership) that has defaulted on its debt obligations.

Eligibility to File:

• A corporate debtor itself can initiate insolvency proceedings if it defaults on payment of debt and decides to voluntarily file for corporate insolvency resolution under CIRP.
• The debtor company needs to pass a board resolution to file for insolvency and appoint a resolution professional to oversee the process.

Process:

A corporate debtor may voluntarily approach NCLT for admission to the CIRP if it is facing insolvency and is unable to pay off its creditors.

4. Operational Creditors (In Case of a Default on Payments to Service Providers):

If an operational creditor has provided goods or services to the company and has not received payments for the same, they can initiate insolvency proceedings.

The process is as follows:

• The operational creditor sends a demand notice under Section 8 of the IBC.
• If no payment or dispute arises within 10 days, the creditor can file an application with the NCLT for initiating the CIRP.

Financial creditors and operational creditors have distinct roles in the Committee of Creditors (CoC) during the resolution process.

5. Insolvency Professional (RP) Filing On Behalf of Creditors:

Insolvency professionals are appointed under the IBC to manage insolvency cases. They act as intermediaries to ensure that proceedings are conducted fairly and according to legal standards.

Eligibility to File:

• An insolvency professional (RP) can file for insolvency on behalf of creditors, after receiving approval from the Committee of Creditors (CoC).
• The RP will take over the management of the debtor company’s operations during the resolution process.

6. Personal Insolvency (Individuals or Partnerships):

Individuals or Partners can also file for insolvency under the IBC, which was introduced through amendments in 2019. The process for individual insolvency is slightly different but still follows the insolvency resolution process similar to corporate insolvency.

Eligibility to File:

• An individual debtor or partnership can file for insolvency if they are unable to pay off their debts exceeding the threshold set by the IBC.

Process:

Individuals and partnerships may file an application before NCLT for the resolution of their insolvency, where the debtor may either undergo debt restructuring or liquidation.

7. Regulatory Authorities (In Specific Cases):

In certain cases, regulatory authorities like the Reserve Bank of India (RBI) may initiate insolvency proceedings, especially in the case of financial institutions or when there is a failure to resolve large-scale corporate defaults.

• RBI may intervene in cases of systemic risk or non-compliance in the financial sector.

8. Government and Public Sector Enterprises:

While government entities or Public Sector Enterprises (PSEs) are generally not directly covered under the IBC, if they are incorporated as private companies, they can be subjected to the insolvency process if they fail to meet their debt obligations.

If a government-controlled company defaults, it can still file for insolvency.

Key Points to Remember:

• Financial creditors and operational creditors (individuals, service providers, suppliers, etc.) can file for insolvency if a debt is unpaid for more than 10 days.
• Corporate debtors can voluntarily file for insolvency if they cannot meet their debt obligations.
• The minimum default amount for filing insolvency proceedings is ₹1 lakh.
• The insolvency professional (RP) plays a significant role in managing insolvency cases, representing creditors, and overseeing resolution plans.
• The moratorium period begins once the insolvency petition is admitted, preventing creditors from further recovery actions during the resolution process.

Example Scenarios:

Scenario 1: Financial Creditor Files Insolvency

A bank has lent a corporate debtor a large sum of money, and the debtor defaults on payments. The bank (as a financial creditor) files an insolvency petition with NCLT after failing to recover dues. NCLT admits the application, and CIRP begins.

Scenario 2: Operational Creditor Files Insolvency

A supplier who has provided raw materials to a manufacturing company but hasn’t been paid for 6 months, sends a demand notice to the company. When no payment is received, the supplier files an insolvency petition before the NCLT for initiating CIRP.

Scenario 3: Corporate Debtor Files Insolvency

A textile company facing severe financial stress due to market conditions decides to voluntarily file for insolvency. The board of the company passes a resolution to file the application and appoint a Resolution Professional (RP) to manage the CIRP process.

Conclusion:

Insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), 2016 can be initiated by various parties, including financial creditors, operational creditors, corporate debtors, and insolvency professionals. Each party must meet specific criteria, such as the minimum default amount and lack of payment for over 10 days, to file an insolvency petition before the National Company Law Tribunal (NCLT). The IBC offers a time-bound resolution process to maximize the value of the distressed company’s assets and ensure the recovery of debts.