How to initiate insolvency proceedings against a defaulter under Insolvency and Bankruptcy Code, 2016


Overview: Recently, Insolvency and Bankruptcy Code, 2016 and application to Adjudicating Authority) Rules, 2016 were enacted by the government. The objective behind the Insolvency and Bankruptcy Code, 2016 is to consolidate laws which relate to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals. This code also aims to achieve a resolution of the problem faced by a creditor in a time bound manner. Further, it seeks to establish an Insolvency and Bankruptcy Board of India as a regulatory body for insolvency and bankruptcy law.

Purpose: the purpose of this article is to provide a snapshot of the procedure to be followed by an operational creditor, when there is an there is occurrence of default on the part of the corporate debtor. Please note that this code becomes applicable only when the amount of the default is one lakh rupees or more. This article is only indicative remedies that are available and gives a brief overview of the process and procedure that has to be followed by an operational creditor. The article is not to be construed as any legal advice whatsoever. The readers must seek profession help at all times.  

Areas of Application of Law: Insolvency and Bankruptcy Code, 2016, application to Adjudicating Authority) Rules, 2016

Process:

The code inter-alia applies to Companies incorporated under the Companies Act, 2013 or previous company law;

In accordance with the insolvency and bankruptcy code and the rules, the corporate insolvency resolution process can be initiated by an operational creditor of the corporate debtor by filing an application before the relevant National Company Law Tribunal (“NCLT/ Adjudicating Authority”) when there is a default in the payment of its operational debt.

For this purpose, a specific demand notice/ invoice has to be sent by the operational creditor to the corporate debtor where the creditor makes a demand for the payment of a debt that has been defaulted. Please note that in case there are any disputes between the parties and the corporate debtor has issued a notice of dispute to the operational creditor, then the NCLT which is the Adjudicating Authority for the purpose of the proceedings will in accordance with law reject the application operational creditor. In other words, if the evidence of any pre-existing disputes or repayment of debt is shown then the corporate insolvency process will not be initiated against the operational debtor.

Please note that the Demand Notice has to be issued in accordance with a specific format which has been provided in Form No. 3 of the Application to Adjudicating Authority Rules. a copy of invoice has to be sent to the corporate debtor along with this notice. Therefore it is advisable to engage a professional advocate at all times.

This has to be replied by the corporate debtor in ten days from receipt of the notice. Please also note the specific modes of service of this notice are provided. Service by hand, registered post or speed post with the acknowledgment is one of the modes.

After this period the operational creditor may approach the NCLT by way of filing an application seeking to initiate initiating a corporate insolvency resolution process. The NCLT shall within fourteen days of receipt of the application, admit or reject the application.

The application before NCLT has to be made in a specific form as provided in the code and rules. The Operational Creditor has to make the application in Form 5.

It must be noted that the defaulted debt must be an operational debt in accordance with the code.

 

Documents required to be submitted in the court if any: as indicated above along with the documents provided in the code and rules.  

 

Punishment/Expected Relief: payment of debt which has been defaulted or initiation of the corporate insolvency process

 

Landmark Judgments: (Title & Link of Judgments) –

Kirusa vs mobilox and other cases as available on the websites of NCLAT and NCLT. The law is developing every day.

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