Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016 pertains to the initiation of a Corporate Insolvency Resolution Process (CIRP) by a financial creditor. It lays out the conditions, requirements, and procedures for a financial creditor to trigger insolvency proceedings against a corporate debtor. Here’s an explanation of the key concepts:

1. Who Can File?

• A financial creditor, individually or jointly with other financial creditors, has the right to file an application for initiating the CIRP.
• A financial creditor is defined under the IBC as a person to whom a financial debt is owed, including institutions like banks, NBFCs, or any individual providing loans with interest.

2. What Is a Financial Debt?

• Financial debt is any debt with interest that has been disbursed against consideration for the time value of money. It includes loans, bonds, debentures, guarantees, and similar financial instruments.

3. Grounds for Filing

The application can be filed if:

• A corporate debtor commits a default in the repayment of financial debt.
• The default amount meets or exceeds the threshold limit (as notified by the government, currently ₹1 crore, as of the latest amendment).

4. Application to the Adjudicating Authority

• The application must be submitted to the National Company Law Tribunal (NCLT), which is the Adjudicating Authority for corporate persons.
• The application should include:
  • Proof of the existence of financial debt.
  • Evidence of the default.
  • Details of the corporate debtor.
  • The name of the proposed Interim Resolution Professional (IRP).

5. Role of the NCLT

Upon receiving the application, the NCLT performs the following functions:

• Admissibility Check: The NCLT examines whether:
  • The application is complete.
  • There is evidence of a default.
  • The financial creditor has provided the required information.
• Time Frame for Decision: The NCLT must decide to admit or reject the application within 14 days of receipt.
  • If the application is admitted, the CIRP commences, and the IRP takes charge.
  • If the application is rejected, the NCLT provides reasons in writing and may allow rectification.

6. Commencement of CIRP

Once the NCLT admits the application:

• A moratorium under Section 14 comes into effect, halting actions like lawsuits or asset seizure against the corporate debtor.
• The IRP is appointed, and a public announcement is made to invite claims from creditors.
• The CIRP process must be completed within 180 days (extendable by another 90 days in specific circumstances).

7. Corporate Debtor’s Rights

• The corporate debtor has the right to oppose the application by proving the absence of default or providing evidence of dispute regarding the debt.

8. Significance of Section 7

• Empowers Financial Creditors: It provides financial creditors with a streamlined mechanism to address payment defaults and recover their dues.
• Promotes Transparency: The requirement for proof ensures frivolous claims are minimized.
• Initiates Resolution: It aims to either revive the corporate debtor through a resolution plan or ensure its liquidation in case of unsustainability.

Challenges and Criticism

• Timelines: Often, the 14-day limit for NCLT’s decision is not adhered to, causing delays.
• Ambiguity: Disputes over the classification of a financial creditor or financial debt sometimes lead to prolonged litigation.
• Moratorium Misuse: Critics argue that some corporate debtors misuse the moratorium provision to delay recovery efforts by other creditors.

Conclusion

Section 7 of the IBC, 2016, provides financial creditors with a robust framework to initiate insolvency proceedings. It ensures that defaulting corporate debtors are held accountable while aiming to balance creditor and debtor interests. However, effective implementation, reduced delays, and clarity in procedures are essential for the section to achieve its intended objectives.

Landmark Judgments

1. Innoventive Industries Ltd. v. ICICI Bank (2017)

• Case Summary: This was one of the first significant judgments under Section 7. The Supreme Court held that the admission of a petition under Section 7 is not subject to any preliminary investigation or adjudication. The only condition is that the default in payment must be established.
• Significance: The ruling clarified that if a default in repayment is proven, the NCLT must admit the petition. This judgment also made it clear that the NCLT cannot look into the merits of the debt or disputes between the creditor and the debtor at the stage of admission.
• Impact: The judgment strengthened the creditor’s position and ensured that financial creditors could initiate the insolvency process more effectively.

2. V. Padmakumar v. Stressed Assets Stabilization Fund (2018)

• Case Summary: This case revolved around the issue of whether a financial creditor could initiate CIRP when the default is not based on a genuine debt. The Court ruled that the NCLT should examine whether a default in payment of a financial debt occurred, but it cannot delve into the disputes regarding the debt at the time of admitting the petition.
• Significance: This judgment reinforced the idea that the IBC is meant to resolve the insolvency issues quickly, and courts should not delve into the merits of the claims during the admission phase.

3. Dena Bank v. C. Shivakumar Reddy (2018)

• Case Summary: The Supreme Court ruled on the issue of the role of a financial creditor in initiating the CIRP. It confirmed that a financial creditor can approach the NCLT directly for the initiation of the CIRP, even if the debtor’s financial position has already deteriorated.
• Significance: This judgment reiterated that the primary objective of the IBC is to revive financially distressed companies, not just to liquidate them, thus allowing financial creditors the right to trigger CIRP.

4. Edelweiss Asset Reconstruction Company Ltd. v. Rohan Garg (2020)

• Case Summary: The Supreme Court ruled on the issue of whether the “existence of a default” must be proven before the NCLT can admit a petition. The Court concluded that the financial creditor must prove the existence of a default, but it does not have to be a willful default.
• Significance: The judgment clarified that the mere occurrence of default is enough for initiating CIRP under Section 7 of IBC, irrespective of whether the default was intentional or inadvertent.

5. State Bank of India v. Jyoti Structures Ltd. (2021)

• Case Summary: In this case, the NCLT and NCLAT initially dismissed the application filed under Section 7 on the grounds that the default was disputed. However, the Supreme Court held that the mere dispute of the default is not sufficient to reject an application. The Court emphasized that the financial creditor is entitled to trigger CIRP as long as the default can be established, even if the debtor raises disputes.
• Significance: The ruling reinforced that NCLT’s role is to assess whether a default exists, and not to assess the merit of the dispute at the stage of admission.

6. Rohit Mehra v. State Bank of India (2020)

• Case Summary: This case involved a dispute regarding the jurisdiction of the NCLT to entertain a Section 7 application when there was a dispute between the parties about the claim amount. The Court ruled that the NCLT has jurisdiction to admit a Section 7 petition if the financial creditor can establish the existence of a default.
• Significance: This judgment emphasized the need to prioritize the resolution of insolvency cases and the application of the IBC without being impeded by disputes over the quantum of debt during the initiation stage.

7. K. Sashidhar v. Indian Overseas Bank (2019)

• Case Summary: This landmark decision focused on the powers of the Committee of Creditors (CoC) in the Corporate Insolvency Resolution Process (CIRP). The Court ruled that the CoC has the authority to approve or reject a resolution plan, but it cannot challenge the decision to admit a Section 7 application based on internal disputes.
• Significance: The judgment made it clear that once a petition under Section 7 is admitted, the CoC cannot interfere in the admission decision, ensuring the CIRP is not delayed by internal disputes.

8. M/s. Tata Steel Limited v. M/s. Videocon Industries Limited (2021)

• Case Summary: The Supreme Court ruled on the issue of whether an application under Section 7 could be admitted after the filing of the application was delayed. The Court upheld the principle that the IBC aims to resolve insolvency issues in a time-bound manner and should not be bogged down by delays in initiating the process.
• Significance: The Court’s ruling underlined the urgency and efficiency required in CIRP processes, and stressed that the IBC framework is meant to address financial distress in a time-bound manner.