Section 7 Requirements Under The Insolvency & Bankruptcy Code (IBC)

Written By: Radhika Deekshay, Intern, Jindal Global Law School

The Insolvency & Bankruptcy Code, 2016 (further amended in 2019) was introduced with the motive of concluding insolvency proceedings in a time-bound and efficient manner. The IBC allows multiple parties (i.e. corporate debtors, financial creditors, operational creditors) to initiate an insolvency resolution process on account of a default related to the debt.

Who are financial creditors and corporate debtors? Section 5(7) broadly defines ‘Financial Creditor’ to mean any person, to whom a debt is owed, including those to whom the debt has been transferred or legally assigned, as well. A ‘Corporate Debtor’ is any corporate person who owes the aforesaid debt to the financial creditor.

The procedure under Section 7, however, is specifically meant for financial creditors, who may file an application to initiate Corporate Insolvency Resolution Process either by themselves or jointly with other creditors before the National Company Law Tribunal, under clause (1) of the provision. To that extent, Section 7 of the IBC vests a right in financial creditors to initiate corporate insolvency resolution process against corporate debtors.

The Explanation to Section 7(1) broadly defines ‘default’ – in respect of which the application is filed – to include both defaults specifically in respect of the debt owed to the applicant as well as debts owed to other financial creditors. This means that even though the default may occur with respect to debt owed to financial creditor A, financial creditor B can file an application under Section 7 on account of this – even though no default has occurred with respect to debt owed to him.

In 2019, Section 7(1) was amended to introduce two exceptions to the general rule, via three provisos. As per the First Proviso, in the case of financial creditors referred to in Section 21(6A)(a) and (b) (i.e. deposit or bondholders, and class of creditors that exceed the number as may be specified) – an application under Section 7(1) is to be mandatorily filed by atleast 100 creditors of the same class or ten percent (10%) of the total number of creditors, whichever is less. The same rule, per the Second Proviso, has also been imposed for financial creditors who are real estate allottees under a certain real estate project, such that an application filed by them must also be filed jointly by not less than 100 creditors or ten percent (10%) of the total number, whichever is less. Furthermore, these new requirements have also been given a certain retrospective effect by the Third Proviso, such that they will also apply to applications that were filed before the 2019 amendment but not yet admitted.

The constitutional validity of these amendments, specifically the third proviso, has been recently upheld by the Supreme Court in the case of Manish Kumar vs. Union of India vide order dated 19th January, 2021. The case had been filed by a group of real estate allottees, who alleged that the different thresholds enacted for them by virtue of the second proviso were in violation of Article 14 of the Constitution.

Further, Section 7(3) requires that a financial creditor/applicant must also provide:

  1. record of the default recorded with information utility or other such evidence of the default,
  2. name of the interim resolution professional,
  3. any other information that the Board requires.

As evident by the use of the term “shall provide”, the requirements under Section 7(3) are mandatory, such that non-compliance of the same leads to rejection of the application filed under Section 7.

The requirement under clause (a) is specifically important, as the duty of the Adjudicating Authority i.e. the National Company Law Tribunal (NCLT) rests completely on the same. The Adjudicating Authority, while assessing a Section 7 application, is only required to ascertain the existence of a default – no more and no less. And it must ascertain this default based on the evidence provided under clause (a) of Section 7(3). In order to ensure speedy disposal, the Adjudicating Authority is required to pass its order within 14 days of the application, as mandated by sub-section (4).

The Adjudicating Authority may either admit or reject the application, as per Section 7(5). The admittance of an application rests upon the completion of three requirements by the NCLT lawyer – first, the existence of a default, as made out by the Adjudicating Authority based on the evidence furnished to him; second, the application must be complete; and three, no disciplinary proceeding must be pending against the resolution professional. If all three requirements are satisfied, the application may be admitted by the NCLT under Section 7(5)(a).

However, if either of the three requirements remains unfulfilled, the NCLT may reject the application under Section 7(5)(b). The rejection of an application entails two more procedural requirements – one, the recording of reasons in writing by the Adjudicating Authority; and two, a notice to the financial creditor/applicants before the said rejection. The notice is meant to give seven days to the applicants to rectify any mistakes on their part, that are the cause of said rejection. If the same are duly rectified to the satisfaction of the Adjudicating Authority, an order of admittance may be passed under clause (a), instead.

The final step under Section 7 comes after the application has been admitted or rejected: a notice has to be sent to both the financial creditor and corporate debtor in case of the former, and to the financial creditor alone in case of the latter.

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