Financial vs Operational Creditors

Financial Creditor Definitions

• Financial debt is debt plus interest, disbursed against the consideration of the time value of money.
• A financial creditor is any person to whom a financial debt is owed, including a person to whom a financial debt has been legally assigned or transferred.
• Guardians, administrators, executors of estates, and debenture trustees are eligible to initiate corporate insolvency resolution processes (CIRP) for financial creditors.
• A creditor with security from a corporate debtor for a third-party debt is not considered a financial creditor unless the debtor owes a financial debt to that person.

Operational Creditor Definitions

• Operational debt is a claim for goods, services, employment, or repayment of dues under current law and payable to the Central Government, State Government, or local authorities.
• An operational creditor is any person who is owed an operational debt. This includes persons legally assigned or transferred the debt.

Default Definition

• Default is the non-payment of a debt (or installment) when it is due and payable.

Initiation of CIRP

• CIRP is the process of resolving corporate insolvency, following the provisions of the Code.
• A financial creditor or an operational creditor can initiate CIRP.
• A corporate applicant can also initiate CIRP.
• Minimum amount of default for CIRP initiation is Rs.1 crore.

Operational Creditor Initiation

• An operational creditor must send a demand notice or invoice for payment of the operational debt to the corporate debtor.
• The corporate debtor has 10 days to respond to the notice (or invoice) confirming dispute existence or payment.
• If dispute exists or the payment is made then the operational creditor can file an application with the National Company Law Tribunal, for insolvency.

Corporate Applicant Initiation Process

• Section 10(3) of the Code requires a corporate applicant to submit information relating to its books of account, special resolution passed by shareholders or at least 3/4 of partners approving the application and the resolution professional proposed.
• The existence of default must be determined within 14 days (from receiving the application).

Rights and Powers of Resolution Professionals (RP)

• Protecting and preserving corporate debtor assets.
• Representing the corporate debtor for any third party involvement.
• Appointing accountants and legal personnel.
• Convening and attending meetings of the Committee of Creditors (CoC).
• Presenting resolution plans.
• Raising interim funds.
• Duties of managing corporate operations.
• Entering and modifying contracts on behalf of the corporate debtor

Committee of Creditors (CoC)

• The CoC decides on the corporate debtor's functioning.
• It handles matters related to the company.
• It can approve or reject the resolution plan.
• It can choose liquidation rather than resolution plan acceptance.
• It can modify the resolution plan with changes as needed.

Interim Resolution Professionals (IRP)

• Collecting financial data.
• Collecting creditor claims.
• Reporting to the CoC on the corporate debtor's financial position.
• Acting as interim representatives of the corporate debtor.

Interim Moratorium

• A temporary suspension of legal or judicial proceedings against a corporate debtor.
• The moratorium is in effect from the date the application is made until its acceptance or rejection.

Examination of Application by Resolution Professional (RP)

• The RP has 10 days to review and report to the adjudicating authority.
• Any information inaccuracies can cause rejection of applications.
• The RP will determine if the debtor is able to pay the debts listed in the application.
• Any errors in application details result in rejection.

Objection by Creditor

• Creditors have 10 days to file objections after the initial order.
• Grounds for objection include incorrect qualifying debt inclusions or inaccuracies in debt detail.

Application Against RP Decisions

• The debtor or creditor can file objections to resolution professional decisions within 10 days.
• Grounds for objection include lack of opportunity for representation or non-compliance with the specific requirements of the Code.

General Duties of the Debtor

• Providing all needed information to the RP and attend meetings as required.
• Reporting any significant changes in financial circumstances.

Revocation of order admitting an application

• When circumstances change, the application can be revoked if the debtor is no longer eligible for a fresh start.

Discharge Order

• RP must submit a final list of eligible debts 7 days prior to the moratorium ending.
• The adjudicating authority can then order discharge from the qualifying debts.

Fast Track CIRP

• Fast Track CIRP is for small corporations..
• Debtor or creditors initiate application for fast track.
• A 90-day time-frame with possible extensions for completion of resolution is set in place up front.
• 75% of CoC voting support is required for extensions.
• An application must include proof of the debtor's eligibility.

Moratorium Under Part 3

• A 180-day moratorium starts if the application is accepted.
• The 180-days start counting from the day the adjudicating authority admits or rejects the application.
• This will encompass all debts.

Waterfall Mechanism

• The step-by-step liquidation process (Section 59).
• The order liquidates the corporate debtor's assets to pay off debtors.

Liquidation Order

• The company is liquidated according to Section 31 of the Companies Act and the creditors get paid.
• A public announcement of the liquidation process is made.

Liquidator Appointment

• An existing Resolution Professional (RP) can transition to liquidator with proper consent.
• The NCLT or the AA can choose a replacement RP when needed.

Liquidator Scope/Powers/Duties

• Taking ownership and control of the corporate debtor's assets, property, and claims.
• Evaluating assets and properties in the manner prescribed by the IBBI.
• Protecting and preserving the corporate debtor's assets and properties.
• Conducting sales related to the corporate debtor's assets, or properties by public auction or private contract.
• Determining, investigating, and determining the value of claims by creditors.
• Taking care of legal proceedings on behalf of the corporate debtor.
• Engaging professional assistance, as needed.
• Notifying creditors about claims and related details.
• Dealing as the authorized representative of the corporate debtor.
• Distributing, or passing along, proceeds of sale to the creditors.

Preferential Transaction Set Aside

• A transfer of assets that favours one creditor above other creditors.
• A transaction for the benefit of a creditor, surety, or guarantor.
• Transfers in the ordinary course of business, security interests, transactions post commencement, or any transaction based on pre-existing arrangements are exempt.
• Preference given to creditors in the two-year period before initiating insolvency proceedings

Undervalued Transactions

• Transfers assets where the consideration value is significantly less than the assets' value.
• Relevant time is within two years from insolvency for related parties, or one year for other parties.

Extortionate Credit Transactions

• This involves transactions where exorbitant repayments or debt are involved, and can be declared invalid if too exorbitant.
• The Liquidator can decide if there is an extortionate transaction based on whether the payment was reasonable for the services or assets involved and whether this happened in the 2 years proceeding the insolvency commencement date.

Bankruptcy Estate

• Section 79(9).
• Taking control of assets and distributing proceeds to creditors.
• Assets may include land, buildings, and cash.
• This includes handling appropriate proceedings by the relevant authority.

Adjudicating Authority (NCLT/NCLAT)

• The National Company Law Tribunal (NCLT) is the primary adjudicating authority for CIRP and liquidation cases.
• The National Company Law Appellate Tribunal (NCLAT) handles appeals related to NCLT decisions.
• The authority handles disputes arising within the scope of IBC or any other related laws.
• The Authority is responsible for determining the admissibility of an application for initiating insolvency proceedings, making the order for the liquidation of corporate assets and approving resolution plans.

Appellate Authorities

• The National Company Law Appellate Tribunal (NCLAT) handles appeals against NCLT decisions about the resolution or liquidation orders.
• The NCLAT is the highest appellate body in terms of corporate insolvency cases, and provides a final decision against disputes.

Debts Recovery Tribunals (DRTs) and Debts Recovery Appellate Tribunals (DRATs)

• Established tribunals to expedite the adjudication and recovery of debts owed by entities to banks and financial institutions.
• The tribunals and appellate bodies can handle bankruptcy cases from individuals and partnerships in addition to businesses.
• The tribunals are equipped to resolve debts over 20 lakhs.

Procedure for Applications to DRTs

• Application to a DRT is received by the authority in its respective jurisdiction.
• The applicant gives a statement with associated fees.
• The DRT will allow or disallow the application in line with its authority, jurisdiction, and any requirements of the relevant legislations.

Evolution of IBC

• The IBC evolved through various historical acts, adapting through time, with a focus on restructuring, rather than liquidation.
• Prior acts focused on financial institutions, not a broad combination of corporations and individuals as in the IBC.

Sick Industrial Companies Act, 1985 (SICA)

• SICA was a pre-IBC law that aimed to solve financial problems through restructuring, and is largely superseded by the IBC.
• SICA had a broad scope but significant limitations, primarily due to its focus on corporate debt, and lacked a unified process.

This quiz explores the definitions and distinctions between financial and operational creditors. Understand the key concepts surrounding financial debt and operational debt, including eligibility for corporate insolvency resolution processes. Test your knowledge on the roles and definitions crucial for navigating financial situations.