Financial vs Operational Creditors

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Questions and Answers

What is the primary purpose of the provisions outlined?

To ensure debts are paid immediately.

To guide creditors on how to collect debts.

To impose restrictions on debtors' financial activities.

To assist debtors in making a fresh start. (correct)

Which of the following qualifies as a 'Qualifying Debt' under S.79(19)?

Fines imposed by a court.

Debts secured by property or assets.

Any amount due under a liquidated sum contract. (correct)

A debt incurred three months prior to the application.

Which of these debts is specifically categorized as 'Excluded Debt'?

Credit card debt.

A debt from a utility bill.

Damages for breach of a legal obligation. (correct)

A personal loan from a bank.

Who can make the application for a fresh start according to S.80(2)?

The responsible party designated by the debtor. Signup and view all the answers

What type of debts cannot be discharged when applying under these provisions?

Secured debts and certain specified excluded debts. Signup and view all the answers

What is the maximum time frame within which the Board must nominate a person after receiving direction from the AA?

10 days Signup and view all the answers

What must the resolution professional do within ten days of their appointment?

Submit a report to the AA Signup and view all the answers

Which of the following is NOT a ground for the rejection of an application under Section 83?

The debtor's financial circumstances have improved Signup and view all the answers

When does the moratorium commence according to Section 85?

From the date of admission of the application Signup and view all the answers

What action must the RP take regarding objections made by the creditor as per Section 86?

Examine and then accept or reject the objections Signup and view all the answers

What is the primary purpose of a demand notice?

To demand payment of an operational debt Signup and view all the answers

How long does a corporate debtor have to notify the operational creditor of a dispute regarding the debt?

Ten days Signup and view all the answers

What happens if the operational creditor does not receive a payment or notice of dispute within ten days?

The creditor can file an application with the National Company Law Tribunal Signup and view all the answers

What must accompany the application to the National Company Law Tribunal?

A copy of the demand notice or invoice Signup and view all the answers

Which document acts as proof that there is no dispute regarding the debt?

An affidavit that there is no dispute Signup and view all the answers

What is the consequence of the corporate debtor not responding to the demand notice?

Insolvency resolution process may be initiated Signup and view all the answers

What type of creditor issues a demand notice?

Operational creditor Signup and view all the answers

Which of the following is NOT required to file an application with the tribunal?

Evidence of prior communication with other creditors Signup and view all the answers

What is one of the responsibilities of the resolution professional (RP) after examining the debtor's situation?

Prepare an amended list of qualifying debts Signup and view all the answers

What is the time frame within which an application against the decision of the resolution professional must be made?

10 days Signup and view all the answers

Which of the following is NOT a ground for filing an application against the resolution professional?

RP provided incorrect financial assessments Signup and view all the answers

In which situation can a debtor apply for a revocation of the order admitting their application?

If the debtor is no longer eligible due to financial changes Signup and view all the answers

What must the resolution professional do at least 7 days before the moratorium ends?

Submit a final list of qualifying debts to the Adjudicating Authority Signup and view all the answers

Which duty is a debtor required to fulfill under section 88?

Make all financial information available to the RP Signup and view all the answers

What is one of the reasons the Adjudicating Authority must decide on the application against the RP within a certain time frame?

To ensure the debtor's rights are protected Signup and view all the answers

What action can the debtor or creditor take under section 89 regarding the resolution professional?

Apply to replace the RP Signup and view all the answers

Under which condition does a transfer made by a corporate debtor (CD) not constitute a preferential transaction?

If the transfer creates a security interest to secure new value Signup and view all the answers

What constitutes an undervalued transaction according to Section 45?

A transaction for a consideration significantly lower than the fair value Signup and view all the answers

What is a key characteristic of preferential transactions?

They can benefit related parties if done before a specific time frame Signup and view all the answers

What is considered a relevant time for a transaction under Section 46?

If it was made to a related party within 2 years of insolvency Signup and view all the answers

Which of the following is an example of an extortionate credit transaction?

Receipt of operational debt under coercive circumstances Signup and view all the answers

Which situation would classify a transfer as a preference?

If a debt is settled in a manner affecting other creditors adversely Signup and view all the answers

What action may be taken under Section 47 regarding suspected transactions?

An application may be made to reverse the transaction Signup and view all the answers

What is not classified as a preferential transaction?

Transfers made in the ordinary course of business Signup and view all the answers

Which statement accurately describes 'undervalued transactions'?

They occur when assets are transferred for significantly low consideration Signup and view all the answers

What is the primary function of Debts Recovery Tribunals (DRTs)?

To facilitate debt recovery involving banks and financial institutions. Signup and view all the answers

What is the maximum claim amount that DRTs can adjudicate?

20 lakhs Signup and view all the answers

Where must banks file their applications for debt recovery?

In the DRT within the local limits where the defendant resides or conducts business. Signup and view all the answers

What restricts a defendant from disposing of their property during a DRT case?

An interim order from the Tribunal. Signup and view all the answers

Which of the following correctly describes the head of a Debts Recovery Appellate Tribunal (DRAT)?

Chairperson Signup and view all the answers

What must a defendant do before the first hearing in a DRT case?

Present a written statement of their defense. Signup and view all the answers

How long does a DRT have after hearing both parties to pass a final judgment?

30 days Signup and view all the answers

What provides access to the Debts Recovery Tribunals (DRTs) for financial institutions?

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. Signup and view all the answers

Study Notes

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.

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Description

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.