How Financial Creditors Can Start CIRP in India: Legal Process Explained

Corporate Insolvency Resolution Process (CIRP) by a Financial Creditor
The Corporate Insolvency Resolution Process (CIRP) is a structured legal mechanism under the Insolvency and Bankruptcy Code, 2016 (IBC) that allows creditors to resolve the insolvency of a corporate debtor (CD) in a time-bound manner. A financial creditor (FC) plays a critical role in initiating CIRP when a corporate debtor defaults on its
financial obligations.

I. Legal Basis
The CIRP initiated by a financial creditor is governed by the IBC, 2016 and the Insolvency and Bankruptcy Board of India (IBBI) Regulations. The relevant provisions are:

Key Sections of the IBC, 2016:

• Section 7 – Initiation of CIRP by a Financial Creditor.
• Section 5(7) – Definition of Financial Creditor (includes banks, debenture
holders, bondholders, and any entity that has lent money).
• Section 5(8) – Definition of Financial Debt (includes loans, bonds,
debentures, lease financing, and derivatives).
• Section 14 – Moratorium on all legal actions against the corporate debtor
once CIRP is initiated.
• Section 30 – Submission and approval of a Resolution Plan.
• Section 31 – NCLT's power to approve or reject the Resolution Plan.
• Section 33 – Liquidation proceedings if CIRP fails.

Relevant Regulations:

• IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 – Lays down the procedural framework.
• Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 – Prescribes the application format and supporting documents.
• IBBI (Liquidation Process) Regulations, 2016 – Becomes applicable if CIRP fails and liquidation is initiated.

II. Steps in CIRP Initiated by a Financial Creditor

Step 1: Default by Corporate Debtor

A financial creditor can initiate CIRP when a corporate debtor defaults in repayment of a financial debt of ₹1 crore or more (threshold raised from ₹1 lakh via a notification dated 24 March 2020).
Key Points:
• The debt should be financial in nature (loan, bonds, debentures, etc.).
• The default must be established through documentary evidence (loan agreements, bank statements, Information Utility records).
• The financial creditor can be a single entity or a group of creditors.

Step 2: Filing an Application with NCLT (Section 7)

• The financial creditor files an application before the National Company Law Tribunal (NCLT), the adjudicating authority for corporate insolvency cases.
• The application should include:
o Evidence of default (records from an Information Utility, financial statements, loan agreements, or court orders).
o Details of the Corporate Debtor (name, address, corporate identification number).
o Name of the proposed Interim Resolution Professional (IRP) (optional, but preferred).
o Certificate from the financial institution confirming non-payment of debt.

Step 3: Admission or Rejection by NCLT

• Timeline: NCLT must decide within 14 days of receiving the application.
• NCLT will either:
1. Admit the application if the default is established, or
2. Reject the application, providing reasons. The financial creditor is given 7 days to rectify defects in case of rejection.

Step 4: Commencement of CIRP & Moratorium (Section 14)

Once the application is admitted:
1. Moratorium Period Begins.
o No legal actions can be taken against the corporate debtor.
o No debt recovery proceedings, property sales, or enforcement of security interests.
o No termination of essential contracts.

2. Public Announcement:
o Invites claims from creditors.
o Declares moratorium and details of the Interim Resolution Professional (IRP).

3. Appointment of IRP:
o The IRP takes over the management of the corporate debtor.
o Collects financial and operational data.

Step 5: Formation of Committee of Creditors (CoC)

• The IRP verifies claims submitted by financial and operational creditors.
• A Committee of Creditors (CoC) is formed, comprising only financial creditors (no operational creditors unless they hold significant debt).
• The CoC takes control of decision-making regarding the corporate debtor’s future.

Step 6: Appointment of Resolution Professional (RP)

• The CoC, within 30 days, either confirms the IRP as the Resolution Professional (RP) or appoints a new RP.
• The RP:
o Prepares an Information Memorandum detailing the financial condition of the corporate debtor.
o Invites resolution plans from prospective applicants.

Step 7: Resolution Plan Submission & Approval (Sections 30 & 31)

• Eligible applicants submit Resolution Plans to revive the corporate debtor.
• The CoC evaluates the plans based on feasibility, viability, and potential to revive the business.
• Approval requires 66% of CoC members' voting share.
• If approved, the plan is sent to NCLT for final approval.

Step 8: Approval or Liquidation

• If NCLT approves the Resolution Plan, the corporate debtor is revived under the plan’s terms.
• If no plan is approved within 330 days, NCLT orders liquidation under Section 33.

III. Timeline for CIRP (Section 12)

The entire process is time-bound to ensure swift resolution:
• 180 days for CIRP completion (extendable by 90 days).
• Maximum 330 days (including litigation delays).

IV. Key Regulations Involved

• IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 – Governs CIRP.
• IBBI (Liquidation Process) Regulations, 2016 – Governs liquidation.

V. Recent Judicial Interpretations

1. Innoventive Industries Ltd. v. ICICI Bank (2017):
o NCLT only needs to check default, not business viability.

2. Swiss Ribbons Pvt. Ltd. v. Union of India (2019):
o Upheld constitutional validity of Section 7 CIRP process.

3. Essar Steel India Ltd. v. Satish Kumar Gupta (2019):
o CoC decisions are paramount; NCLT cannot interfere with commercial wisdom.

4. Pioneer Urban Land & Infrastructure Ltd. v. Union of India (2019):
o Homebuyers qualify as financial creditors under IBC.

VI. Conclusion
The CIRP process empowers financial creditors by providing a structured mechanism to recover dues from insolvent corporate debtors. The financial creditor's role is crucial in initiating CIRP, forming the CoC, and approving resolution plans. If resolution fails, liquidation ensures orderly winding up. Adherence to timelines and effective decision
making by the CoC are key to the success of CIRP.