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Role of Financial Creditors in Initiating CIRP

Learn about Role of Financial Creditors in Initiating CIRP as part of Insolvency and Bankruptcy Code (IBC) Practice

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Role of Financial Creditors in Initiating Corporate Insolvency Resolution Process (CIRP)

The Insolvency and Bankruptcy Code, 2016 (IBC) introduced a paradigm shift in how corporate distress is handled in India. A cornerstone of this reform is the Corporate Insolvency Resolution Process (CIRP), designed to provide a time-bound mechanism for resolving insolvency. Financial Creditors play a pivotal role in initiating this process, acting as gatekeepers to ensure that only genuine cases of default trigger the extensive procedures of CIRP.

Understanding Financial Creditors

Under the IBC, a 'Financial Creditor' is defined as any person to whom a financial debt is owed. This includes, but is not limited to, banks, financial institutions, and entities that have provided finance to a corporate debtor. A 'Financial Debt' is a debt along with interest, if any, which is disbursed against the consideration for the time value of money. This broad definition ensures that entities providing crucial funding to businesses are recognized and empowered within the insolvency framework.

The Application Process for Financial Creditors

To initiate CIRP, a Financial Creditor must file an application in the prescribed form (Form 'C') with the NCLT. This application must be accompanied by:

  1. Records of the default to the best of the applicant's knowledge.
  2. The name of the Resolution Professional proposed to be appointed.
  3. Proof of payment of the requisite fee.

The IBC aims to be a creditor-driven process. Financial Creditors, by virtue of their financial stake, are given the primary right to initiate CIRP.

Key Considerations for Financial Creditors

Before filing an application, Financial Creditors must carefully consider several aspects:

  1. Nature of Debt: Ensure the debt is a 'financial debt' as defined under the IBC.
  2. Existence of Default: Gather sufficient evidence to prove a clear and unequivocal default.
  3. Threshold Limit: Confirm the debt amount meets or exceeds the ₹1 Crore threshold.
  4. Proposed Resolution Professional: Identify a suitable and independent Resolution Professional.
  5. Timeliness: The IBC is time-bound, so prompt action is crucial.
What is the minimum debt threshold for a Financial Creditor to initiate CIRP?

₹1 Crore

Impact of Financial Creditor's Role

The proactive role of Financial Creditors in initiating CIRP ensures that viable businesses facing temporary liquidity issues can be rescued, while non-viable ones are resolved efficiently. This mechanism promotes a healthier credit ecosystem by providing a structured framework for debt recovery and resolution, thereby fostering economic growth and investor confidence.

The initiation of CIRP by a Financial Creditor involves a structured process. It begins with the creditor identifying a default in repayment of a financial debt. This default must be substantial, meeting the minimum threshold set by the IBC. The creditor then prepares an application, Form 'C', detailing the default and proposing a Resolution Professional. This application is filed with the National Company Law Tribunal (NCLT). The NCLT, upon admission, initiates the CIRP, appointing the Resolution Professional to manage the corporate debtor and facilitate a resolution plan. This entire sequence highlights a clear workflow from debt default to resolution initiation.

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Learning Resources

Insolvency and Bankruptcy Code, 2016 - Bare Act(documentation)

The official and most up-to-date version of the Insolvency and Bankruptcy Code, 2016, essential for understanding the legal framework and definitions.

Insolvency and Bankruptcy Board of India (IBBI) - About CIRP(documentation)

Official overview from IBBI explaining the Corporate Insolvency Resolution Process, its objectives, and key stakeholders.

NCLT Rules and Procedures(documentation)

Provides access to the rules and regulations governing the National Company Law Tribunal, crucial for understanding procedural aspects of filing applications.

Understanding the Role of Financial Creditors under IBC(blog)

A detailed article explaining the rights, responsibilities, and procedural steps for financial creditors under the IBC.

CIRP Initiation: A Guide for Financial Creditors(blog)

A practical guide focusing on the practical steps and considerations for financial creditors when initiating the CIRP.

Supreme Court Judgments on IBC - Key Cases(paper)

Access to Supreme Court judgments, which often interpret and clarify provisions of the IBC, including the role of financial creditors.

National Company Law Tribunal (NCLT) - Case Search(documentation)

Allows users to search for admitted CIRP cases, providing real-world examples of applications filed by financial creditors.

IBC Explained: A Video Series by a Law Firm(video)

A hypothetical link to a video explaining IBC concepts, including the initiation of CIRP by financial creditors (actual link would need to be found).

Wikipedia: Insolvency and Bankruptcy Code, 2016(wikipedia)

Provides a general overview of the IBC, its history, objectives, and key features, including the role of different creditors.

IBBI Discussion Paper on CIRP(paper)

A discussion paper from IBBI that may offer insights into current challenges and proposed amendments related to CIRP, including the creditor's role.