Role of Operational Creditors in Initiating CIRP
The Insolvency and Bankruptcy Code, 2016 (IBC) introduced a streamlined process for resolving corporate insolvency, known as the Corporate Insolvency Resolution Process (CIRP). A crucial aspect of initiating this process involves understanding the rights and roles of various stakeholders, particularly operational creditors. This module focuses on how operational creditors can play a pivotal role in triggering CIRP.
Who are Operational Creditors?
Operational creditors are entities to whom a corporate debtor owes an operational debt. An 'operational debt' is a claim in respect of the provision of goods or services, including employment to the corporate debtor. This contrasts with financial creditors, who have a financial relationship with the debtor, typically involving the lending of money.
Initiating CIRP: The Process for Operational Creditors
An operational creditor can initiate CIRP by filing an application before the Adjudicating Authority (National Company Law Tribunal - NCLT). The application must demonstrate that a default has occurred and that the amount of the default is not less than INR 1 lakh (as per current provisions, subject to amendments).
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Key Requirements for the Application
To successfully file an application, an operational creditor must provide specific documentation and information to the NCLT. This includes:
- A copy of the invoice or record of the default to the corporate debtor, provided by the operational creditor.
- A record of the default to the information utility or a certificate from the financial institution maintaining accounts of the corporate debtor, if available.
- Proof of non-payment of the operational debt by the corporate debtor.
The 'default' is the cornerstone of an operational creditor's claim. Without a demonstrable default, the application to initiate CIRP will likely be dismissed.
The Demand Notice
Before filing an application with the NCLT, an operational creditor is required to serve a demand notice on the corporate debtor. This notice must be in the prescribed form and demand payment of the unpaid operational debt. The corporate debtor then has 10 days from the receipt of the notice to either pay the debt or bring to the notice of the creditor the existence of a dispute or the record of the pendency of a suit or arbitration proceedings filed before the receipt of such notice or thereafter, which has not been stayed.
Disputes and Their Impact
A significant defense for a corporate debtor against an operational creditor's application is the existence of a 'dispute'. If the corporate debtor can demonstrate a pre-existing dispute regarding the debt, or a pending suit or arbitration proceeding that challenges the debt, the NCLT may reject the application. The dispute must be genuine and not a mere afterthought to avoid insolvency proceedings.
The IBC framework distinguishes between a 'default' and a 'dispute'. A default is a failure to pay an amount when it becomes due. A dispute, on the other hand, implies a disagreement over the existence or quantum of the debt itself. The NCLT's role is to ascertain if a default has occurred. If a genuine dispute exists, it suggests that the claim might not be a clear-cut debt, and thus, CIRP might not be the appropriate recourse. The burden is on the corporate debtor to prove the existence of such a dispute.
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Significance of Operational Creditors in CIRP
Operational creditors, though often unsecured, are vital to the functioning of any business. Their ability to initiate CIRP ensures that companies remain accountable for their contractual obligations. This mechanism not only helps operational creditors recover their dues but also contributes to market discipline by discouraging companies from defaulting on their operational debts.
INR 1 lakh (subject to amendments).
10 days from the receipt of the notice.
Learning Resources
The official and most up-to-date version of the Insolvency and Bankruptcy Code, 2016, essential for understanding the legal framework and specific provisions related to CIRP initiation.
Detailed regulations governing the Corporate Insolvency Resolution Process, providing procedural clarity and specific requirements for filing applications, including those by operational creditors.
A comprehensive guide to the procedures and practices followed at the National Company Law Tribunal, offering insights into how applications are handled and what to expect during the process.
An informative blog post that breaks down the IBC from the perspective of operational creditors, explaining their rights and the steps involved in initiating CIRP.
This article delves into the specific role and significance of operational creditors within the broader insolvency framework, highlighting their power to trigger the resolution process.
A practical, step-by-step guide that walks operational creditors through the entire process of initiating CIRP, from issuing a demand notice to filing the application.
Access to landmark Supreme Court judgments related to operational creditors and CIRP, crucial for understanding judicial interpretations and precedents.
The official rules governing insolvency and liquidation proceedings, which include detailed procedures for filing applications by operational creditors and the subsequent NCLT process.
This resource clarifies the critical distinction between 'default' and 'dispute' under the IBC, which is fundamental for operational creditors when initiating CIRP and for corporate debtors when defending against such applications.
A video explaining the overall CIRP process, often including segments on the role and initiation by operational creditors, providing a visual and auditory learning experience.