Authored By: Jyoti Kumari (LL.B), Law Centre 2, Faculty of Law, Delhi University, India, Research Writer at Law Audience®,
Edited By: Mr. Varun Kumar, Advocate, Himachal, Punjab & Haryana and Founder at Law Audience
The commencement of the corporate insolvency resolution process by a financial creditor is regulated under section 7 of the insolvency and bankruptcy code,2016(IBC). This legislation was introduced to unify and reform the legal framework concerning insolvency and restructuring of corporate entities, partnership firms, and individuals. Its primary objective is to ensure a time-bound resolution process that maximizes the value of assets, encourages entrepreneurship, improve credit availability, and safeguards the interests of all stakeholders.
The subject holds significant importance for law students, as it explains the procedure through which insolvency proceedings are initiated before the adjudicating authority, namely the national company law tribunal (NCLT).
Meaning of financial creditor
Sec 5(7) of the insolvency and bankruptcy code,2016defines a financial creditor as any person to whom a financial debt is due.it also covers any individual or entity to whom such debt has been validly assigned or transferred. In simple terms, not only the original lender but also a person who later acquires the debt through legal transfer will be treated as a financial creditor under the code.
Sec5(8) explains the meaning of financial debt, including interest if applicable, which is disbursed in exchange for the time value of money. The concept of time value of money means that funds are given today with an expectation of repayment in the future along with compensation, usually in the form of interest.
The definition on financial debt is wide and includes various types of financial transactions, such as:
- Loans borrowed with an obligation to pay interest
- Amounts obtained under any credit arrangement like cash credit or overdraft
- Funds raised through instruments such as bonds, debentures, or promissory notes
- Liabilities arising from financial lease or hire purchase agreements
- Obligations to reimburse a person under a counter-indemnity relating to a guarantee
- Any liability arising from a guarantee given for repayment of financial debt
- Therefore, entities like banks, financial institutions, holders of debentures or bonds, and even homebuyers (after statutory amendments) ae recognized as financial creditors under the code, provided the transaction involves disbursement of money against consideration for time value.
When can a financial creditor start CIRP?
A financial creditor can start the corporate insolvency resolution process (CIRP) when the company has defaulted in payment.
Under section 3(12) of the insolvency and bankruptcy code 2016, default means that the company has failed to pay its debt when it became due. It does not matter the full amount or only a part of the amount is unpaid. If the payment date has passed and the money is not Paid, it is called default.
Example; – earlier, the minimum amount of default required to start CIRP was Rs 1 lakh. But on 24march 2025 the government increased this limit to Rs 1 crore.
so now, if a company law tribunal (NCLT) to start insolvency proceedings.
In short, once the company does not pay Rs 1crore or more after the due date, the financial creditor gets the right to approach the NCLT and begin the CIRP.
filling of application under section 7
A financial creditor may file an application either by itself or jointly with other financial creditors. The application must be filed in form 1 as prescribed under the insolvency and bankruptcy (application to adjudicating authority) rules, 2016.
The application must contain;
- Record of default (from information utility or other evidence)
- Name of the proposed interim resolution professional
- Any other information as specified by the insolvency and bankruptcy board of India.
The creditor must also pay the prescribed fee and attach necessary documents such as;
- Loan agreements
- Bank statements
- Proof of default
- Written communication from proposed IRP
- Proof of disbursement
Role of information utility
An information utility (IU) is an entity registered under the insolvency and bankruptcy code,2016 that maintains and verifies records of debt and default. Its main function is to collect, store, authenticate, and provide financial information relating to creditors and debtors.
When a default is recorded with an information utility, that record acts as prima facia proof of default. This means the adjucating authority can rely on it as initial evidence. It makes the insolvency process faster and reduces unnecessary disputes about whether default has actually occurred.
Satisfaction of the adjudicating authority
Under section 7(5) of the code, the national company law tribunal (NCLT) is required to determine whether a default has taken place within 14 days of receiving the application.
The NCLT will admit the application if it is satisfied that:
- A default has occurred.
- The application is properly filed and complete in all respects, and
- There are no disciplinary proceedings pending against the proposed interim resolution professional (IRP)
Role of interim resolution professional (IRP)
The IPR performs several important functions during the CIRP.
- Taking control of assets:
The IPR takes custody and control of all assets, records, and financial information of the corporate debtor.
- Collection and verification of claims;
The IPR receives claims from creditors, verifies them,and prepares a list of financial creditors.
- Constitution of the committee of creditors (CoC):
After verifying claims, the IPR forms the committee of creditors consisting of financial creditors.
- Managing the company as a going concern;
The IPR ensures that the business of the corporate debtor continues to operate. The objective is not to shut down the company but to preserve its value during the resolution process.
Thus, during the CIPR, the IRP effectively replaces the board of directors, and all management powers are vested in him or her.
Committee of creditors (CoC)
The committee of creditors is the most important decision-making body in the CIRP. It primarily consists of financial creditors. Operational creditors generally do not have voting rights, unless they also qualify as financial creditors.
The CoC exercises significant powers, including:
- Appointment of resolution professional (RP):
the CoC may confirm the IPR as the resolution professional or replace him/her with another insolvency professional.
- Approval of resolution plan:
Any resolution plan must be approved by at least 66% of the voting share of the financial creditors.
- Decision on liquidation:
If no viable resolution plan is received, the CoC may decide, by the required majority, to liquidate the corporate debtor.
The CoC evaluates the feasibility and viability of resolution and ensures that the interests of financial stakeholders are protected.
Time limit of CIRP
The IBC emphasizes a strict time-bound process to avoid delays.
- The CIRP must be completed within 180 days from the date of admission.
- The period may be extended by a maximum of 90 days,if approved by the NCLT.
- However, the total time period, including extensions and time taken in legal proceedings, cannot exceed 330 days.
The strict timeline reflects the primary objective of the code- speedy resolution of insolvency. Delays reduce asset value and harm creditors. Therefore, the IBC aims to ensure quick and efficient resolution or liquidation.
In summary, once the application is admitted, a structured process begins involving moratorium, appointment of IPR, formation of CoC, and preparation of a resolution plan within a fixed timeframe. The entire framework is designed to preserve the company’s value and achieve resolution in a time-bound and transparent manner.
Difference between financial creditor and operational creditor
A financial creditor is one who provides funds to the corporate debtor in exchange for the time value of money, such as loans or financial facilities. In contrast, an operational creditor is a person who supplies goods or renders services to the corporate debtor.
The procedure for initiating CIRP is also different:
- A financial creditor can directly file an application before the national company law tribunal under section 7 without giving any prior demand notice.
- An operational creditor must first issue a demand notice under section 8 and give the corporate debtor an opportunity to respond before approaching the tribunal.
Admission of application and its consequences
When an application under section 7 of the insolvency and bankruptcy code 2016 is admitted by NCLT, the corporate insolvency resolution officially starts. This has important legal effects on the company and its stakeholders.
- Moratorium (sec14)
After admission the nclt declares a moratorium which means a temporary suspension of legal actions against the company. During the period:
- No new suits or legal proceedings can be started or continued
- The company cannot transfer or sell its assets.
- Creditors cannot enforce security or recover property.
The moratorium continues until the resolution plan is approved or the company or company is ordered to liquidated. Its purpose is to protect the company’s assets and ensure smooth resolution.
- Public announcement
the interim resolution professional makes a public announcement to inform all creditors about the start of CIRP and invites them to submit their claims.
- Appointment of IRP
Upon admission, the proposed IRP takes charge. the powers of the board of directors are suspended, and management of the company shifts to the IRP. The IRP controls the assets and manages the company as a going concern during the insolvency process.
Withdrawal of application
Section 12A of the insolvency and bankruptcy code, 2016 permits withdrawal of an insolvency application even after it has been admitted under section 7. However, such withdrawal is not automatic. It requires the approval of at least 90% of the voting share of the committee of creditors (CoC).
This provision ensures that once the insolvency process has begun, it cannot be terminated marely at the request of the applicant. Since the matter affects all creditors, their collective consent is necessary before withdrawal is allowed.
Objective of section 7
The purpose of empowering a financial creditor to initiate CIRP under section 7 is to ensure timely action when a company shows signs of financial distress. The key objective includes:
- Identifying and addressing financial problems at an early stage.
- Maintaining stability and confidence in the credit system.
- Preserving and maximizing the value of the company’s assets.
- Protecting the interests of all stakeholders, including creditors and employees.
- Once default occurs, the control of the company shifts from existing management to the creditors through the insolvency framework. This creditor-in-control model ensures professional management during the resolution process.
Nature of proceeding under section7
Proceedings under sec7 are summary in character. The NCLT does not undertake a detailed trial of examine complex disputes. It primarily verifies:
- Whether a financial debt exists, and
- Whether a default has taken place.
The objective of the IBC is not penalize the corporate debtor but to provide a structured mechanism for resolving insolvency in a time-bound manner.
Practical example
For instance, if a company takes a loan of 10crore from a bank and fails to pay instalments for several months, resulting in a default exceeding 1 crore, the bank can initiate proceedings under section 7 before the NCLT.
If the tribunal is satisfied that a financial debt exists and default has occurred, it will admit the application. Consequently, a moratorium will be declared, an interim resolution professional (IRP) will be appointed, and the corporate insolvency process will commence.
Through the 2018 amendment to the code, homebuyers (allottees in real estate estate projects) were recognized as financial creditors. The recognition allows them to participate in the committee of creditors and initiate CIRP collectively.
However, to prevent misuse, a threshold requirement was introduces. An application by homebuyers can be filed only if it is supported by:
- At least 100 allottees, or
- Not less than 10% of he total number of allottees in the project,
Whichever number is lower.
This amendment ensures a balance between protecting homebuyers’ right and preventing frivolous insolvency proceedings.
Conclusion
Initiation of CIRP by a financial creditor under section 7 of the insolvency and bankruptcy code 2016 is an important remedy to deal with corporate insolvency.
The creditor must show that a financial debt exists and that a default has occurred. If satisfied the NCLT admits the application, declares moratorium, appoints an IRP, and starts the CIRP.
Thus, the IBC provides a time-bound, creditor- driven mechanism to maximize asset and resolve insolvency.
