In this Flash editorial, the author begins by referring the provisiosn of Insolvency & Bankruptcy Code, 2016. Since the code come into effect from December 2016 all the applicants/ creditors have begun to file applications under the Code. The main thrust of the article, however, is upon the “provisions / process of initiation of Insolvency Resolution Process against the Corporate Debtor by Operational Creditor.”

This is article no. 231 of the series of editorials written by the author on corporate laws
{Including Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.

Earlier only secured financial creditors (creditors holding collateral against loans), can file an application for declaring a company sick. Under this code operational creditors, such as employees whose salaries are due, seller of Goods & Services etc be allowed to initiate the insolvency resolution process (IRP).

 As per Insolvency and Bankruptcy Code 2016, Corporate Insolvency Resolution process can be initiated by;

Ø  Financial Creditor
Ø  Operational Creditor and
Ø  Corporate Debtor

·         A person to whom an operational debt is owed and
·         Any person to whom such debt has been legally assigned or transferred

Operational debt has been defined by section 5(21) of IBC and it must fulfill following substantive elements namely:
(a) Debt arising out of professional goods; or
(b) Services: or
(c)  Out of Employment.
(d) It also covers dues arising under any law for the time being in force and payable
       to the Central or State Government or local authority.


Step – 1: Default by Corporate Debtor

As stated in section 6 of IBC, Creditors may act for initiation of insolvency resolution process against corporate debtor only in the situation where Corporate Debtor commits a default.
Default: means non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.

Step –2: Default Notice on Occurrence of Default

Section 8 (1) states that an operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in prescribed forms (Form- 3 & Form 4).

Step –3: Respond by Corporate Debtors

Corporate debtor has to respond the demand notice within 10 days. Corporate can bring into notice of operational creditors existence of any dispute, proof of repayment of debt if any.

Step –4: Application to NCLT

If the Operational creditor doesn’t not receive the payment or any notice of dispute from the corporate debtor within 10 days of issue of demand notice, then OC can file the application with NCLT.
Information / documents required to be submitted along with application:
(i) A copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;
(ii) An affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt and such other information as may be specified;
(iii) a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor; and
(iv) Such other information as may be specified.

Step –5: Decision of NCLT – Admission/ Rejection of Case

The NCLT shall within fourteen days of the receipt of the application, ascertain the existence of default from the records of information utilities or on the basis of evidence furnished by the operational creditor. NCLT can admit application or reject application.

Grounds of Rejection of Application:
§  [1]The application made under sub-section (2) is incomplete ;
§  There has been repayment of the unpaid operational debt ;
§   the creditor has not delivered the invoice or notice for payment to the corporate debtor ;
§  Notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility ; or
§  Any disciplinary proceeding is pending against any proposed resolution professional

Notice by NCLT to OC/ CD:
In case of admission / rejection of application by NCLT, it shall communicate the decision to the operational creditor and corporate debtor.

Process after admission of application by NCLT

Step –6: Commencement of Insolvency Resolution Process

The Corporate insolvency resolution process shall commence from the date of admission of the application by NCLT.

Step –7: NCLT shall order:

A.     Moratorium Order
On the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium. The motivation behind the moratorium is that it is value maximizing for the entity to continue operations even as viability is being assessed during the Insolvency resolution process (IRP).

The NCLT shall by order prohibit the following namely:
1. The institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority.
2. Transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein.
3. Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002,
4. The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

The order of moratorium shall have effect from the date of admission of application process and shall cease to have effect from the date of approval of resolution plan or liquidation order, as the case may be.

B.     Appointment of Insolvency Resolution Professional
While filing of application with NCLT in step 4 Operational creditor may propose an interim resolution professional. If not proposal made by operational creditor, the Adjudicating Authority shall make a reference to the Board for the recommendation of an insolvency professional who may act as an interim resolution professional. The Board shall, within ten days of the receipt of a reference from the Adjudicating Authority shall recommend the name of an insolvency professional.

The NCLT shall appoint an interim resolution professional at the start of the Insolvency resolution process i.e within fourteen days from the insolvency commencement date, if no disciplinary proceedings are pending against him. The term of shall not exceed 30 days from the date of his appointment.

C.      Cause Public Notice:
NCLT Cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims. The public announcement shall be made immediately after the appointment of the interim resolution professional.

The Public announcement shall contain the following information, namely:-
(a) name and address of the corporate debtor under the process, name of the authority with which the corporate debtor is incorporated or registered,
(b) the last date for submission of claims,
(c) details of the interim resolution professional who shall be vested with the management of the corporate debtor and be responsible for receiving claims,
(d) penalties for false or misleading claims and
(e) the date on which the corporate insolvency resolution process shall close, which shall be the one hundred and eightieth day from the date of the admission of the application, as the case may be.

Step –8: Duties of Insolvency resolution professional (IRP):

As stated in section 18 IRP have several duties, some are mentioned below:
§  Collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor.
§  The IRP shall receive and collate all the claims submitted by creditors to him, pursuant to the public announcement.
§  Constitute a committee of creditors

Step –9: Committee of Creditors:

The interim resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors. The committee of creditors shall comprise all financial creditors of the corporate debtor. All decisions of the committee of creditors shall be taken by a vote of not less than seventy-five per cent. of voting share of the financial creditors.

The first meeting of the committee of creditors shall be held within seven days of the constitution of the committee of creditors. Members of the committee may meet in person or by such electronic means as may be specified. Resolution professional shall conduct all the meetings, including giving notices of each meeting to members of Committee of creditors, members of the suspended Board of Directors or the partners of the corporate persons, as the case may be.

Step –10: Preparation & approval of Resolution plan by IRP:

Resolution professional shall prepare an information memorandum for formulating resolution plan. A resolution applicant may submit a resolution plan to the resolution professional prepared on the basis of the information memorandum. The resolution professional shall examine each resolution plan received by him.

The resolution professional shall present to the committee of creditors for its approval such resolution plans. The Committee of creditors may approve a resolution plan by a vote of not less than seventy five percent of voting share of the financial creditors.

The resolution professional shall submit the resolution plan as approved by the committee of creditors to the Adjudicating Authority.

Step –11: Submission of resolution plan to NCLT:

If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan.

Binding: It shall be binding on corporate debtor, its employees, members, creditors, guarantors and other stakeholders involved in resolution plan.

Where the Adjudicating Authority is satisfied that the resolution plan does not confirm to the requirements referred to in sub-section (1), it may, by an order, reject the resolution plan

Step –12: Effect of Order of NCLT:

§  The moratorium order passed by the Adjudicating Authority shall cease to have effect.
§  The resolution professional shall forward all records relating to the conduct of the corporate insolvency resolution process and the resolution plan to the Board to be recorded on its database

Step –13: Appeal

Any appeal from an order approving the resolution plan shall be in the manner and on the grounds laid down in sub-section (3) of section 61.

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION. 

[1] The NCLT shall, before rejecting the application give notice to the applicant to rectify the defect in his application within seven days of receipt of such notice


  1. can you tell , what happens if a IRP''s appointment is irregular? as in there was appointment of IRP, than he did some work related to that insolvency proceedings but later the IRP elected was found wrongly elected and a new IRP was confirmed. In that case would all the work done by the previous IRP get cancelled out or would the new IRP begin its work with continuance of already related work done? what would be the consequence of irregular appointment of IRP?

  2. Is the demand notice to be sent to the registered office (no one present,Delhi) or corporate office (Bangalore)
    If company is already preparing for filing, what should be done by employees to get 3-4 months unpaid salary, PF and other settlement and compensation for existing active employees.

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