Triggering CIRP: A Step-by-Step Breakdown of Sections 7 and 9 of the IBC, 2016

The #Insolvency and #Bankruptcy Code, 2016 (IBC) provides creditors with a structured mechanism to initiate the #Corporate Insolvency #Resolution Process (CIRP) against a defaulting corporate debtor. Depending upon the nature of the #debt, #creditors may invoke either Section 7 or Section 9 of the Code. While both provisions empower creditors to approach the National #Company #Law #Tribunal (NCLT) for commencement of #CIRP, the threshold requirements and procedural framework under each section differ significantly.

Initiation of CIRP by a Financial Creditor under Section 7

Section 5(7) of the #IBC defines a #Financial Creditor as a person to whom a financial debt is owed, including any person who has acquired such debt through #assignment or #transfer. Financial institutions, #banks, #debenture holders, and other #lenders typically fall within this category.

To successfully invoke Section 7, the applicant must establish the existence of a financial debt as defined under Section 5(8) of the Code and demonstrate that a default has occurred in respect of such debt. The Financial Creditor is then required to file an application in the prescribed form before the #AdjudicatingAuthority, namely the #NCLT, supported by relevant records and evidence of default.

The adjudicatory inquiry under Section 7 is relatively straightforward. The NCLT primarily examines whether a financial debt exists and whether the corporate debtor has committed a default in repayment. Upon being satisfied with these two elements, the Tribunal may admit the application and initiate CIRP.

Initiation of CIRP by an Operational Creditor under Section 9

Section 5(20) of the IBC defines an #Operational Creditor as a person to whom an operational debt is owed by the corporate debtor, including any person who has lawfully acquired such debt through assignment or transfer. Operational debts generally arise from the #supply of goods, provision of #services, #employment dues, or #statutory #liabilities.

Unlike Section 7, the initiation of CIRP under Section 9 involves additional procedural safeguards. Before approaching the NCLT, the Operational Creditor must first issue a demand notice under Section 8 of the Code, calling upon the corporate debtor to discharge the outstanding operational debt.

Upon receipt of the #demand #notice, the corporate debtor is afforded an opportunity to either make payment or bring to the creditor's notice the existence of a genuine pre-existing #dispute. The absence of such a dispute is a crucial prerequisite for the admission of a Section 9 application.

Where the corporate debtor fails to make payment and is unable to establish the existence of a valid pre-existing dispute, the Operational Creditor may proceed to file an application before the NCLT along with the requisite supporting #documents, including proof of debt, proof of default, and evidence of service of the demand notice.

Although both Sections 7 and 9 serve as gateways to the Corporate Insolvency Resolution Process, the evidentiary burden and procedural requirements differ. Section 7 focuses primarily on establishing the existence of a financial debt and #default, whereas Section 9 imposes additional safeguards by requiring the issuance of a demand notice and the absence of a pre-existing dispute. Consequently, creditors, #directors, and #shareholders must carefully assess the applicable statutory requirements before initiating or responding to insolvency proceedings under the IBC.

🖋️ Vanshika Yadav

Intern- Nenwani Law Associates,

5th Year law student B.B.A., LL.B. (H) at DAVV Indore

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