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3.4 -Initiation of proceedings by financial creditor

3.4 Initiation of proceedings by financial creditor

Financial Creditor can initiate insolvency resolution proceedings.
"Financial creditor" means any person to whom a financial debt is owed and includes a person to whom
such debt has been legally assigned or transferred to - Section 5(7) of Insolvency Code, 2016.
The term 'financial debt' has been defined in section 5(8) of Insolvency Code, 2016 [see discussions in
para 3.2-3]
Debenture is financial debt - Debenture is financial debt - Neelkanth Township v. Urban Infrastructure
Trustees Ltd. (2017) 143 SCL 536 = 85 taxmann.com 120 (NCLAT).
Person to whom financial debt is transferred through valid assignment is 'financial creditor' - Person to
whom financial debt is transferred through valid assignment comes within the definition of 'financial
creditor' – Asset and Reconstruction Co. v. Rustagi Impex (2018) 147 SCL 550 = 94 taxmann.com 4
(NCLT).
If outstanding debt is assigned to asset reconstruction company, it will come within definition of 'financial
creditor' - Alchemist Asset and Reconstruction Co. Ltd. v. Jaipur Metals [2018] 148 SCL 343 = 94
taxmann.com 52 (NCLT).
Home buyer is financial creditor - The home buyers can initiate Corporate Insolvency Process against
builder or developer as they have been included in definition of 'financial debt' as per explanation to
section 5(8)(c) of Insolvency Code, inserted w.e.f. 6-6-2018.
Committed return promised on sale of commercial premises means it is debt – Though specific provision
has been made for home buyers w.e.f. 6-6-2018, following case law is relevant for sale of commercial
premises.
In Nikhil Mehta v. AMR Infrastructure Ltd. (2017) 143 SCL 278 = 84 taxmann.com 163 (NCLAT),
appellant had entered into sale purchase agreement with respondent. Respondent undertook to pay a fixed
amount to appellant as committed returns from date of agreement till actual possession of the unit to
appellant. It was held that this has commercial effect of borrowing as there was consideration for time
value of money and the appellant is a 'financial creditor' and can initiate insolvency process – same view in
Anil Mahindroov.Earth Iconic Infrastructures (P.) Ltd. [2018] 93 taxmann.com 170 (NCLT) * Anil
Mahindroo v. Earth Iconic Infrastructure (2018) 91 taxmann.com 143 (NCLAT) * Mahesh Kumar Panwar
v. Neelam Singh (2018) 148 SCL 135 = 94 taxmann.com 191 (NCLAT).* Nikhil Mehta v. AMR
Infrastructure Ltd. (2018) 148 SCL 221 = 94 taxmann.com 131 (NCLT).
There is exactly contrary view in Rajendra Kumar Saxena v. Earth Gracia Buildcon (P.) Ltd. (2018) 92
taxmann.com 250 (NCLT) * Manoj Kumar Babri v. Entertainment City Ltd. (2018) 147 SCL 378 = 93
taxmann.com 195 (NCLT).
Now the issue has been settled in respect of buyers of home but continues to be valid for buyers of
commercial premises.
Amount disbursed should be for time value of money - If the person claiming to be financial creditor fails
to show that loan amount disbursed by it to Corporate debtor was against consideration for time value of
money, it did not come within meaning of 'financial creditor' - Vishwa Nath Singh v. Visa Drugs &
Pharmaceuticals (P.) Ltd. [2018] 89 taxmann.com 5 (NCLAT) * Dr. B.V.S. Lakshmi v. Geometrix Laser
Solutions (P.) Ltd. [2018] 89 taxmann.com 352 (NCLAT) * Mack Soft Tech (P.) Ltd. v. Quinn Logistics
India Ltd. [2018] 94 taxmann.com 406 (NCLAT).
If loan was without interest and without agreement (as it was from promoters), loan was not against time
value of money. Hence, it is not financial debt – Ravinder Pal Singh Lamba v. Satkar Air Cargo Services
(2018) 149 SCL 719 = 97 taxmann.com 186 (NCLT).

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Document filed as evidence is required to be duly stamped - In A. Senthil Kumar v. IRP [2018] 90
taxmann.com 99 (NCLT), amount of Rs 16 crores was advanced against pledge of securities. However,
there was only MOU which was not duly stamped. It was held that in absence of any other document, the
MOU should be treated as agreement and should be stamped. Then the application for resolution process
will be considered.
Assignee of debt can file application for resolution process - Assignee of debt can file application for
resolution process - Edelweiss Asset Reconstruction Co. Ltd. v. Synergies Dooray Automotive Ltd. (2017)
85 taxmann.com 136 (NCLT).
If excessive interest is claimed by financial creditor, petition by financial creditor can be dismissed - If
excessive interest is claimed by financial creditor, petition by financial creditor filed under section 7 of
Insolvency Code can be dismissed under provisions of Usurious Loans Act, 1918 - Bell Finvest (India) v.
Intercon Container Survey (2018) 145 SCL 173 = 88 taxmann.com 211 (NCLT). [In this case, interest rate
claimed was 92% per annum!].
3.4-1 Process of initiation by Financial Creditor
A financial creditor can initiate action himself or jointly with other financial creditors, or any other person
on behalf of the financial creditor, as may be notified by the Central Government, against a corporate
debtor when a default occurs. The default can be in respect of any other financial creditor also – section
7(1) of Insolvency Code, 2016 [The words in italics inserted w.e.f. 6-6-2018].
The amendment seems mainly to enable associations or representatives of home buyers to file application
for insolvency resolution.
Application can be filed by any of the following, on behalf of financial creditor – (i) a guardian (ii) an
executor or administrator of an estate of a financial creditor (iii) a trustee (including a debenture trustee)
and (iv) a person duly authorised by the Board of Directors of the company – Notification No. SO 1091(E)
dated 27-2-2019.
"Corporate debtor" means a corporate person who owes a debt to any person - section 3(8) of Insolvency
Code, 2016.
Procedure to be followed by financial creditor - The financial creditor shall make application by itself or
jointly against a corporate debtor in form 1 before NCLT as contained in Insolvency and Bankruptcy
(Application to Adjudicating Authority) Rules, 2016.
Copy of application shall be forwarded to registered office of corporate debtor by registered post or speed
post.
Application fees of Rs. 25,000 are payable.
Application should give details of record of default and name of resolution professional proposed to be
appointed as interim resolution professional - section 7(3) of Insolvency Code, 2016.
Notice sent to corporate debtor at his old address not valid – In Rajneet Karnal v. Bell Finvest (2018) 146
SCL 711 = 92 taxmann.com 57 (NCLAT), notice was sent to corporate debtor at his old address even if
Financial Creditor was aware of new address. It was held that notice served is invalid as violation of
principles of natural justice and order of Adjudicating Authority was set aside.
Any member of consortium of banks can file application - Any member of consortium of banks can
individually file application seeking initiation of insolvency proceedings where default has occurred. [It is
not necessary that all banks of consortium should join or agree] - ICICI Bank v. Tirupatu Inks Ltd. (2017)
144 SCL 415 = 87 taxmann.com 175 (NCLAT).
Financial Creditor need not be member of CoC, he can file application independently - Provisions of
section 52 of Insolvency Code give an option to secured creditor to realize its security interest by
informing liquidator of such security interest and identify assets subject to which such security interest has
to be realized. Therefore, it is not mandatory under Code proceedings for financial creditor to be a part of
CoC (Committee of Creditors) to enforce its security interest. Hence, application filed by financial creditor
was to be accepted - Assets Care & Reconstruction Enterprises Ltd. v. Shriram EPC Ltd. [2018] 95
taxmann.com 93 (NCLT )
Application can be filed by authorized person - A person holding general power of attorney made by
financial creditor can file application under section 7 - Punjab National Bank v. Dinesh Polytubes (2018)
145 SCL 696 = 89 taxmann.com 150 (NCLT).

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Officer authorized by Bank can file application under section 7 - An officer empowered by Bank to
move Court on behalf of Bank can initiate action under section 7 against corporate debtor - Ramesh
Chandra Gupta v. Punjab National Bank (2017) 144 SCL 368 = 87 taxmann.com 61 (NCLAT) Palogix
Infrastructure v. ICICI Bank (2017) 144 SCL 319 = 86 taxmann.com 81 (NCLT).
3.4-2 Application by Power of Attorney Holder permissible?
In Palogix Infrastructure v. ICICI Bank (2017) 144 SCL 319 = 86 taxmann.com 81 (NCLT), it has been
held that Application for initiation of action can be filed by authorized person and not by holder of power
of attorney.
In Vijay Kumar Jain v. DBS Bank Ltd. [2018] 92 taxmann.com 271 (NCLAT), it was held that power of
attorney holder cannot file application. However, in this case, the Board of Bank had authorised certain
officers to file application, though the authorisation was termed as 'power of attorney'. It was held that
application filed by such authorised officers is permissible.
The decision does not seem to be correct and needs review. Supreme Court has held that the Insolvency
Code and Advocates Act are not inconsistent with each other. Same principle should apply to Power of
Attorney Act also.
In Bank of Baroda v. Barnala Steel Industries P Ltd. (2018) 148 SCL 246 = 94 taxmann.com 202 (NCLT).
Bank had authorized DGM by power of attorney to initiate insolvency proceedings. He could appoint
further POA holder. DGM delegated power in favour of CM. It was held that CM could validly initiate
CIRP proceedings under section 7 of Insolvency Code.
In AU Small Finance Bank Ltd. v. Prabhu Shanti Real Estate (P.) Ltd. [2018] 148 SCL 596 = 95
taxmann.com 223 (NCLT), application signed by Power of Attorney Holder was accepted and application
was admitted. In this case power was granted by financial creditor to attorney to institute and prosecute all
legal proceedings in Tribunal.
Power of Attorney - Power of Attorney is an authority whereby one is set in the turn, stead, or place of
another to act for him. - . - It is an instrument by which a person is authorised to act as an agent of the
person granting it. - Section 2 of Power of Attorney Act, 1882 empowers the donee of a power of attorney
to do anything 'in and with his own name and signature' by the authority of the donor of power. - Once
such authority is granted, the said Act recognises that everything done by the donee shall be as effectual in
law as if it had been done by the donee of the power in the name and with the signature of the donor
thereof - T C Mathai v. District & Sessions Judge 1999 AIR SCW 1062 = AIR 1999 SC 1385.
In P Punniah v. Jeypore Sugar Co. Ltd. AIR 1994 SC 2258 = 81 Comp Cas 1 = 1994 AIR SCW 2128 =
(1994) 4 SCC 341 = (1994) 3 CLJ 13 (SC), it was held that consent given by holder of general power of
attorney on behalf of shareholder is valid, on the principle that excepting matters of personal nature,
whatever a person can do himself, he can get it done through other. [However, in this case, shareholder
was abroad and ratified the consent after her return].
However, power of attorney holder cannot depose in Court on behalf of Principal for acts done by
Principal, where only Principal can have personal knowledge and in respect of which he can be cross
examined - Janki Vashdeo Bhojwani v. Indusind Bank Ltd. AIR 2005 SC 438 = 2004 AIR SCW 7064.
Power of attorney holder cannot be treated as 'pleader' of complainant. A person can appoint an agent, but
this principle of common law does not apply where the act to be performed is personal in character, or
when annexed to a public office or to an office involving fiduciary obligation - Jimmy Jahangir Madan v.
Bolly Cariyappa Hindley 2004 AIR SCW 6248 = 126 Comp Cas 385 (SC). In this case, it was held that a
holder of power of attorney of heir of complainant cannot apply for continuation of prosecution after death
of the complainant. Such application has to be made by heir himself u/s 302 of CrPC.
3.4-3 Withdrawal of application before admission and even after admission
Application can be withdrawn before or after admission.
Application can be withdrawn any time before admission, with permission of Adjudicating Authority
(NCLT) – rule 8 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.
The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9
or section 10, on an application made by the applicant with the approval of ninety per cent voting share of
the committee of creditors, in such manner as may be specified – section 12A of Insolvency Code inserted
w.e.f. 6-6-2018.
This is a good provision to enable corporate debtor to rehabilitate itself.
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In Swiss Ribbons v. UOI (2019) 4 SCC 17 = 152 SCL 365 = 101 taxmann.com 389 (SC), it was held that
section 12A is not arbitrary or unconstitutional as NCLT and NCLAT have powers to set aside decision of
CoC.
Merely because promoter wants to pay all dues including default amount cannot be a ground to set aside
Corporate Insolvency Resolution Process' (CIRP). Once CIRP is admitted, it cannot be set aside except for
illegality to be shown – Binani Industries Ltd. v. Bank of Baroda (2018) 150 SCL 703 = 99 taxmann.com
164 (NCLAT).
3.4-4 Adjudicating Authority can accept or reject the application
Adjudicating Authority can accept or reject the application.
Ascertainment of default within 14 days - Adjudicating Authority (NCLT) shall ascertain the existence of
a default from the records of an information utility or on the basis of other evidence furnished by the
financial creditor, within 14 days - section 7(4) of Insolvency Code, 2016.
Recording of reasons if default not ascertained within 14 days - If the Adjudicating Authority has not
ascertained the existence of default and passed an order under section 7(5) of Insolvency Code within 14
days, it shall record its reasons in writing for the same - proviso to section 7(4) of Insolvency Code,
inserted vide Insolvency and Bankruptcy Code (Amendment) Act, 2019 to be effective from date to be
notified.
Admission of application once default ascertained - If Adjudicating Authority (AA) is satisfied that - (a)
default has occurred (b) application under section 7(2) is complete and (c) there is no disciplinary
proceeding pending against proposed resolution professional, it may, by order, admit application - section
7(5)(a) of Insolvency Code, 2016.
Rejection of application - Adjudicating Authority may reject the application by issuing order, if it is
satisfied that - (a) default has not occurred or (b) the application under sub-section (2) is incomplete or (c)
any disciplinary proceeding is pending against the proposed resolution professional - section 7(5)(b) of
Insolvency Code, 2016.
Before rejecting application, opportunity will be given to applicant to rectify the defects within seven days.
If defects are not rectified, application will be rejected by Adjudicating Authority and intimation sent to
the financial creditor.
There is no specific provision of giving notice to corporate debtor at that stage. There is also no provision
that permission from Joint Lender Forum should be obtained before initiating action. The application can
be rejected only on the grounds specified in section 7(5)(b) and not on any other ground - Innoventive
Industries v. ICICI Bank (2017) 142 SCL 11 = 82 taxmann.com 190 (NCLAT).
While counting period of seven days, holidays of NCLT, Saturdays and Sundays shall be excluded -
Palogix Infrastructure v. ICICI Bank (2017) 144 SCL 319 = 86 taxmann.com 81 (NCLT).
Time limits in sections 7(5), 9(5) and 10(4) are directory and not mandatory - In Surendra Trading Co. v.
Juggilal Kamlapat Jute Mills (2017) 144 SCL 198 = 55 taxmann.com 372 (SC), it has been held that the
period of seven days for removing defects (as contained in provision to section 9(5) of Insolvency Code) is
not mandatory, as the applicant does not gain anything by not removing the objections [confirming J K
Jute Mills v. Surendra Trading Co. (2017) 142 SCL 188 = 81 taxmann.com 314 (NCLAT)]- decision
quoted with approval in Macquarie Bank Ltd.v. Shilpi Cable TechnologiesLtd. [2017] 88 taxmann.com 180
= 145 SCL 236 (SC).
In contrary decision Surendra Trading Co. v. Juggilal Kamlapat Jute Mills (2017) 144 SCL 198 = 55
taxmann.com 372 (SC), it has been held that the period of seven days for removing defects (as contained in
proviso to section 9(5) of Insolvency Code) is not mandatory, as the applicant does not gain anything by
not removing the objections [confirming J K Jute Mills v. Surendra Trading Co. (2017) 142 SCL 188 = 81
taxmann.com 314 (NCLAT)] - quoted with approval in Macquarie Bank Ltd.v. Shilpi Cable
TechnologiesLtd. [2017] 88 taxmann.com 180 = 145 SCL 236 (SC).
Except corporate debtor and financial creditor, no other person can intervene in proceedings under
section 7 - Except corporate debtor and financial creditor, no other person (like investor) can intervene in
proceedings under section 7 – KKR Jupiter Investors v. JBF Petrochemicals (2019) 151 SCL 127 = 100
taxmann.com 341 (NCLT) – relying on Axis Bank v. Lotus Three Development (2018) 97 taxmann.com 96
(NCLAT).
3.4-5 Admission of application by Adjudicating Authority
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If Adjudicating Authority (AA) is satisfied that default has occurred, it will admit application - section 7(5)
(a) of Insolvency Code, 2016.
If financial debt is established, application under section 7 has to be admitted - Bank of Baroda v. Vimal
Oil (2018) 145 SCL 553 = 89 taxmann.com 176 (NCLT) * State Bank of India v. Essar Steels (2017) 84
taxmann.com 43 (NCLT) * Inderpreet Singh v. Mariners Buildcon India Ltd. (2018) 90 taxmann.com 11
(NCLT). * State Bank of India v. Videocon Industries (2018) 148 SCL 506 = 94 taxmann.com 214 (NCLT)
* Edelweiss Asset Reconstruction Co v. Net 4 India Ltd. (2019) 152 SCL 771 = 104 taxmann.com 71
(NCLT) * Dena Bank v. Kansal Building Solutions (2019) 153 SCL 132 = 104 taxmann.com 276 (NCLT)
* ICICI Bank v. VIL Ltd. (2019) 153 SCL 143 = 104 taxmann.com 243 (NCLT).
If the dispute is only about amount of loan (and not about loan itself), application is required to be
admitted if there is default – Reliance Commercial Finance v. Noble Resourcing Business and Solutions
(2018) 150 SCL 279 = 98 taxmann.com 372 (NCLT).
Notice to corporate debtor and hearing mandatory before admitting application - Application cannot be
admitted by Adjudicating Authority without issuing notice to Corporate Debtor. Issue of order of
admission of application without such notice and hearing has to be set aside – Chand Khan v. RCI
Industries (2018) 145 SCL 553 = 89 taxmann.com 314 (NCLAT) * P K Ores v. Tractors India (2018) 91
taxmann.com 170 (NCLAT) * Dinesh Kumar Bhasin v. Batliboi Impex Ltd. (2018) 148 SCL 647 = 96
taxmann.com 94 (NCLAT). * Dilip Chhabria v. Minda Capital (2019) 152 SCL 695 = 103 taxmann.com
370 (NCLAT).
If there is dispute, application cannot be admitted? – In case of application by operational creditor, there
is clear provision that application cannot be admitted if there is dispute about a debt. However, in case of
application by financial creditor, the term used is 'default'. Once there is 'default', application for CIRP is
required to be admitted. However, in K Kesava v. Ajay Gopaldas Samat (2018) 96 taxmann.com 266
(NCLAT), it has been held that if there is dispute, application cannot be admitted [may be justified on basis
of facts of the case, but may not apply universally].
Copy of order to financial creditor and corporate debtor - Order of admission will be sent to financial
creditor and corporate debtor – section 7(7)(a) of Insolvency Code, 2016.
Reasons for default are not relevant – If there was debt and there is default, application is required to be
admitted. Reasons for default are not relevant – Dr. H N Nagaraj v. Edelweiss Asset Reconstruction Co.
Ltd. (2018) 148 SCL 447 = 84 taxmann.com 326 (NCLAT). [In this case, the applicant argued that the
restructured loan instalments were to be paid by selling immovable properties. However, these could not
be sold as financial creditor had obtained injunction from Court].
Mere having intention to repay not sufficient - In Deepak Seth v. Moods Hospitality (2018) 149 SCL 681
= 97 taxmann.com 418 (NCLT), it was held that merely having good intention to repay loan is not
sufficient to dismiss application filed by financial creditor to initiate CIRP, merely because company is
going through financial constraint – similar views in Loiz Oil PTC Ltd. v. Interlink Petroleum (2018) 149
SCL 672 = 97 taxmann.com 627 (NCLT).
Commencement of corporate insolvency resolution process - The corporate insolvency resolution process
shall commence from the date of admission of the application under section 7(5) - section 7(6) of
Insolvency Code, 2016.

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