Interpretational Issues In IBC

Answers to these will contribute to the jurisprudence relating to corporate insolvency in India.

- Pooja Mahajan

The Insolvency and Bankruptcy Code, 2016 (“IBC”) brings a tectonic shift in jurisprudence relating to corporate insolvency. Given this sudden shift, both lenders and debtors are struggling to understand the implication of IBC for them. Unlike the erstwhile law, IBC provides for a two-stage process to deal with corporate insolvency. In stage I, the corporate undergoes a corporate insolvency resolution process (“CIRP”) during which, the committee of the corporate’s financial creditors (“CoC”) attempts to resolve insolvency of the corporate. If the CIRP fails, the corporate enters stage II for its mandatory liquidation. Stage I must precede stage II.

Stage I can be initiated by a financial creditor, an operational creditor, or the corporate itself, on occurrence of a ‘payment default’ by the corporate, by filing an application before the relevant National Company Law Tribunal (“NCLT”). Since December 2016 (when the IBC provisions relating to corporate insolvency were notified), multiple applications have been filed under the IBC for initiation of CIRP and many interesting questions of interpretation have come up in these applications. This article discusses some such key interpretational issues.

Definition of financial creditor and operational creditor

To trigger CIRP, a creditor must either be an operational or financial creditor of the corporate. Terms ‘financial creditor’ and ‘operational creditor’ have been defined in the IBC and are being currently debated before the National Company Law Appellate Tribunal (“NCLAT”) in several appeal cases.