Insolvency refers to the financial state of an individual or a company where they find themselves the money that they owe to the creditors. These creditors can either be financial creditors or operational creditors.
Insolvency laws are laws that are established pertaining to these creditors. The rules and regulations described in this law are geared towards the following:
- Making sure that the creditors get what they are owed
- Protecting the insolvent entity (the debtor)
- Making sure that the property of the insolvent entity is distributed to its creditors in a properly scrutinized and fair manner.
Section 8 of insolvency
Section 8 of the insolvency laws are meant for corporate debtors and the operational/financial creditors. The definitions of these are as follows:
- Operational creditors are the ones that have provided some kind of service to the debtors.
- Financial creditors are the ones who have lent money to the debtors.
- Corporate debtors refer to the corporate entity who owes a debt. This entity can be anything from a one person company, a private limited company, a public limited company, a producer company, Section 8 Company, a limited liability partnership or a partnership firm.
Under the section 8 of the insolvency laws, in the event of payment default, the operational/financial creditor can deliver a demand notice to the corporate debtor demanding the payment for the services owed (if operational creditor) or repayment of the money owed.
On the other end, once the corporate debtor has 10 days to come up with a response to the notice. There can only be two types of response:
- Returning the debt that the corporate debtor owes: In addition to the repayment, the corporate debtor has to forward any of the following to the operational/financial debtor.
- An attested copy of the electronic transfer receipt of the unpaid dept amount that was made by the corporate debtor to the operational/financial creditor.
- The copy of the bank account statement that details the encashment of cheque of unpaid amount by the operational/financial creditor.
- Showing the proof that the unpaid debt is still in dispute. For that, the creditor has to bring the evidence to support this claim of dispute. This evidences can be:
- Record of the pendency suite
- Invoice related to the dispute or
- Arbitration proceeding details that were filed before the corporate debtor received the demand notice.
Now, as we states, the corporate debtor has 10 days to come up with a response. If not, the operational/financial creditor can file a petition under section 9 to the NCLT (National Company law tribunal) to start the insolvency resolution.
Section 9 petition and insolvency resolution
If the corporate debtor does not come up with a proper response or does not repay the debt that they owe to the financial/operational creditor after they have received the demand notice, the operational creditor can file a section 9 petition to the NCLT(The adjudicating authority in this matter) to start the insolvency resolution process. Along with this petition, which would be in the form of an application, the following shall be needed:
- A copy of the demand notice or the copy of invoice demanding payment delivered by the operational/financial creditor to the corporate debtor.
- An affidavit that states that there is no notice is given by the debtor relating to the dispute over unpaid operational/ financial debt.
- A copy of the certification from the financial institution that holds of the operational/financial creditor confirming that no payment was made for the unpaid payment by the corporate debtor.
Before we move on any further, let us discuss the meaning of insolvency resolution process. See, if the above section 9 petition is accepted by the adjudicating authority, then if the application is accepted, then the following will take place:
The adjudicating authority shall decide whether the corporate debtor’s business is viable for continuation. Furthermore, the authority, along with an IP (Insolvency Professional) shall look into the ways to rescue the debtor. However, if the insolvency resolution fails, or the committee of creditors decide to wind up the corporate debtor’s business, then liquidation will take place. In this case, the debtor’s assets shall be liquidated and distributed among the operational/financial creditors.
That being said, following are the conditions that have to be met in order for the adjudicating authority to accept the petition:
- The application should be complete.
- Unpaid operational debt has not been paid.
- The demand notice has been forwarded to the corporate debtor from the operational/financial creditor.
- No notice has been received by the operational/financial creditor from the corporate debtor.
- There is no disciplinary proceeding that is still pending against the resolution professional.
However, if any of these following conditions are true, then the adjudicating authority shall reject the petition:
- The application is not complete.
- The unpaid operational debt has already been paid.
- No demand notice has been served to the corporate debtor from the operational/financial debtor.
- There is a notice of dispute and it has been forwarded to the operational/financial creditor by the corporate debtor.
- A disciplinary proceeding is still pending against the resolution professional.
If the authority rejects the application/petition, then a time of 7 days is given to the applicant/petitioner to rectify the mistakes within 7 days.