An In-Depth Analysis of Section 6 of the Insolvency and Bankruptcy Code 2016

By: Vedant Chahal

The Insolvency and Bankruptcy Code, 2016 stands as a testament to India's commitment to streamlining its insolvency resolution procedures. At the heart of this ambitious legislation is Section 6, which distinctly maps out the entities authorized to initiate the Corporate Insolvency Resolution Process (CIRP) against a defaulting corporate debtor. This section serves as a gatekeeper, defining the legitimate stakeholders in the insolvency resolution process.

Key Entities Allowed to Initiate CIRP:

1. Financial Creditor:
   

   • Definition: A financial creditor refers to any individual or entity to whom a financial debt, arising out of disbursed funds against the payment of interest, is owed. Examples include banks, NBFCs, and other financial institutions.

   • Procedure: Such creditors can either individually or jointly with other financial creditors approach the Adjudicating Authority, primarily the National Company Law Tribunal (NCLT), with evidence of the default.

Case Law: Innoventive Industries Ltd. vs ICICI Bank & Anr. (2017)

• Insight: This landmark case underscored the financial creditor's right to initiate CIRP. It emphasized the legislation's intent to fast-track the insolvency process, mitigating prolonged financial distress.

1. Operational Creditor:
   

   • Definition: This refers to entities to whom operational debts are due. These are typically obligations related to goods supplied, services rendered, or dues from employment.

   • Procedure: The Code mandates operational creditors to first serve a demand notice to the corporate debtor. If within ten days, the debtor neither pays nor showcases the existence of a dispute, the operational creditor can move the Adjudicating Authority for CIRP initiation.

Case Law: Mobilox Innovations Private Limited vs. Kirusa Software Private Limited (2017)

• Insight: The Court, in this case, elaborated on what constitutes a 'dispute'. It clarified that the intent was to prevent frivolous triggers for CIRP, ensuring that the dispute is genuine.

1. Corporate Applicant:
   

   • Definition: This is an umbrella term encompassing:

     • The corporate debtor, signifying the entity undergoing insolvency.

     • Those in the management of the corporate debtor.

     • Individuals having control over the corporate debtor’s financial decisions.

     • Members or partners of the corporate debtor with the authority to apply for CIRP.

• Procedure: Such applicants can directly file an application with the Adjudicating Authority.

Case Law: Prakash Udhyog vs. Northern Arc Capital Limited (2020)

• Insight: This case reaffirmed the right of corporate debtors to initiate CIRP against themselves, emphasizing the Code's objective of timely identification and resolution of financial distress.

Critical Aspects of Section 6:

• Existence of a Default: It is the bedrock for initiating CIRP. The Code stipulates a minimum default amount, which is revisited periodically to reflect economic realities. Case Law: Swiss Ribbons Pvt. Ltd. & Anr. vs Union of India & Ors. (2019)
  

  • Insight: The Court's decision here fortified the essence of the IBC, underlining its primary focus on reviving the corporate debtor, rather than mere debt recovery.

• Time-bound Process: The IBC enshrines the principle of timely resolution. Post CIRP initiation, resolution must be achieved within 180 days, with a potential extension of 90 days in special scenarios. Case Law: Committee of Creditors of Essar Steel India Limited vs Satish Kumar Gupta & Ors. (2019)
  

  • Insight: This case highlighted the importance of resolution over liquidation. The Court posited that the IBC's essence was to salvage businesses, thereby preserving economic value and employment.

• Role of Interim Resolution Professional (IRP): The IRP's appointment is a consequential step post-application admission. Entrusted with the corporate debtor's reins, the IRP's primary mandate is charting a resolution plan in collaboration with the Committee of Creditors (CoC). Case Law: Forech India Pvt. Ltd. vs. Edelweiss Asset Reconstruction Co. Ltd. (2018)
  

  • Insight: This case cemented the IRP's pivotal role, asserting that post their appointment, the erstwhile management's powers are effectively superseded by the IRP's authority.

Significance of Section 6:

• Protection to Creditors: By offering a robust legal avenue, Section 6 fortifies creditors' trust in the credit ecosystem, stimulating further lending and economic growth.

• Encouraging Self-reporting: The IBC's provision allowing corporate applicants, inclusive of the corporate debtor, to kickstart the CIRP is visionary. It promotes self-identification of financial distress, paving the way for timely interventions.

• Transparency & Fairness: By vividly outlining the legitimate entities and the due process for CIRP initiation, Section 6 ensures transparency and fairness, warding off potential misuse.

Conclusion:

Section 6 of the IBC 2016, bolstered by judicial interpretations, stands as a testament to India's commitment to creating a robust insolvency resolution framework. It embodies the delicate balance between swift resolution and safeguarding stakeholders' interests. Given the inherent complexities, it's prudent for stakeholders to collaborate with legal experts to navigate the IBC's intricacies.