The Code provides suppliers with a mechanism to initiate an insolvency resolution process in the event a debtor company is unable to pay its debts.
The Code allows the suppliers to initiate an insolvency resolution process, if the amount of default by the debtor company is at least One Crore rupees.
The debts should be undisputed. Effective supplier dues recovery requires timely payment, clear communication, negotiation, follow-up, and legal action if necessary.
A debtor company may also, by itself, take recourse to the Code if it wants to avail of the mechanism of resolution process. In the event of the inability to pay creditors, a company may choose to go for an insolvency resolution process – a measure by which the company can itself approach the NCLT for the purpose of resolution, for timely and effective supplier dues recovery.
A company may also, take recourse of the Code to go for voluntary liquidation process, if it wants to exit from business, provided the assets of the company are sufficient to set off liabilities and dissolve it.
As per Section 5(8) of the Code, Financial Debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes:-
a) Any money borrowed against the payment of interest.
b) Any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent.
c) Any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument.
d) The amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards.
e) Any receivables sold or discounted other than any receivables sold on non-recourse basis.
f) Any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing.
g) Any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account.
h) Any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution.
i) The amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in above clauses.
As per Section 5(21) of the Code, Operational Debt means a claim in respect of
a) Provision of goods or
b) Provision of services including employment
c) Or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.
It may be initiated by the:
- Financial Creditors (singly or jointly with other creditors);
- Operational Creditors (including Government and Employees/Workmen);
- Corporate Debtor
CIRP may be initiated where the minimum amount of default i.e. failure to pay whole or any part of installment of the debt or interest due is Rs. 1,00,000/- or such higher amount as may be notified by the Central Govt. not exceeding Rs. 1 Cr. Presently, it is Rs. One Crore.
Yes, a financial creditor for whom there is no default can still file an application against a corporate debtor provided, the corporate debtor has a default against some other financial creditor. However, in that case, he can only file joint application with the financial creditor for whom there is default.