Section 7 of the Insolvency and Bankruptcy Code, 2016 empowers a financial creditor — either individually or jointly with other financial creditors, or any person authorised on their behalf — to file an application before the National Company Law Tribunal (NCLT) for initiating the Corporate Insolvency Resolution Process (CIRP) against a corporate debtor that has committed a default.
Who Is a Financial Creditor?
A financial creditor, as defined under Section 5(7) of the IBC, is any person to whom a financial debt is owed. Financial debt (Section 5(8)) includes money borrowed against the payment of interest, amounts raised under credit facilities, bonds, debentures, lease obligations, receivables sold or discounted (other than on a non-recourse basis), and any derivative transaction entered into in connection with protection against fluctuation in rates. Home buyers in real estate projects are also treated as financial creditors following the 2018 amendment.
Requirements — Debt and Default
The financial creditor must establish two essential ingredients: the existence of a financial debt and the occurrence of a default. Default means the non-payment of a debt that has become due and payable, whether in whole or in part. The current minimum threshold for filing is ₹1 crore, raised from the original ₹1 lakh by a government notification dated 24 March 2020. The application must be accompanied by records of the default from an information utility or other evidence.
Documentation & NCLT Filing Procedure
The application is filed in Form 1 prescribed under the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. It must include a record of default from the Information Utility (if available), evidence of the financial debt, the name of the proposed Interim Resolution Professional (IRP) with their written consent and IBBI registration details, and any other documents substantiating the default. The NCLT must admit or reject the application within 14 days of filing, though in practice this timeline is often extended.
Key Supreme Court Judgments
In Swiss Ribbons Pvt. Ltd. v. Union of India (2019), the Supreme Court upheld the constitutional validity of the IBC and clarified the distinction between financial and operational creditors. In Essar Steel India Ltd. v. Satish Kumar Gupta (2019), the Court held that the CoC has the commercial wisdom to decide the distribution of amounts under a resolution plan, and the NCLT/NCLAT cannot interfere with this wisdom. In Innoventive Industries Ltd. v. ICICI Bank (2018), the Court established that the NCLT need only satisfy itself that a default has occurred to admit a Section 7 application.
Timeline & Threshold
Once admitted, the CIRP commences and must be completed within 180 days (extendable by 90 days). The ₹1 crore threshold was introduced to prevent frivolous filings and reduce the burden on NCLT Benches. Financial creditors, including banks, NBFCs, and debenture holders, remain the most frequent initiators of CIRP under the IBC.
Key Points
- Financial creditors file under Section 7 by establishing debt and default.
- The minimum default threshold is ₹1 crore (since March 2020).
- Application is filed in Form 1 with details of the proposed IRP.
- NCLT must ascertain the existence of default — no adjudication of disputed claims.
- Home buyers qualify as financial creditors under the 2018 amendment.
- Key rulings: Swiss Ribbons, Essar Steel, Innoventive Industries.