National University of Juridical Sciences, Kolkata

'Insolvency & Bankruptcy Code - Law and Practice’

Credit Course, BA.LLB. (Hons.), August-December 2022

Take Away/Self-scheduled

Part I

Answer 1 (768 words)

In the present case, Victoria bank provided a long-term loan and an overdraft facility to Plassey Ltd.(Corporate

Debtor) for Rs. 50 lacks, which held a fixed and floating charge over Plassey’s business and assets. Plassey Ltd

defaulted the payment, and thus, Victoria Bank can proceed against the corporate debtor under section 7 of the

IBC as it qualifies as a financial creditor. The nuances of the present case are discussed below-

Section 7 of the IBC enables a Financial Creditor to file an application for commencing CIRP against a

Corporate Debtor when a default has occurred. CIRP gets triggered when the Corporate Debtor commits a

default. Under Section 3(8) of the IBC, a “corporate debtor” refers to a corporate person who owes a debt to

any person. “Debt” defined under Section 3(11) of the IBC refers to a liability in respect of a claim due from

any person and includes a financial and operational debt. Moreover, “default” is defined in Section 3(12) of the

IBC to mean “non-payment of a debt when the whole or any part or instalment of the amount of debt has

become due and payable and is not paid by the debtor or the Corporate Debtor, as the case may be”.

Furthermore, Section 5(7) defines “financial creditor” as any person to whom a financial debt is owed and

includes a person to whom the debt is legally assigned. Section 5(8) defines “financial debt” as a debt along

with interest if any which is disbursed against the consideration of time value of money, and includes the

components of sub-clauses (a) to (i) of the said section.

The Victoria Bank classified the Corporate Debtors Account NPA in 2016. It was held by the Supreme Court in

the cases of Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. and B.K. Educational

Services Pvt. Ltd. v. Paras Gupta & Associates that the limitation period for filing an application under Section

7 of the IBC is three years as provided by Article 137 of the Limitation Act 1963, which commences from the
date of default and is extendable only by an application under Section 5 of the limitation act if the case for the

condonation of delay is made out successfully. In the Babulal Vardharji Gurjar case, the Hon'ble Court also

observed that the "date of the default is the date when the Account of the Corporate debtor is classified as an

NPA." In another case of Sesh Nath Singh v Baidyabati Sheoraphuli Co-Operative Bank Ltd, the Apex Court

affirmed the applicability of Section 5 of the limitation act for application under the IBC under certain facts and

circumstances. Since in the present case, NPA was declared in 2016, the date of default also arises in the year

2016. Thus, in order to file an application under section 7 of the IBC for initiation of insolvency proceedings

against the corporate debtor at the present date(2022), the Victoria bank has to file an application under Section

5 of the limitation act for the extension of the limitation period.

Another point to be noted in the present case is the amount of default committed. According to Rule 4 of the

Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, Victoria bank should file the

application in Form 1, accompanied by relevant documents and records as required by the rules. The corporate

debtor might raise two defences on its behalf. The first defence can be that the present case is barred by

limitation and the second, that the threshold of default has not been met.

According to section 238A of the IBC, the provisions of the Limitation Act have been made applicable to the

proceedings pertaining to IBC. It was held in the case of B.K. Educational Services Case that the limitation

period for filing an Application under Section 7 of IBC is three years as provided under Article 137 of the

Limitation Act. The limitation period is calculated from the date of default which in the present case is in 2016.

The second defence that can be raised by the corporate debtor is that debt in question is Rs 50 Lakh which does

not meet the threshold of Rs 1 crore as required by Section 4(1) of the IBC, which was amended by the

Government of India vide Notification F. No. 30/09/2020 dated 24th March 2020. In the case of Madhusudan

Tantia v. Amit Choraria, Foseco India Limited, the Appellate Tribunal held that the notification could only be

applied prospectively and the threshold of 1 crore rupees would only apply to defaults that have occurred after

25th March 2020.

Answer 2: (414 words)

The outstanding salary of Rs. 10 lakhs fall within the purview of an “operational debt” under the IBC, and Rai

Dullabh can claim it if the threshold is fulfilled. Section 5(20) of the IBC defines “operational creditor” as a

“person to whom an operational debt is owed and includes any person to whom such debt has been legally

assigned or transferred.” Further, Section 5(21) of the IBC defines “operational debt” as “a claim in respect of

the provision of goods or services including employment 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”. In Swiss Ribbons v. Union of India as well as Mobilox Innovations (P) Ltd. V/s Kirusa

Software (P) Ltd, the Supreme Court interpreted the definition of “operational debt” under the IBC and held

that “operational debt” would include claims with respect to provision of goods or services, including

employment, or debt concerning the payment of dues under any law payable to the government or any local

authority.

With respect to the instant matter, it is submitted that the outstanding salary of Rs. 10 lakhs due from the

Corporate Debtor arises during the operation of the Company. Further, the debt in question is clearly a claim of

the employee in respect of non-payment of salary for the provision of services during the period of his

employment in the company. Hence, in light of the aforementioned provisions of the IBC as well as judicial

pronouncements on this point, Rai Dullabh’s outstanding salary to the tune of Rs. 10 lakhs clearly fall within

the purview of an “operational debt” under the IBC.

Owing to a default on the part on the Corporate Debtor in paying the outstanding salary, he can act in

accordance with Section 8(1) of the IBC, and deliver a demand notice of the operational debt in the form set out

in Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. If, after the

expiry of 10 days, the operational creditor does not either receive payment from the corporate debtor or notice

of dispute, the operational creditor may trigger the insolvency process by filing an application before the

adjudicating authority under Sections 9(1) and 9(2) of the IBC. However, the threshold which is 1 crore is not

met in the present case, therefore Rai would not be able to proceed as an operational creditor.
Part II

Answer 1) (a) Swiss Ribbons Pvt. Ltd. and Ors. v. Union of India;

Answer 2) (b) that the IB Code seeks liquidation of the corporate debtor for better resolution

Answer 3) (c) the NCLT admits the application since only debt and default is relevant

Answer 4) (a) Swiss Ribbons Pvt. Ltd. and Ors. v. Union of India

Answer 5) (b) the Bankruptcy Law Reforms Committee Report

Answer 6) (a) IBBI

Answer 7) (d) Financial Creditors are effectively the relevant party that appoints the Resolution Professional.

Answer 8) (a) cost incurred by the liquidator in relation to compromise or arrangement under section 230 of the

Companies Act, 2013

Answer 9) (c) insolvency resolution process costs, then workmen’s dues, then financial debts owed to

unsecured creditors; and then amount due to the Central Government

Answer 10) (c) the IBBI frames rules to give effect to the provisions of the IB Code

Answer 11) (d) the IB Code is based on allowing free flow of the market forces.

Answer 12) (b) Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India

Answer 13) (b) the Adjudicating Authority

Answer 14) (d) to sell the immovable and movable property or actionable claims of the corporate debtor in

liquidation to any person who is not eligible to be a resolution applicant

Answer 15) (d) assets owned by a third party which are in possession of the corporate debtor