Who is a Debtor under IBC 2016

 Under the Insolvency and Bankruptcy Code, 2016 (IBC), a debtor is defined as a person or entity that owes a debt. More specifically, in the context of the IBC, the term "debtor" is typically used to refer to a corporate debtor, but it can also apply to individuals and partnerships under certain provisions of the Code. The debtor is the party who is in default and to whom an insolvency resolution process (CIRP) is applied if they fail to meet their obligations.

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Who is a Debtor under IBC 2016?

1. Corporate Debtor:

   • Under the IBC, a corporate debtor refers to a company or limited liability partnership (LLP) that owes a financial or operational debt to creditors.

   • A corporate debtor can be a private company, public company, partnership firm, or any other corporate body recognized by law.

   • The corporate debtor is the entity undergoing the insolvency resolution process (CIRP) if they have defaulted on debt payments.

   • The corporate debtor can initiate the CIRP themselves (voluntary) or can be forced into it by a creditor (involuntary).

2. Individual and Partnership Debtors:

   • Individuals or partnerships who owe debts to creditors are also covered under the IBC but through a separate part of the law known as the Insolvency and Bankruptcy Code (Personal Insolvency and Bankruptcy), which came into effect through the Insolvency and Bankruptcy Code (Amendment) Act, 2019.

   • Under the IBC, individual and partnership debtors can be subject to insolvency proceedings under Part III (commencing Section 79).

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Legal Definition of Debtor Under IBC:

• Section 3(7) of the IBC defines a "debtor" in the context of a corporate debtor as the person or corporate entity that owes a debt to another person.

• The debtor is the one who defaults on the debt and, as a result, may be subjected to a corporate insolvency resolution process (CIRP) or liquidation.

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Debtor's Role in CIRP:

1. Filing for Insolvency (Voluntary):

   • A corporate debtor can voluntarily initiate the CIRP by filing a petition before the National Company Law Tribunal (NCLT) if they are unable to repay their debts.

   • The debtor, in such a case, must also submit a list of creditors, their debt amounts, and details of the default.

2. Defending the Application (Involuntary):

   • If an operational creditor or financial creditor files an insolvency petition against the corporate debtor due to a default in payment, the debtor can defend the application by presenting evidence of a pre-existing dispute or payment of the debt.

   • If the default is not disputed, the corporate debtor is typically subjected to CIRP.

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Key Rights of the Debtor Under IBC:

1. Representation in the Committee of Creditors (CoC):

   • During the CIRP, the corporate debtor is represented by an interim resolution professional (IRP), who manages the day-to-day affairs of the debtor company and its financial decisions.

   • The debtor can propose a resolution plan (subject to approval by the Committee of Creditors (CoC)) to resolve the insolvency.

2. Avoidance of Liquidation:

   • The debtor can negotiate with creditors during the CIRP to avoid liquidation and reach a resolution plan to settle debts.

3. Corporate Restructuring:

   • The debtor can propose restructuring options such as the sale of assets, debt rescheduling, or compromise agreements to address the defaulting debts and return to solvency.

4. Time for Resolution:

   • The debtor is given a time frame of 180 days (extendable by 90 days) to finalize a resolution plan. If the debtor fails to propose a viable plan or if the creditors reject it, the debtor’s assets can be liquidated.

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Debtor's Liabilities During CIRP:

• During the CIRP process, the debtor's assets are preserved and managed under the supervision of an interim resolution professional (IRP). The debtor is required to cooperate fully with the IRP and creditors.

• The debtor's directors or management may lose control over the company during this process, as the IRP takes charge.

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Debtor in the Case of Individuals and Partnerships:

For individuals and partnerships, the concept of debtor insolvency operates under separate rules in the IBC. These include:

• Individual Debtors: Persons who owe financial or operational debt to creditors.

• Partnership Debtors: Partnership firms or individuals in a partnership who have incurred default and owe debt to creditors.

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Judicial Precedents Involving Debtors under IBC:

1. M/s. Innoventive Industries Ltd. v. ICICI Bank Ltd. (2018):

   • The Supreme Court emphasized that if the corporate debtor defaults on a debt, a financial creditor can initiate the CIRP under Section 7 of the IBC.

   • The debtor can only defend against the insolvency application if there is a pre-existing dispute or proof of payment.

2. Swiss Ribbons Pvt. Ltd. v. Union of India (2019):

   • The Supreme Court upheld the constitutional validity of the IBC, asserting that it aims to resolve corporate defaults by providing a structured process for both creditors and debtors.

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Conclusion:

Under the Insolvency and Bankruptcy Code, 2016, the debtor refers to any person or entity that owes a debt to a creditor, typically in the context of a corporate debtor who has defaulted on their financial or operational obligations. The debtor can voluntarily initiate the insolvency resolution process or face involuntary proceedings initiated by creditors. The debtor has certain rights to propose a resolution plan but also has the obligation to cooperate with the insolvency process, which could ultimately lead to liquidation if the issues are not resolved.