IBC Section 123: Application by creditor

Section 123 of Insolvency and Bankruptcy Code, 2016: Application by creditor

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

(1) The application for bankruptcy by the creditor shall be accompanied by-

(a) the records of insolvency resolution process undertaken under Chapter III;

(b) a copy of the order passed by the Adjudicating Authority under Chapter III permitting the creditor to apply for bankruptcy;

(c) details of the debts owed by the debtor to the creditor as on the date of the application for bankruptcy; and (d) such other information as may be prescribed.

(2) An application under sub-section (1) made in respect of a debt which is secured, shall be accompanied with-

(a) a statement by the creditor having the right to enforce the security that he shall, in the event of a bankruptcy order being made, give up his security for the benefit of all the creditors of the bankrupt; or

(b) a statement by the creditor stating-

(i) that the application for bankruptcy is only in respect of the unsecured part of the debt; and

(ii) an estimated value of the unsecured part of the debt.

(3) If a secured creditor makes an application for bankruptcy and submits a statement under clause (b) of sub-section (2), the secured and unsecured parts of the debt shall be treated as separate debts.

(4) The creditor may propose an insolvency professional as the bankruptcy trustee in the application for bankruptcy.

(5) An application for bankruptcy under sub-section (1), in case of a deceased debtor, may be filed against his legal representatives.

(6) The application for bankruptcy shall be in such form and manner and accompanied by such fee as may be prescribed.

(7) An application for bankruptcy by the creditor shall not be withdrawn without the permission of the Adjudicating Authority.

Legal Commentary & Landmark Judgments: Section 123

Section 123 prescribes the procedure for creditors filing a bankruptcy application against an individual debtor or personal guarantor.

Creditor Application: A creditor may file an application for bankruptcy individually or jointly with other creditors in respect of an unpaid qualifying debt.
Prerequisites for Creditor Petition: Must demonstrate that the debt is an undisputed, liquidated sum exceeding the threshold, and that the repayment plan failed under Section 118 or was rejected under Chapter III.
Proof of Claim and Security Details: The petition must detail all securities held, estimate the value of unsecured balances, and specify whether the creditor intends to surrender or enforce its security interest.

Key Landmark Precedents:

Lalit Kumar Jain v. Union of India (2021) 9 SCC 321: Affirmed that creditors have the statutory right under Part III to initiate bankruptcy against high-net-worth personal guarantors for corporate debts remaining unpaid after resolution failure.
Dena Bank v. C. Shivakumar Reddy (2021) 10 SCC 330: Emphasized that creditor petitions under the Code require clear proof of subsisting legal debt and default supported by financial records and tribunal orders.

Courtroom Practice & Strategic Litigation Guidance:

Creditors filing under Section 123 must clearly declare whether they are relinquishing their security to the bankruptcy estate or standing outside the bankruptcy to realize their security; failing to specify this may complicate their voting share under Section 134.