Corporate Person and Corporate Debtor under the IBC

Part II of the Code applies to corporate debtors, a term that depends on two definitions: corporate person and debt. Not every entity that does business qualifies. Banks, insurers and other financial service providers are excluded because their failure affects depositors and the financial system, though large non-banking finance companies can be brought in by notification. This note explains who is a person, a corporate person and a corporate debtor, which entities fall outside, and how the special regime for financial service providers works.

1. Person

• Section 3(23). Person includes an individual, a Hindu Undivided Family, a company, a trust, a partnership, a limited liability partnership, any other entity established under a statute, and a person resident outside India.
• Significance. The definition is wide because creditors may be any person, including foreign lenders and suppliers; the narrower definitions of corporate person and corporate debtor decide who can be taken into insolvency under Part II.

2. Corporate Person and Corporate Debtor

• Corporate person, section 3(7). A company as defined in the Companies Act, 2013, a limited liability partnership under the LLP Act, 2008, or any other person incorporated with limited liability under any law, but not a financial service provider.
• Corporate debtor, section 3(8). A corporate person who owes a debt to any person; no minimum amount is needed to be a corporate debtor, though a minimum default is needed to start the process (Topic 6)
• Corporate applicant, section 5(5). The corporate debtor itself, a member or partner authorised by its constitution, an individual in charge of managing its operations, or a person with control and supervision over its financial affairs, any of whom may apply under section 10 (Topic 14)
• Corporate guarantor, section 5(5A). A corporate person who is the surety in a contract of guarantee to a corporate debtor; as it owes a debt once the guarantee is invoked, it is itself a corporate debtor.

Figure 1: Is the entity a corporate debtor?

3. Entities Covered

• Companies. All companies incorporated under the Companies Act, 2013 or earlier company laws, including private, public, one person, section 8 and government companies.
• Special Act companies. Companies governed by a special Act are covered except to the extent the Code is inconsistent with that Act (section 2(b))
• LLPs. Limited liability partnerships are corporate persons and go through the same process.
• Corporate guarantors. In Laxmi Pat Surana v Union Bank of India (2021), the Supreme Court held that a financial creditor may initiate CIRP against a corporate guarantor without first proceeding against the principal borrower, since the guarantor's liability is co-extensive (Topic 12)

Figure 2: Which law and forum apply to which debtor

4. Financial Service Providers

• Financial services, section 3(16). Includes accepting deposits, safeguarding and administering assets consisting of financial products, effecting contracts of insurance, offering, managing or agreeing to manage financial products, rendering or offering investment advice, and transferring or exchanging funds.
• Financial service provider, section 3(17). A person engaged in the business of providing financial services under an authorisation or registration granted by a financial sector regulator.
• Financial sector regulator, section 3(18). An authority or body constituted under any law to regulate services or transactions of the financial sector, including the RBI, SEBI, IRDAI and PFRDA.
• Why excluded. The failure of a bank, insurer or other financial firm affects depositors, policyholders and the payment system, and needs a specialised resolution regime run by its regulator, not a creditor-led process.

Figure 3: Treatment of financial service providers

• Banks. Remain under the Banking Regulation Act, 1949, which provides for moratorium, reconstruction and amalgamation by the RBI and the Central Government; the Financial Resolution and Deposit Insurance Bill, 2017, which proposed a separate regime, was withdrawn in 2018.
• Section 227. Notwithstanding the exclusion, the Central Government may, in consultation with the appropriate regulator, notify financial service providers or categories of them for insolvency and liquidation proceedings, with such modifications as it prescribes.
• FSP Rules, 2019. Notified in November 2019 for non-banking finance companies, including housing finance companies, with an asset size of five hundred crore rupees or more; only the appropriate regulator, the RBI, may apply to the NCLT; an administrator replaces the insolvency professional; and the licence of the provider cannot be suspended or cancelled during the process.
• Practice. Dewan Housing Finance Corporation was the first financial service provider admitted under these Rules on an application by the RBI, followed by others such as Srei and Reliance Capital (Topic 37)
• As creditors. The exclusion operates only when the financial service provider is the debtor; banks and NBFCs are the main financial creditors in other insolvency proceedings.

5. Entities Outside Part II

• Individuals and firms. Partnership firms, proprietorships and individuals fall under Part III; only personal guarantors to corporate debtors are currently covered (Topic 65)
• Trusts and societies. Trusts are not incorporated with limited liability and are not corporate persons; co-operative and registered societies have generally been treated by the tribunals as falling outside the definition, and a creditor must pursue remedies under their own statutes.
• Unnotified financial service providers. Remain outside the Code and are resolved under their sectoral laws.

6. Frequently Asked Questions

Can a creditor file for insolvency of an NBFC?

Not directly. An NBFC is a financial service provider and is excluded. If it falls within the categories notified under section 227, only the RBI, as its regulator, may apply to the NCLT under the FSP Rules, 2019.

Is a limited liability partnership a corporate debtor?

Yes. An LLP is a corporate person under section 3(7), and if it owes a debt it is a corporate debtor to which Part II applies.

Must a lender first sue the principal borrower before proceeding against a corporate guarantor?

No. The guarantor's liability is co-extensive with that of the principal debtor, and the Supreme Court in Laxmi Pat Surana (2021) held that an application under section 7 may be filed against the corporate guarantor on its default, independently of the borrower.

7. Related Topics

• Topic 12: Corporate Guarantors and Simultaneous CIRP. Proceedings against borrower and guarantor.
• Topic 37: Insolvency of Financial Service Providers. Section 227 in detail.
• Topic 65: Part III. Individuals and partnership firms.