Section 123: Application by Creditor for Bankruptcy under the IBC, 2016
Section 123 of the Insolvency and Bankruptcy Code, 2016 (IBC) sets out the documents, declarations and procedural conditions for a bankruptcy application made by a creditor. It addresses secured creditors, appointment proposals for a bankruptcy trustee, applications concerning deceased debtors and the need for permission before withdrawal.
Section 123: Application by creditor - statutory requirements
The following preserves the substantive requirements of Section 123, organised by subsection for clarity.
123(1). An application for bankruptcy by a creditor shall be accompanied by:
- the records of the insolvency resolution process undertaken under Chapter III;
- a copy of the order passed by the Adjudicating Authority under Chapter III permitting the creditor to apply for bankruptcy;
- details of the debts owed by the debtor to the creditor as on the date of the bankruptcy application; and
- such other information as may be prescribed.
123(2). Where the application concerns a secured debt, it must additionally contain either:
- a statement by the creditor entitled to enforce the security that, if a bankruptcy order is made, the creditor will give up the security for the benefit of all creditors of the bankrupt; or
- a statement that the application concerns only the unsecured part of the debt, together with an estimated value of that unsecured part.
123(3). If a secured creditor elects the second option under subsection (2), the secured and unsecured portions are treated as separate debts.
123(4). The creditor may propose an insolvency professional as bankruptcy trustee in the application.
123(5). Where the debtor has died, the creditor may file an application under subsection (1) against the debtor's legal representatives.
123(6). The application must comply with the prescribed form, manner and fee.
123(7). A creditor's bankruptcy application cannot be withdrawn without the Adjudicating Authority's permission.
Meaning and explanation of Section 123
Section 123(1): Documents supporting the application
A creditor cannot rely on a bare allegation of non-payment. The application is linked to an earlier insolvency resolution process and the qualifying order under Chapter III of Part III. The creditor should provide the relevant process records, the order permitting a bankruptcy application, and an accurate statement of outstanding debt as at the filing date. Further prescribed particulars must be supplied under the applicable procedural rules.
Section 123(2): Declaration by a secured creditor
A secured creditor must choose how its security will be treated in connection with the bankruptcy application. The creditor may undertake to surrender the security for the common benefit of creditors if bankruptcy is ordered, or apply only for the estimated unsecured portion while identifying that portion. These alternatives should not be conflated.
Section 123(3): Separation of secured and unsecured portions
Where the creditor proceeds only in respect of the unsecured portion under Section 123(2)(b), the law treats the secured and unsecured portions as distinct debts for the purposes of that election. The valuation and description of each part therefore matter.
Section 123(4): Proposed bankruptcy trustee
A creditor may nominate an insolvency professional for consideration as bankruptcy trustee. A proposal does not itself appoint the professional: appointment remains subject to the statutory process and the role of the Adjudicating Authority and the Insolvency and Bankruptcy Board of India (IBBI).
Section 123(5): Death of the debtor
The provision expressly contemplates an application against the legal representatives of a deceased debtor. The nature and extent of any liability and the administration of the deceased person's estate must be assessed under the applicable legal framework; this provision should not be read as automatically creating unlimited personal liability for heirs.
Sections 123(6) and 123(7): Filing formalities and withdrawal
Prescribed forms, supporting information and fees must be checked before filing. Once filed, the creditor cannot unilaterally withdraw the application: permission from the Adjudicating Authority is required.
Secured creditor options: a practical comparison
- Surrender security: The creditor declares that, if bankruptcy is ordered, the security will be given up for the benefit of creditors collectively.
- Apply for unsecured balance only: The creditor identifies the unsecured portion and its estimated value, with the secured and unsecured parts treated as separate debts under subsection (3).
For example, if a creditor claims a debt of Rs. 10 lakh and estimates the realisable value of the security at Rs. 7 lakh, the estimated unsecured portion may be Rs. 3 lakh. The actual treatment depends on valuation, documentation and applicable law; this is only an illustration.
Procedure and related IBC provisions
- Qualifying event: Section 121 permits a bankruptcy application following the specified orders under Sections 100(4), 115(2) or 118(3), subject to the conditions of that section.
- Time limit: Section 121(2) provides a three-month period from the relevant qualifying order for filing the bankruptcy application.
- Creditor's application: Section 123 specifies the supporting material, secured-debt declarations and procedural safeguards.
- Next steps: Sections 124 onwards govern aspects of the bankruptcy application process, including the effect of filing and appointment-related procedures, subject to the operative statutory and regulatory framework.
For personal guarantors to corporate debtors, the applicable rules include the Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019. The Adjudicating Authority and forum should be determined in light of the IBC, including Section 60 where applicable.
Read the Insolvency and Bankruptcy Code, 2016 overview for the broader statutory framework.
Frequently asked questions
Can a creditor apply directly for bankruptcy under Section 123?
Section 123 operates with Section 121. The creditor must satisfy the qualifying-order and timing requirements; Section 123 then specifies what must accompany the application.
Can a secured creditor retain its security?
Section 123(2) provides an option to apply only for the unsecured part of the debt, identifying its estimated value. Alternatively, the creditor may undertake to surrender security for the common benefit of creditors.
Can the creditor nominate a bankruptcy trustee?
Yes. Section 123(4) allows the creditor to propose an insolvency professional, but the proposal is not an automatic appointment.
Can a bankruptcy application be withdrawn after filing?
Not without permission of the Adjudicating Authority, under Section 123(7).
Official sources and further reading
- India Code - official central legislation repository (search for the Insolvency and Bankruptcy Code, 2016, Act 31 of 2016).
- IBBI - legal framework, rules, regulations and notifications.
- Insolvency and Bankruptcy Board of India - official website.
Legal information only. Verify the latest amended text, commencement notifications, procedural rules and judicial decisions before taking action.