Insolvency Resolution by Operational Creditor (Section 8)

insolvency-resolution-by-operational-creditor-section-8

Introduction

The Code outlines separate insolvency resolution processes for individuals, companies and partnership firms. The process may be initiated by either the debtor or the creditors. A maximum time limit, for completion of the insolvency resolution process, has been set for corporates and individuals.

An operational creditor as defined under s 5(20) of the Insolvency and Bankruptcy Code 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 operational debt is defined 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.

The operational creditor can invoke the jurisdiction of the Tribunal as prescribed under the scheme of the Code, in the following manner:

  1. It shall send a demand notice along with an invoice to the corporate debtor in case of a default.
  2. The corporate debtor shall within 10 days, either inform the existence of a dispute by way of a pending suit or proceeding, along with proofs thereof or shall inform about the payment against such invoice along with proofs thereof.
  3. After expiry of 10 days as prescribed, from the date of the notice, if neither any payment in case of default nor any information is furnished by the corporate debtor, an operational creditor may approach the Tribunal by way of an application for initiation of Corporate IRP.

Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provides that an operational creditor shall deliver to the corporate debtor, the following documents, namely-

  • A demand notice in Form 3; or
  • A copy of an invoice attached with a notice in Form 4.

Further the demand notice or the copy of the invoice demanding payment referred to in sub-section (2) of section 8 of the Code, may be delivered to the corporate debtor,

  • At the registered office by hand, registered post or speed post with acknowledgement due; or
  • By electronic mail service to a whole time director or designated partner or key managerial personnel, if any, of the corporate debtor.

The Rule also prescribes that a copy of demand notice or invoice demanding payment served under this rule by an operational creditor shall also be filed with an information utility, if any.

The scheme as laid down under section 8 is distinct from the one provided under section 7. In case of section 8, upon occurrence of a default the operational creditor, will foremost have to deliver a demand notice of the unpaid debt to the debtor. The corporate debtor then within notice of the unpaid debt to the debtor. The corporate debtor then within 10 days of the receipt of such notice, bring to the notice of the operational creditor the existence of a dispute or the record of the pendency of a suit or arbitration proceedings, which is preexisting-i.e. before such notice or invoice was received by the corporate debtor. Hence the very moment there is existence of such dispute, the operational creditor gets out of the ambit of the Code.

Case law- Innoventive Industries Limited v ICICI Bank & Anr

Conclusion

Whereas section 7 stipulates that in case when the corporate debtor commits a default of a financial debt, the adjudicating authority is only to consider the information provided by the information utility or the evidence adduced by the financial creditor in order to satisfy itself of the default. It is of no matter that the debt is disputed so long as the debt is “due” i.e payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when the said is proved to the satisfaction of the adjudicating authority that it may reject an application and not otherwise.

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Disclaimer – the above summary is based on the personal interpretation of the revised regulations, which may differ person to person. Hence, the readers are expected to take expert opinion before placing reliance on this article.

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