Procedure of filing application by Operational Creditor before NCLT under Section 8 & 9 of the Insolvency and Bankruptcy Code 2016 (IBC)

CIRP
CIRP Application and withdrawal

Procedure of filing application by Operational Creditor before NCLT under Section 8 & 9 of the IBC

On occurrence of default in repayment of operational debt of a corporate debtor, the operational creditor can file an application for initiating corporate insolvency resolution process (CIRP) against the corporate debtor before the Adjudicating Authority(NCLT).

There two steps of filling of the application:

  1. Issue Demand Notice to Corporate Debtor (Sec. 8)
  2. Filing of Application before NCLT (Sec. 9)
Minimum amount of default

A operational creditor can file application before NCLT against a corporate debtors where the minimum amount of the default is one lakh rupees.[Sec. 4]

Note: Vide Notification No. S.O. 1205(E) dated 24.03.2020, the default limit has been increased to 1 crore rupees.

Step-I: Demand Notice[sec. 8]

1. Issue Demand Notice to Corporate Debtor

An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor.

A demand notice means a notice served by an operational creditor to the corporate debtor demanding payment of the operational debt in respect of which the default has occurred. NCLAT held that demand notice issued u/s 8 of the Code, against the corporate debtor, for the dues of sister concern/group company, cannot be treated as a valid notice-Anil Syal Vs. Sanjeev Kapoor (Proprietor Kapoor Logistics) & Anr.

Hon’ble Supreme Court in the matter of Macquarie Bank Limited Vs. Shilpi Cable Technologies Ltd. 60(IBC)06/2017 held that a conjoint reading of Section 30 of the Advocates Act and Sections 8 and 9 of the Code together with the Adjudicatory Authority Rules and Forms thereunder would yield the result that a notice sent on behalf of an operational creditor by a lawyer would be in order.

The following forms prescribed for demand notice and invoice:

(a) a demand notice in Form 3; or

(b) a copy of an invoice attached with a notice in Form 4.

The demand notice or the copy of the invoice demanding payment may be delivered to the corporate debtor:

(a) at the registered office by hand, registered post or speed post with acknowledgement due; or

(b) by electronic mail service to a whole time director or designated partner or key managerial personnel, if any, of the corporate debtor.

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.

NCLAT in the matter of M/s Flipkart India Private Limited 132(IBC)98/2020 held that the choice of issuance of demand notice u/s 8(1) of the Code, either in Form 3 or Form 4, under the Application to Adjudicating Authority Rules 2016, depends on the nature of Operational Debt. Section 8(1) does not provide the Operational Creditor, with the discretion to send the demand notice either Form 3 or Form 4, as per its convenience. The applicability of Form 3 or Form 4 depends on whether the invoices were generated during the course of transaction or not. It is also made clear that the copy of the invoice is not mandatory if the demand notice is issued in Form 3 of the Application to Adjudicating Authority Rules 2016 provided the documents to prove the existence of operational debt and the amount in default is attached with the application. NCLAT in the matter of M/s Krystal Integrated Services Pvt. Ltd. Vs. M/s Indiaontime Express Private Limited held that in absence of service of demand notice upon the Corporate Debtor whose existence at the given address itself is doubtful, Operational Creditor is not entitled to seek triggering of CIRP.

2. Action by Corporate Debtor

The corporate debtor shall, within a period of 10 days of the receipt of the demand notice or copy of the invoice bring to the notice of the operational creditor:

(a) existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;

(b) the payment of unpaid operational debt—

(i) by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor; or

(ii) by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor.

Existence of the dispute and/or the suit or arbitration proceeding must be pre-existing (it must exist before the receipt of the demand notice or invoice) u/s 8– Ahluwalia Contracts (India) Limited Vs. Raheja Developers Limited – NCLAT

Step-II: Filing of application for initiation of CIRP [Sec. 9]

After the expiry of the period of 10 days from the date of delivery of the notice or invoice demanding payment, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute, the operational creditor may file an application before the Adjudicating Authority (NCLT) for initiating a CIRP.

Hon’ble Supreme Court in the matter of Sunrise 14 A/S Denmark Vs. Ravi Mahajan 61(IBC)01/2018 held that petition filed by an advocate would be maintainable.

NCLAT in the matter of Palogix Infrastructure Private Limited Vs. ICICI Bank Limited held that a Power of Attorney holder cannot file any application u/s 7 or Sec. 9 or Sec. 10 of Code.

1. Application Form and Documents

An operational creditor shall make an application in Form 5, along with the application furnish—

(a) a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;

(b) an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;

(c) a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available;

(d) a copy of any record with information utility confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available; and

(e) any other proof confirming that there is no payment of any unpaid operational debt by the corporate debtor or such other information, as may be prescribed.

The applicant shall dispatch forthwith, a copy of the application filed with the Adjudicating Authority, by registered post or speed post to the registered office of the corporate debtor.

2. Propose Resolution Professional

An operational creditor initiating a corporate insolvency resolution process under this section, may propose a resolution professional to act as an interim resolution professional.

3. Admission or Rejection of the Application

The Adjudicating Authority shall, within 14 days of the receipt of the application, by an order:

(i) admit the application and communicate such decision to the operational creditor and the corporate debtor if:

(a) the application is complete;

(b) there is no payment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor;

(d) no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility; and

(e) there is no disciplinary proceeding pending against any proposed resolution professional, if any.

(ii) reject the application and communicate such decision to the operational creditor and the corporate debtor, if:

(a) the application is incomplete;

(b) there has been payment of the unpaid operational debt;

(c) the creditor has not delivered the invoice or notice for payment to the corporate debtor;

(d) notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or

(e) any disciplinary proceeding is pending against any proposed resolution professional:

The Adjudicating Authority, shall before rejecting an application give a notice to the applicant to rectify the defect in his application within 7 days of the date of receipt of such notice from the adjudicating Authority.

Hon’ble Supreme Court in re Surendra Trading Company Vs. Juggilal Kamlapat Jute Mills Company Ltd. & Others 57(IBC)03/2017 held that the time limit prescribed in IBC, 2016 for admitting or rejecting a petition or initiation of CIRP under proviso to sub-sec. (5) of Sec. 9, is directory.

4. Initiation & Commencement of CIRP

Initiation date of CIRP means the date on which a financial creditor, corporate applicant or operational creditor, as the case may be, makes an application to the Adjudicating Authority for initiating CIRP[Sec. 5(11)] and the CIRP shall commence from the date of admission of the application.

III. Judicial Pronouncements

1. Operational creditors cannot use the Insolvency Code either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures- K. Kishan vs. M/S Vijay Nirman Company Pvt. Ltd.- Supreme Court

2. IBC is not intended to be substitute to a recovery forum & whenever there is existence of real dispute, the IBC provisions cannot be invoked-Transmission Corporation of Andhra Pradesh Ltd. Vs. Equipment Conductors & Cables Ltd.- Supreme Court.

3. The proceedings u/s 9 of IBC is summary in nature & it is not possible for the Adjudicating Authority to go into the questions whether the Respondent could or could not have unilaterally withdraw from the MoU & Indemnity Bond given-Indo Alusys Industries Limited vs. SMW Metal Private Limited – NCLAT.

4. Lease of immovable property cannot be considered as a supply of goods or rendering of any services and thus, cannot fall within the definition of Operational Debt-Mr. M. Ravindranath Reddy Vs. Mr G. Kishan & Ors.-NCLAT

5. Jurisdiction to decide whether the application u/s 9 is time barred by limitation or not, it is within the domain of the Adjudicating Authority and not NCLAT-State Bank of India vs Sical Logistics Ltd.-NCLAT

6. Adjudicating Authority in an application u/s 9 as it cannot decide the claim or counter claim being not Court of competent jurisdiction. It is required to be seen that prior to issuance of demand notice u/s 8(1) is there any dispute-Suman Chakraborty Vs. Anhui Technology Imp. & Exp. Co. Ltd. -NCLAT

7. Application u/s 9 with malicious intent (to realise only Interest) for any purpose other than for the Resolution of Insolvency, or Liquidation of the Corporate Debtor is barred in view of Sec. 65 of the Code-S.S. Polymers Vs. Kanodia Technoplast Limited-NCLAT

8. The Adjudicating Authority is not a Civil Court to decide the breach of the contract between the parties – M/s Saregama India Limited Vs. M/s Home Movie Makers Private Limited – NCLAT

9. If there was a quality difference, then there was no question of issuing post-dated cheque,while giving reply to the notice under Section 8(2). The said post-dated cheques have also been bounced & OC has no other option but to file the application under IBC- Mukesh Agarwal Vs. RQS Engineering Pvt. Ltd. – NCLAT

10. If on receipt of the notice, Corporate Debtor has not raised any objection, nor there is anything on record to suggest a pre-existing dispute raised before issuance of Demand Notice u/s 8(1), it can’t be said that there was pre-existence dispute – Beacon Trusteeship Ltd. Vs. Earthcon Infracon Pvt. Ltd. & Anr. – NCLAT

11. Adjudicating Authority can’t reject the application u/s 9 merely on the ground that the dispute about the quantum of payment cannot be determined – Pedersen Consultants India Pvt. Ltd. Vs. Nitesh Estates Limited – NCLAT

12. Sec. 9 of IBC occupies different field than Sec. 16G(1) of the Tea Act, 1953-A.J. Agrochem Vs. Duncans Industries Ltd.-NCLAT

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