The procedure of filing an application by an operational creditor under Insolvency and Bankruptcy Code (IBC)

operational creditor

Section 6 of the Insolvency and Bankruptcy Code,2016 (“IBC”) provides that only three categories of persons can initiate Corporate Insolvency Resolution Process(“CIRP”) namely financial creditors, operational creditors and the corporate debtor itself. Procedure for initiating the corporate insolvency process in all the three cases are different.

Who is an operational creditor?

Any person from whom goods and services are availed in the normal course of business. Such debts can include an outstanding salary of an employee or tax dues or raw material suppliers.

Procedure for filing an application or initiating the CIRP by an operational creditor is covered by section 8 and 9 of IBC. Section 8 deals with the procedure an operational creditor has to follow before approaching the adjudicating authority and section 9 deals with the procedure which has to be followed while approaching the adjudicating authority.

When and against whom when can an operational creditor file an application for CIRP?

Currently, a CIRP can be initiated only against a corporate debtor. Corporate debtor means either a company registered under the Companies Act, 2013 or a Limited Liability Partnership ("LLP") registered under the LLP Act, 2008)

An application can be filed only when a corporate debtor fails to pay back its debt which has arisen out of goods being sold or services being supplied and there is no dispute related to such transaction.

When and how can a corporate debtor avoid payment of the alleged debt?

In practice, the only situation in which a corporate debtor can escape or delay the strict provisions of the IBC in case of a demand from the operational creditor is when there exists a dispute between the parties. As per section 5(6) of the IBC dispute can be a suit or arbitration proceeding relating to:

  1. A dispute related to the amount of debt: - A dispute related to the existence of such debt or a dispute related to the exact amount of debt.
  2. Quality of goods or service: - A dispute regarding the quality of the goods and services which was delivered.
  3. Breach of representation or warranty: - A dispute related to any representation or warranty made in the agreement. This can also include violation of any terms or conditions made in the agreement.

Procedure to be followed by an operation creditor before approaching the adjudicating authority

Step 1: Send a demand notice:

Send a demand notice and an invoice of the outstanding payment to the corporate debtor in Form 3 or Form 4 prescribed in the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

This demand notice can be sent in hard copy to its registered office through registered post, speed post or by hand. In such cases acknowledgement of the receipt of the notice is mandatory. It can also be sent via e-mail to its whole-time director, designated partner or a key managerial person (includes CEO and CFO).

Step 2: File a copy of demand notice or invoice with an information utility. Details of information utilities can be found here: https://www.ibbi.gov.in/service-provider/information-utilities.

Step 3: Wait for 10 (ten) days after the notice is received by the corporate debtor.

            Within these 10 days three things can happen:

  1. The corporate debtor pays back the dues amount within these 10 days: In such a case, the corporate debtor has to send a proof of payment as a reply to the notice. This proof of payment can be a record of online/electronic transfer or record of encashment of cheque by the operational creditor.
  2. The corporate debtor sends a reply to the notice within these 10 days under section 8(1) of the IBC saying that there exists a dispute.
  3. The corporate debtor sends no reply or a proper reply within these 10 days.

An operational creditor can approach the adjudicating authority only in the third case where it has not received a reply or a proper reply.

Step 4: Make an application to the adjudicating authority in Form 5 prescribed in the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 along with:

  1. Copy of demand notice which was served to the corporate debtor.
  2. Copied all the documents supporting the claim of the operational creditor.
  3. Copy of account statement of the operational creditor to confirm that there was no payment of the said debt.
  4. Affidavit as prescribed in the form.
  5. Application fee and proof that the application fees have been paid.

After the application is made and the application and it is admitted the CIRP will commence.

Disclaimer: - This article is for the general information and awareness of its readers, In-case of any legal matter in relation with readers, they are expected to have legal opinion before placing reliance on it. Further it contains completely author's views on the subject and completely unbiased based on authors own experience, study and understanding. 

By: EasyLegalTax Team

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