Operational Creditors under the IBC: Demand Notice, Dispute and Admission

The Insolvency and Bankruptcy Code, 2016 allows a supplier of goods or services to apply for the insolvency of a company that has not paid, but the right is narrower than many suppliers expect. The route is formal, it fails on the existence of a genuine dispute, and it is not a general debt-collection process. This note describes the steps open to an operational creditor and the grounds on which applications are rejected. It is general information, not advice on a particular debt.

Who is an operational creditor

An operational creditor is a person to whom an operational debt is owed. An operational debt is 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 and payable to the Government or a local authority. A supplier owed the price of goods, or a contractor owed for services, is an operational creditor.

The monetary threshold

Under Section 4 the Code applies only where the minimum amount of default is fixed by notification. That amount has been one crore rupees since a notification of March 2020. A creditor should check the current notification before filing, because the figure is set by the Government and may be changed.

The steps

1. Demand notice, Section 8. The creditor delivers a demand notice, or a copy of the unpaid invoice, to the corporate debtor, demanding payment of the operational debt.
2. Ten days. Within ten days of receiving the notice, the debtor must either pay or bring to the creditor's notice the existence of a dispute, or the pendency of a suit or arbitration relating to it, which was started before the notice was received.
3. Application, Section 9. If the debtor does neither, the creditor may file an application with the National Company Law Tribunal, after the ten days have expired. It must attach the invoice or notice, an affidavit that no notice of dispute has been received, and a copy of the bank statement showing that the debt has not been paid.
4. Decision. Within fourteen days the adjudicating authority must admit the application or reject it. Admission begins the corporate insolvency resolution process and a moratorium under Section 14.

Why applications are rejected

The adjudicating authority must reject an application where the application is incomplete and the defect is not cured, where the debt has been paid, where a notice of dispute was received, or where a disciplinary proceeding is pending against the proposed resolution professional.

The dispute ground is the most contested. In Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2017), the Supreme Court held that the authority must examine whether there is a plausible contention requiring further investigation, and that a dispute which is patently feeble, or a mere bluster, does not stand in the way. The dispute must also pre-date the demand notice. A creditor should therefore examine its own file for earlier emails or complaints about quality, delivery or price, since the debtor will rely on them.

Limitation and the special periods

The three-year period under Article 137 applies to an application under Section 9, as the Supreme Court held in B.K. Educational Services v. Parag Gupta (2018). Section 10A suspended the filing of applications for defaults arising on or after 25 March 2020 until 24 March 2021, and that suspension should be considered for any default in that period.

The Code is not a collection tool

The Supreme Court has said that the Code is meant for resolving insolvency and not for recovering debts. In Vidarbha Industries Power Ltd. v. Axis Bank Ltd. (2022), considering Section 7, it held that admission is not automatic once default is shown and that the authority has discretion. A creditor who files an application against a solvent debtor, to pressure it into paying, risks rejection and loses time. A debtor that is not insolvent is better pursued by a suit, a summary suit or, where a cheque was dishonoured, a complaint under Section 138.

Withdrawal and settlement

An application admitted under Section 9 may be withdrawn under Section 12A only with the approval of ninety per cent of the committee of creditors, and, before the committee is constituted, the tribunal may allow withdrawal on application. A settlement should therefore be reached before admission wherever possible.

The choice to file under Section 9 should be made after weighing the debtor's financial position, the strength of the record against a dispute, and the other remedies available. Where the debtor is insolvent and the record is clean, it is an effective route. In other cases it is rarely the best one.