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Mobilox Innovations Private Limited Vs. Kirusa Software Private Limited

Supreme Court Of India Civil Appeal /9405/2017

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∙ An application was filed before the National Company Law Tribunal by the appellant under the new Code stating that an operational debt was owed by the respondent with documentary ...

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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 9405 OF 2017

Mobilox Innovations Private Limited … Appellant

Versus

Kirusa Software Private Limited … Respondent

J U D G M E N T

R.F. Nariman, J.

1. The present appeal raises questions as to the triggering

of the Insolvency and Bankruptcy Code, 2016 when it comes to

operational debts owed to operational creditors. The appellant

was engaged by Star TV for conducting tele-voting for the

“Nach Baliye” program on Star TV. The appellant in turn sub-

contracted the work to the respondent and issued purchase

orders between October and December, 2013 in favour of the

respondent. In the “Nach Baliye” program, the successful

dancer was to be selected on various bases, including viewers’

votes. For this purpose, the respondent was to provide toll free

telephone numbers across India, through which the viewers of

the program could cast their votes in favour of one or more

participants. For this purpose, a software was customized by

the respondent, who then coordinated the results and provided

them to the appellant. Since the respondent obtained toll free

numbers from telephone operators in terms of the purchase

orders, the appellant was liable to make payment of rentals for

the toll free numbers, as well as primary rate interface rental to

the telecom operators. The respondent provided the requisite

services and raised monthly invoices between December, 2013

and November, 2014 – the invoices were payable within 30

days from the date on which they were received. Th e

respondent followed up with the appellant for payment of

pending invoices through e-mails sent between April and

October, 2014. It is also important to note that a non-disclosure

agreement (hereinafter referred to as the NDA) was executed

between the parties on 26

December, 2014 with effect from 1

November, 2013.

2. More than a month after execution of the aforesaid

agreement, the appellant, on 30

January, 2015, wrote to the

respondent that they were withholding payments against

invoices raised by the respondent, as the respondent had

disclosed on their webpage that they had worked for the “Nach

Baliye” program run by Star TV, and had thus breached the

NDA. The correspondence between the parties finally

culminated in a notice dated 12

December, 2016 sent under

Section 271 of the Companies Act, 2013. Presumably because

winding up on the ground of being unable to pay one’s debts

was no longer a ground to wind up a company under the said

Act, a demand notice dated 23

December, 2016 was sent for

a total of Rs.20,08,202.55 under Section 8 of the new

Insolvency and Bankruptcy Code, 2016 (hereinafter referred to

as the Code). By an e-mail dated 27

December, 2016, the

appellant responded to the aforesaid notice stating that there

exists serious and bona fide disputes between the parties, that

the notice issued was a pressure tactic, and that nothing was

payable inasmuch as the respondent had been told way back

on 30

January, 2015 that no amount will be paid to the

respondent since it had breached the NDA.

3. An application was then filed on 30

December, 2016

before the National Company Law Tribunal under Sections 8

and 9 of the new Code stating that an operational debt of

Rs.20,08,202.55 was owed to the respondent.

4. On 19

January, 2017, the respondent was orally

intimated to remove a defect in the application, in that it did not

contain the appellant’s notice of dispute. This was rectified by

an affidavit in compliance dated 24

January, 2017, by which

various other documents were also supplied by the respondent

to the Tribunal. On 27

January, 2017, the Tribunal dismissed

the aforesaid application in the following terms:

“On perusal of this notice dated 27.12.2016

disputing the debt allegedly owed to the petitioner,

this Bench, looking at the Corporate Debtor

disputing the claim raised by the Petitioner in this

CP, hereby holds that the default payment being

disputed by the Corporate Debtor, for the petitioner

has admitted that the notice of dispute dated 27

December 2016 has been received by the

operational creditor, the claim made by the

Petitioner is hit by Section (9)(5)(ii)(d) of The

Insolvency and Bankruptcy Code, hence this

Petition is hereby rejected.”

5. An appeal was then filed before the National Company

Law Appellate Tribunal which was decided on 24

May, 2017.

This appeal was allowed in the following terms:

“39. In the present case the adjudicating authority

has acted mechanically and rejected the application

under sub-section (5)(ii)(d) of Section 9 without

examining and discussing the aforesaid issue. If the

adjudicating authority would have noticed the

provisions as discussed above and what constitutes

‘dispute’ in relation to services provided by

operational creditors then it would have come to a

conclusion that condition of demand notice under

sub-section (2) of Section 8 has not been fulfilled by

the corporate debtor and the defence claiming

dispute was not only vague, got up and motivated to

evade the liability.

40. For the reasons aforesaid we set aside the

impugned order dated 27.1.2017 passed by

adjudicating authority in CP No.01/I

&BP/NCLT/MAH/2017 and remit the case to

adjudicating authority for consideration of the

application of the appellant for admission if the

application is otherwise complete.

41. The appeal is allowed with the aforesaid

observations. However, in the facts and

circumstances there shall be no order as to cost.”

6. Shri Mohta, learned counsel on behalf of the appellant,

raised various contentions before us. According to learned

counsel, the application should have been dismissed on the

ground that the operational creditor did not furnish a copy of the

certificate from a financial institution, viz. IDBI in the present

case, that maintained accounts of the operational creditor,

which confirmed that there is no payment of any unpaid

operational debt by the corporate debtor under Section 9(3)(c)

of the Code. This being so, the application ought to have been

dismissed at the very threshold. Apart from this, the learned

counsel took us through various committee reports and the

provisions of the Code and argued that under Section 8 of the

Code, the moment a corporate debtor, within 10 days of the

receipt of a demand notice or copy of invoice, brings to the

notice of the operational creditor the existence of a dispute

between the parties, the Tribunal is obliged to dismiss the

application. According to him, under Section (8)(2)(a), the

expression “existence of a dispute, if any, and

record of the

pendency of the suit or arbitration proceedings filed …” must be

read as existence of a dispute “or” record of the pendency of

the suit or arbitration proceedings filed, i.e. disjunctively.

According to the learned counsel, the definition of “dispute”

under Section 5(6) of the Code is an inclusive one and the

original draft bill not only had the word “means” instead of the

word “includes”, but also the word “bona fide” before the words

“suit or arbitral proceedings”, which is missing in the present

Code. Therefore, learned counsel argued that the moment

there is existence of a dispute, meaning thereby that there is a

real dispute to be tried, and not a sham, frivolous or vexatious

dispute, the Tribunal is bound to dismiss the application.

Learned counsel went on to argue that there is a fundamental

difference between applications filed by financial creditors and

operational creditors. A financial creditor’s application is dealt

with under Section 7 of the Code, in which the adjudicating

authority has to ascertain the existence of a default on the basis

of the records of an information utility or other evidence

furnished by the financial creditor. In contrast to this scheme,

all that a corporate debtor needs to do is to file a reply within a

period of 10 days of the receipt of demand notice or copy of

invoice from an operational creditor, showing the existence of a

dispute, which then does not need to be “ascertained” by the

adjudicating authority. He was at pains to point out that the

application itself must contain all the documents that are

required by the statute and that the timelines indicated in the

statute are mandatory. For this purpose, he referred us to

Sections 61, 62 and 64 in addition to Sections 7 to 9 of the

Code. Finally, on facts, according to learned counsel, the

Tribunal was wholly incorrect in remanding the matter on both

counts – first, to find out whether the application is otherwise

complete and, second, because the Tribunal found that the

dispute in the present case was vague, got up and motivated to

evade the liability, which, according to learned counsel, was a

perverse conclusion reached on the facts of this case.

7. Shri Jawaharlal, learned counsel appearing on behalf of

the respondent, has argued in reply that the only notice given to

rectify the defects by the Tribunal was an oral notice of 19

January, 2017 and that too only to supply the notice of dispute

by the appellant. This was done within time and the Tribunal,

therefore, dismissed the application only on non-fulfillment of

the conditions laid down in Section 9. No plea was ever taken

before the Tribunal that the IDBI certificate was not furnished.

This plea was taken for the first time only in appeal, and since

the Tribunal did not think it fit to dismiss the application on a

technical ground, this ground does not avail the appellants. The

counsel then submitted that the expression “dispute” under

Section 5(6) covers only three things, namely, existence of the

amount of debt, quality of goods or services or breach of a

representation or warranty and since what was sought to be

brought as a defense was that the NDA was breached, it would

not come within the definition of “dispute” under Section 5(6).

He further went on to state that, at best, the breach of the NDA

is a claim for unliquidated damages which does not become

crystallized until legal proceedings are filed, and none have

been filed so far. Therefore, there is no real dispute on the

facts of the present case and the Tribunal was correct in its

finding that the dispute was a sham one.

8. Before going into the contentions of fact and law argued

by both counsel, it is a little important to trace the background

of this path-breaking legislation viz. the Insolvency and

Bankruptcy Code, 2016. The starting point is a Resolution of

the UN General Assembly, Resolution No.59/40, passed on 2

December, 2004, by which it was stated:

“Legislative Guide on Insolvency Law of the

United Nations Commission on International

Trade Law

The General Assembly,

Recognizing the importance to all countries of

strong, effective and efficient insolvency regimes as

a means of encouraging economic development

and investment,

Noting the growing realization that

reorganization regimes are critical to corporate and

economic recovery, the development of

entrepreneurial activity, the preservation of

employment and the availability of finance in the

capital market,

Noting also the importance of social policy

issues to the design of an insolvency regime,

Noting with satisfaction the completion and

adoption of the Legislative Guide on Insolvency Law

of the United Nations Commission on International

Trade Law by the Commission at its thirty-seventh

session, on 25 June 2004,

Believing that the Legislative Guide, which

includes the text of the Model Law on Cross-Border

Insolvency and Guide to Enactment recommended

by the General Assembly in its resolution 52/158 of

15 December 1997, contributes significantly to the

establishment of a harmonized legal framework for

insolvency and will be useful both to States that do

not have an effective and efficient insolvency

regime and to States that are undertaking a process

of review and modernization of their insolvency

regimes,

Recognizing the need for cooperation and

coordination between international organizations

active in the field of insolvency law reform to ensure

consistency and alignment of that work and to

facilitate the development of international standards,

Noting that the preparation of the Legislative

Guide was the subject of due deliberations and

extensive consultations with Governments and

international intergovernmental and non-

governmental organizations active in the field of

insolvency law reform,

1. Expresses its appreciation to the United

Nations Commission on International Trade Law for

the completion and adoption of its Legislative Guide

on Insolvency Law;

2. Requests the Secretary-General to publish

the Legislative Guide and to make all efforts to

ensure that it becomes generally known and

available;

3. Recommends that all States give due

consideration to the Legislative Guide when

assessing the economic efficiency of their

insolvency regimes and when revising or adopting

legislation relevant to insolvency;

4. Recommends also that all States continue

to consider implementation of the Model Law on

Cross-Border Insolvency of the United Nations

Commission on International Trade Law.”

9. The purpose of the Legislative Guide for various nations

was stated as follows:

“The purpose of the Legislative Guide on Insolvency

Law is to assist the establishment of an efficient and

effective legal framework to address the financial

difficulty of debtors. It is intended to be used as a

reference by national authorities and legislative

bodies when preparing new laws and regulations or

reviewing the adequacy of existing laws and

regulations. The advice provided in the Guide aims

at achieving a balance between the need to address

the debtor’s financial difficulty as quickly and

efficiently as possible and the interests of the

various parties directly concerned with that financial

difficulty, principally creditors and other parties with

a stake in the debtor’s business, as well as with

public policy concerns. The Guide discusses issues

central to the design of an effective and efficient

insolvency law, which, despite numerous

differences in policy and legislative treatment, are

recognized in many legal systems. It focuses on

insolvency proceedings commenced under the

insolvency law and conducted in accordance with

that law, with an emphasis on reorganization,

against a debtor, whether a legal or natural person,

that is engaged in economic activity. Issues specific

to the insolvency of individuals not so engaged,

such as consumers, are not addressed.”

In stating some of the key objectives of effective and efficient

insolvency law, the Legislative Guide goes on to state:

“When a debtor is unable to pay its debts and other

liabilities as they become due, most legal systems

provide a legal mechanism to address the collective

satisfaction of the outstanding claims from assets

(whether tangible or intangible) of the debtor. A

range of interests needs to be accommodated by

that legal mechanism: those of the parties affected

by the proceedings including the debtor, the owners

and management of the debtor, the creditors who

may be secured to varying degrees (including tax

agencies and other government creditors),

employees, guarantors of debt and suppliers of

goods and services, as well as the legal,

commercial and social institutions and practices that

are relevant to the design of the insolvency law and

required for its operation. Generally, the mechanism

must strike a balance not only between the different

interests of these stakeholders, but also between

these interests and the relevant social, political and

other policy considerations that have an impact on

the economic and legal goals of insolvency

proceedings.

xxx xxx xxx

An insolvency law should be transparent and

predictable. This will enable potential lenders and

creditors to understand how insolvency proceedings

operate and to assess the risk associated with their

position as a creditor in the event of insolvency.

This will promote stability in commercial relations

and foster lending and investment at lower risk

premiums. Transparency and predictability will also

enable creditors to clarify priorities, prevent disputes

by providing a backdrop against which relative

rights and risks can be assessed and help define

the limits of any discretion. Unpredictable

application of the insolvency law has the potential to

undermine not only the confidence of all participants

in insolvency proceedings, but also their willingness

to make credit and other investment decisions prior

to insolvency. As far as possible, an insolvency law

should clearly indicate all provisions of other laws

that may affect the conduct of the insolvency

proceedings (e.g. labour law; commercial and

contract law; tax law; laws affecting foreign

exchange, netting and set-off and debt for equity

swaps; and even family and matrimonial law).

An insolvency law should ensure that adequate

information is available in respect of the debtor’s

situation, providing incentives to encourage the

debtor to reveal its positions and, where

appropriate, sanctions for failure to do so. The

availability of this information will enable those

responsible for administering and supervising

insolvency proceedings (courts or administrative

agencies, the insolvency representative) and

creditors to assess the financial situation of the

debtor and determine the most appropriate

solution.”

While referring to the commencement of insolvency

proceedings, the Legislative Guide states:

“The standard to be met for commencement of

insolvency proceedings is central to the design of

an insolvency law. As the basis upon which

insolvency proceedings can be commenced, this

standard is instrumental to identifying the debtors

that can be brought within the protective and

disciplinary mechanisms of the insolvency law and

determining who may make an application for

commencement, whether the debtor, creditors or

other parties.

As a general principle it is desirable that the

commencement standard be transparent and

certain, facilitating access to insolvency

proceedings conveniently, cost-effectively and

quickly to encourage financially distressed or

insolvent businesses to voluntarily commence

proceedings. It is also desirable that access be

flexible in terms of the types of insolvency

proceedings available (reorganization and

liquidation), and the ease with which the

proceedings most relevant to a particular debtor can

be accessed, and that conversion between the

different types of proceeding can be achieved.

Restrictive access can deter both debtors and

creditors from commencing proceedings, while the

effects of delay can be harmful to the value of

assets and the successful completion of insolvency

proceedings, in particular in cases of reorganization.

Ease of access needs to be balanced with proper

and adequate safeguards to prevent improper use

of proceedings. Examples of improper use may

include application by a debtor that is not in financial

difficulty in order to take advantage of the

protections provided by the insolvency law, such as

the automatic stay, or to avoid or delay payment to

creditors and application by creditors who are

competitors of the debtor, where the purpose of the

application is to take advantage of insolvency

proceedings to disrupt the debtor’s business and

thus gain a competitive edge.”

10. On the fixation of time limits and denial of an application

to commence proceedings, the Legislative Guide states:

“Where a court is required to make a decision as to

commencement, it is desirable that that decision be

made in a timely manner to ensure both certainty

and predictability of the decision-making and the

efficient conduct of the proceedings without delay.

This will be particularly important in the case of

reorganization to avoid further diminution of the

value of assets and to improve the chances of a

successful reorganization. Some insolvency laws

prescribe set time periods after the application

within which the decision to commence must be

made. These laws often distinguish between

applications by debtors and by creditors, with

applications by debtors tending to be determined

more quickly. Any additional period for creditor

applications is designed to allow prompt notice to be

given to the debtor and provide the debtor with an

opportunity to respond to the application.

Although the approach of fixing time limits may

serve the objectives of providing certainty and

transparency for both the debtor and creditors, the

achievement of those objectives may need to be

balanced against possible disadvantages. For

example, a fixed time period may be insufficiently

flexible to take account of the circumstances of the

particular case. More generally, such time periods

may be set without regard to the resources

available to the body responsible for supervising

insolvency proceedings or of the local priorities of

that body (especially where insolvency is only one

of the matters for which it has responsibility). It may

also prove difficult to ensure that the decision-

making body adheres to the established limit and to

provide appropriate consequences where there is

no compliance. The time period between application

and the decision to commence proceedings should

also reflect the type of proceeding applied for, the

application procedure and the consequences of

commencement in any particular regime. For

example, the extent to which notification of parties

in interest and information gathering must be

completed prior to commencement will vary

between regimes, requiring different periods of time.

For these reasons, it is desirable that an insolvency

law adopt a flexible approach that emphasizes the

advantages of quick decision-making and provides

guidance as to what is reasonable, but at the same

time also recognizes local constraints and priorities.

(d) Denial of an application to commence

proceedings

The preceding paragraphs refer to a number of

instances where it will be desirable, in those cases

where the court is required to make the

commencement decision, for the court to have the

power to deny the application for commencement,

either because of questions of improper use of the

insolvency law or for technical reasons relating to

satisfaction of the commencement standard. The

cases referred to include examples of both debtor

and creditor applications. Principal among the

grounds for denial of the application for technical

reasons might be those cases where the debtor is

found not to satisfy the commencement standard;

where the debt is subject to a legitimate dispute or off-set in an amount equal to or greater than the

amount of the debt; where the proceedings will

serve no purpose because, for example, secured

debt exceeds the value of assets; and where the

debtor has insufficient assets to pay for the

insolvency administration and the law makes no

other provision for funding the administration of

such estates.

Examples of improper use might include those

cases where the debtor uses an application for

insolvency as a means of prevaricating and

unjustifiably depriving creditors of prompt payment

of debts or of obtaining relief from onerous

obligations, such as labour contracts. In the case of

a creditor application, it might include those cases

where a creditor uses insolvency as an inappropriate substitute for debt enforcement

procedures (which may not be well developed); to

attempt to force a viable business out of the market

place; or to attempt to obtain preferential payments

by coercing the debtor (where such preferential

payments have been made and the debtor is

insolvent, investigation would be a key function of

insolvency proceedings).

As noted above, where there is evidence of

improper use of the insolvency proceedings by

either the debtor or creditors, the insolvency law

may provide, in addition to denial of the application,

that sanctions can be imposed on the party

improperly using the proceedings or that that party

should pay costs and possibly damages to the other

party for any harm caused. Remedies may also be

available under non-insolvency law. Where an

application is denied, any provisional measures of

relief ordered by the court after the time of the

application for commencement should terminate

(see chap. II, para. 53).”

(Emphasis supplied)

Ultimately, recommendation 19 of the Legislative Guide

reads as under:

“Commencement on creditor application (paras.57

and 67)

19. The law generally should specify that, where a

creditor makes the application for commencement:

(a) Notice of the application promptly is given to the

debtor;

(b) The debtor be given the opportunity to respond

to the application, by contesting the application,

consenting to the application or, where the

application seeks liquidation, requesting the

commencement of reorganization proceedings; and

and whether the debtor is eligible and the

commencement standard has been met and, if so,

commence insolvency proceedings.

”

11. The legislative history of legislation relating to

indebtedness goes back to the year 1964 when the 24

Law

Commission recommended amendments to the Provincial

Insolvency Act of 1920. This was followed by the Tiwari

Committee of 1981, which introduced the Sick Industrial

Companies Act, 1985. Following economic liberalization in the

1990s, two Narsimham Committee reports led to the Recovery

of Debts and Bankruptcy Act, 1993 and the SARFAESI Act,

2002. Meanwhile, the Goswami Committee Report, submitted

in 1993, condemned the liquidation procedure prescribed by the

Companies Act, 1956 as unworkable and being beset with

delays at all levels – delaying tactics employed by the

management, delays at the level of the Courts, delays in

A determination that the commencement standard has been met may involve consideration of

whether the debt is subject to a legitimate dispute or offset in an amount equal to or greater

than the amount of the debt. The existence of such a set-off may be a ground for dismissal of the

application (see above, paras. 61-63).

making auction sales etc. This then led to the Eradi Committee

Report of 1999, which proposed amendments to the

Companies Act and proposed the repeal of SICA. This

Committee echoed the findings of the Goswami Committee and

recommended an overhaul of the liquidation procedure under

the Companies Act.

12. It was for the first time, in 2001, that the L.N. Mitra

Committee of the RBI proposed a comprehensive Bankruptcy

Code. This was followed by the Irani Committee Report, also of

the RBI in 2005, which noted that the liquidation procedure in

India is costly, inordinately lengthy and results in almost

complete erosion of asset value. The Committee also noted

that the insolvency framework did not balance stakeholders’

interests adequately. It proposed a number of changes

including changes for increased protection of creditors’ rights,

maximization of asset value and better management of the

company in liquidation. In 2008, the Raghuram Raja n

Committee of the Planning Commission proposed improvement

to the credit infrastructure in the country, and finally a

Committee of Financial Sector Legislative Reforms in 2013

submitted a draft Indian Financial Code, which included a

“resolution corporation” for resolving distressed financial firms.

13. All this then led to the Bankruptcy Law Reforms

Committee, set up by the Department of Economic Affairs,

Ministry of Finance, under the Chairmanship of Shri T.K.

Viswanathan. This Committee submitted an interim report in

February 2015 and a final report in November of the same year.

It was, as a result of the deliberations of this Committee, that

the present Insolvency and Bankruptcy Code of 2016 was

finally born.

14. The interim report went into the existing law o n

indebtedness in some detail and discussed the tests laid down

in Madhusudan Gordhandas v. Madhu Woollen Industries

Pvt. Ltd (1972) 2 SCR 201, by which a petition presented

under the Companies Act on the ground that the company is

“unable to pay its debts” can only be dismissed if the debt is

bona fide

disputed, i.e. that the defense of the debtor is

genuine, substantial and is likely to succeed on a point of law.

The interim report also adverted to an amendment made in the

Companies Act, 2003, by which the threshold requirement of

Rs.500 was replaced by Rs.1 lakh.

15. The interim report found:

“Once the petitioning creditor has proved the

inability of the debtor company to pay debts, van

Zwieten states that courts in India have recognised

a wide discretion that enabled it to give time to the

debtor to make payment or even dismiss the

petition. This is in stark contrast with the position in

the UK (from where the law was transplanted)

where once the company’s inability to pay debts has

been proven, the petitioning creditor is ordinarily

held to be entitled to a winding up order (although it

should be noted that there is an alternative

corporate rescue procedure, ‘administration’, which

a debtor may be entitled to enter).

The effect of these abovementioned judicial

developments has been to add significant delays in

the liquidation process under CA 1956 and to add

uncertainty regarding the rights of the creditors in

the event of the company’s insolvency.

Consequently, this has made creditor recourse to

the liquidation procedure as a means of debt

enforcement rather difficult, and secondly, rendered

the liquidation procedure ineffective as a disciplinary

mechanism for creditors against insolvent debtors.”

The interim report then recommended:

“Recommendations:

· In order to re-instate the debt enforcement function

of the statutory demand test for winding up, if a

company fails to pay an undisputed

debt of a

prescribed value as per Section 271(2) (a), the

creditor should be entitled to a winding up order

irrespective of whether it is insolvent (in commercial

or balance sheet terms) or not. Further, the NCLT

should have the discretion to refer the company for

rehabilitation under Chapter XIX before making a

winding up order on such ground, if the company

appears to be prima facie viable. Further, in order to

prevent abuse of the provision by creditors and

ensure that it is not used to force debtor companies

to settle disputed debts, the provision should specify

the factors that the NCLT may take into account to

determine whether the debt under consideration is

disputed or not. As laid down by the courts, a

petition may be dismissed if the debt in question is

bona fide disputed, i.e., where the following

conditions are satisfied: (i) the defence of the debtor

company is genuine, substantial and in good faith;

(ii) the defence is likely to succeed on a point of law;

and (iii) the debtor company adduces prima facie

proof of the facts on which the defence depends.

Further, as with initiation of rescue proceedings, the

NCLT should also have the power to impose

sanctions/costs/damages on a petitioning creditor

and disallow reapplications on the same grounds if

it finds that a petition has been filed to abuse the

process of law.

· The Government may also consider revising the

present value for triggering the statutory demand

test under Section 271 (2) (a) from ‘one lakh rupees’

to a higher amount or revise the provision to state

‘one lakh rupees or such amount as may be

prescribed’.

· ‘Balance sheet insolvency’ and ‘commercial

insolvency’ should be identified as separate

grounds indicating a company’s ‘inability to pay

debt’ in order to avoid conflicts/confusion with the

statutory demand test (as is the case of the IA 1986

where the statutory demand test, the commercial

insolvency test and the balance sheet insolvency

test are alternate grounds for determining a

company’s inability to pay debts under Sections

123(1) (a),123 (1) (e) and 123(2), respectively).”

16. By the final report dated November 2015, the

recommendation of the interim report was shelved. The

Committee made a distinction between financial contracts and

operational contracts. It stated:

“4.3.3 Information about the liabilities of a

solvent entity

Operational contracts typically involve an exchange

of goods and services for cash. For an enterprise,

the latter includes payables for purchase of raw-

materials, other inputs or services, taxation and

statutory liabilities, and wages and benefits to

employees.

xxx xxx xxx

The Code specifies that if the Adjudicator is able to

locate the record of the liability and of default with

the registered IUs, a financial creditor needs no

other proof to establish that a default has taken

place.

xxx xxx xxx

The second set of liabilities are operational

liabilities, which are more difficult to centrally

capture given that the counterparties are a wide and

heterogeneous set. In the state of insolvency, the

record of all liabilities in the IUs become critical to

creditors in assessing the complexity of the

resolution required. Various private players,

including potential strategic acquirers or distressed

asset funds, would constantly monitor entities that

are facing stress, and prepare to make proposals to

the committee of creditors in the event that an

insolvency is triggered. Easy access to this

information is vital in ensuring that there is adequate

interest by various kinds of financial firms in coming

up to the committee of creditors with proposals. It is

not easy to set up mandates for the holders of

operational liabilities to file the records of their

liabilities, unlike the case of financial creditors.

However, their incentives to file liabilities are even

stronger when the entity approaches insolvency.

4.3.4 Information about operational creditors

Once the invoice or notice is served, the debtor

should be given a certain period of time in which to

respond either by disputing it in a court, or pay up

the amount of the invoice or notice. The debtor will

have the responsibility to file the information about

the court case, or the repayment record in response

to the invoice or notice within the specified amount

of time. If the debtor does not file either response

within the specified period, and the creditor files for

insolvency resolution, the debtor may be charged a

monetary penalty by the Adjudicator. However, if

the debtor disputes the claim in court, until the

outcome of this case is decided, the creditor may

not be able to trigger insolvency on the entity. This

process will act as a deterrent for frivolous claims

from creditors, as well as act as a barrier for some

types of creditors to initiate insolvency resolution.”

The Committee then went on to consider as to who can

trigger the insolvency process. In paragraph 5.2.1 the

Committee stated:

“Box 5.2 – Trigger for IRP

1. The IRP can be triggered by either the debtor or

the creditors by submitting documentation specified

in the Code to the adjudicating authority.

2. For the debtor to trigger the IRP, she must be

able to submit all the documentation that is defined

in the Code, and may be specified by the Regulator

above this.

3. The Code differentiates two categories of

creditors: financial creditors where the liability to the

debtor arises from a solely financial transaction, and

operational creditors where the liability to the debtor

arises in the form of future payments in exchange

for goods or services already delivered. In cases

where a creditor has both a solely financial

transaction as well as an operational transaction

with the entity, the creditor will be considered a

financial creditor to the extent of the financial debt

and an operational creditor to the extent of the

operational debt is more than half the full liability it

has with the debtor.

4. The Code will require different documentation for

a debtor, a financial creditor, and an operational

creditor to trigger the IRP. These are listed in Box

5.3 under what the Adjudicator will accept as

requirements to trigger the IRP.

5.2.1 Who can trigger the IRP?

Here, the Code differentiates between financial

creditors and operational creditors. Financial

creditors are those whose relationship with the

entity is a pure financial contract, such as a loan or

a debt security. Operational creditors are those

whose liability from the entity comes from a

transaction on operations. Thus, the wholesale

vendor of spare parts whose spark plugs are kept in

inventory by the car mechanic and who gets paid

only after the spark plugs are sold is an operational

creditor. Similarly, the lessor that the entity rents out

space from is an operational creditor to whom the

entity owes monthly rent on a three-year lease. The

Code also provides for cases where a creditor has

both a solely financial transaction as well as an

operational transaction with the entity. In such a

case, the creditor can be considered a financial

creditor to the extent of the financial debt and an

operational creditor to the extent of the operational

debt.

5.2.2 How can the IRP be triggered?

An application from a creditor must have a record of

the liability and evidence of the entity having

defaulted on payments. The Committee

recommends different documentation requirements

depending upon the type of creditor, either financial

or operational. A financial creditor must submit a

record of default by the entity as recorded in a

registered Information Utility (referred to as the IU)

as described in Section 4.3 (or on the basis of other

evidence). The default can be to any financial

creditor to the entity, and not restricted to the

creditor who triggers the IRP. The Code requires

that the financial creditor propose a registered

Insolvency Professional to manage the IRP.

Operational creditors must present an “undisputed

bill” which may be filed at a registered information

utility as requirement to trigger the IRP. The Code

does not require the operational creditor to propose

a registered Insolvency Professional to manage the

IRP. If a professional is not proposed by the

operational creditor, and the IRP is successfully

triggered, the Code requires the Adjudicator to

approach the Regulator for a registered Insolvency

Professional for the case.

When the Adjudicator receives the application, she

confirms the validity of the documents before the

case can be registered by confirming the

documentation in the information utility if applicable.

In case the debtor triggers the IRP, the list of

documentation provided by the debtor is checked

against the required list. The proposal for the RP is

forwarded to the Regulator for validation. If both the

documentation and the proposed RP checks out as

required within the time specified in regulations, the

Adjudicator registers the IRP.

In case the financial creditor triggers the IRP, the

Adjudicator verifies the default from the information

utility (if the default has been filed with an

information utility, it shall be incontrovertible

evidence of the existence of a default) or otherwise

confirms the existence of default through the

additional evidence adduced by the financial

creditor, and puts forward the proposal for the RP to

the Regulator for validation. In case the operational

creditor triggers the IRP, the Adjudicator verifies the

documentation. Simultaneously, the Adjudicator

requests the Regulator for an RP. If either step

cannot be verified, or the process verification

exceeds the specified amount of time, then the

Adjudicator rejects the application, with a reasoned

order for the rejection. The order rejecting the

application cannot be appealed against. Instead,

application has to be made afresh. Once the

documents are verified within a specified amount of

time, the Adjudicator will trigger the IRP and register

the IRP by issuing an order. The order will contain a

unique ID that will be issued for the case by which

all reports and records that are generated during the

IRP will be stored, and accessed.”

17. Annexed to this Committee Report is the Insolvency and

Bankruptcy Bill, 2015. Interestingly, Section 5(4) defined

“dispute” as:

“5. Definitions

In this Part, unless the context otherwise requires-

(4) “dispute” means a bona fide suit or arbitration

proceeding regarding (a) the existence or the amount of a

debt; (b) the quality of a good or service; or (c) the breach

of a representation or warranty;”

Sections 8 and 9 in the said Bill read as under:

“8. Insolvency resolution by operational creditor.

(1) An operational creditor shall, on the occurrence

of a default, deliver a demand notice or copy of an

invoice demanding payment of the amount involved

in the default to the corporate debtor in such form

as may be prescribed, through an information utility,

wherever applicable, or by registered post or courier

or by any electronic communication.

(2) The corporate debtor shall, within a period of ten

days of the receipt of the demand notice or copy of

the invoice mentioned in sub-section (1) bring to the

notice of the operational creditor –

(a) the existence of a dispute, if any,

and record of the pendency of the suit or

arbitration proceedings filed at least

sixty days prior to the receipt of such

invoice or notice in relation to such

dispute through an information utility or

by registered post or courier or by any

electronic communication;

(b) the repayment of unpaid operational

debt- (i) by sending an attested copy of

electronic transfer of the unpaid amount

from the bank account of the corporate

debtor; or (ii) by sending an attested

copy of proof that the operational

creditor having encashed a cheque

issued by the corporate debtor.

Explanation. – For the purpose of this section a

“demand notice” means a notice served by an

operational creditor to the corporate debtor

demanding repayment of the debt in respect of

which the default has occurred.

9. Application for initiation of corporate

insolvency resolution process by operational

creditor.

(1) After the expiry of the period of ten days from

the date of delivery of the invoice or notice

demanding payment under sub-section (1) of

section 8, if the operational creditor does not

receive payment from the corporate debtor or notice

of the dispute under sub-section (2) of section 8, the

operational creditor may file an application with the

Adjudicating Authority in the prescribed form for

initiating a corporate insolvency resolution process.

(2) The application under sub-section (1) shall be

filed in such form and manner and accompanied

with such fee as may be prescribed.

(3) The operational creditor shall, along with the

application furnish-

(a) the invoice demanding payment or

notice delivered by the operational

creditor to the corporate debtor;

(b) affidavit to the effect that there is no

notice given by the corporate debtor

relating to a dispute of the unpaid

operational debt;

institutions maintaining accounts of the

operational creditor that there is no

payment of an unpaid operational debt

by the corporate debtor; and

(d) such other information or as may be

specified.

(4) The Adjudicating Authority shall, within two days

of the receipt of the application under sub-section

(2), 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 repayment of the unpaid

operational debt;

the corporate debtor has been delivered

by the operational creditor; and

(d) no notice of dispute has been

received by the operational creditor or

there is no record of dispute in the

information utility.

(5) The Adjudicating Authority shall reject the

application and communicate such decision to the

operational creditor and the corporate debtor if –

(a) the application made under this

section is incomplete;

(b) there has been repayment of the

unpaid operational debt;

invoice or notice for payment to the

corporate debtor; and

(d) notice of dispute has been received

by the operational creditor and there is

no record of dispute in the information

utility.

(6) Without prejudice to the conditions mentioned in

sub-section (3), an operational creditor initiating a

corporate insolvency resolution process under this

section, may also propose a resolution professional

to act as an interim resolution professional.

(7) The corporate insolvency resolution process

shall commence from the date of admission of the

application under sub-section (4) of this section.”

18. Meanwhile, the Insolvency and Bankruptcy Bill that was

annexed to the Bankruptcy Law Reforms Committee Report

underwent a further change before it was submitted to a Joint

Committee of the Lok Sabha. In this Bill, the definition of

“dispute” now read as follows:

“5. Definitions.

In this Part unless the context otherwise requires,-

(6) “dispute” includes a suit or arbitration

proceedings relating to—

(a) the existence or the amount of debt;

(b) the quality of goods or service; or

Sections 8 and 9 read as follows:

“8. Insolvency resolution by operational creditor.

(1) An operational creditor may, on the occurrence

of a default, deliver a demand notice of unpaid

operational debt or copy of an invoice demanding

payment of the amount involved in the default to the

corporate debtor in such form as may be

prescribed, through an information utility, wherever

applicable, or by registered post or courier or by

such electronic mode of communication, as may be

specified.

(2) The corporate debtor shall, within a period of ten

days of the receipt of the demand notice or copy of

the invoice mentioned in sub-section (1), bring to

the notice of the operational creditor—

(a) the existence of a dispute, if any,

and record of the pendency of the suit or

arbitration proceedings filed prior to the

receipt of such notice or invoice in

relation to such dispute through an

information utility or by registered post

or courier or by such electronic mode of

communication as may be specified;

(b) the repayment 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.

Explanation.— For the purposes of this section, a

“demand notice” means a notice served by an

operational creditor to the corporate debtor

demanding repayment of the operational debt in

respect of which the default has occurred.

9. Application for initiation of corporate

insolvency resolution process by operational

creditor.

(1) After the expiry of the period of ten days from

the date of delivery of the notice or invoice

demanding payment under sub-section (1) of

section 8, if the operational creditor does not

receive payment from the corporate debtor or notice

of the dispute under sub-section (2) of section 8, the

operational creditor may file an application before

the Adjudicating Authority for initiating a corporate

insolvency resolution process.

(2) The application under sub-section (1) shall be

filed in such form and manner and accompanied

with such fee as may be prescribed.

(3) The operational creditor shall, 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;

financial institutions maintaining

accounts of the operational creditor

confirming that there is no payment of

an unpaid operational debt by the

corporate debtor; and

(d) such other information or as may be

specified.

(4) An operational creditor initiating a corporate

insolvency resolution process under this section,

may propose a resolution professional to act as an

interim resolution professional.

(5) The Adjudicating Authority shall, within fourteen

days of the receipt of the application under sub-

section (2), by an order—

(i) admit the application and

communicate such decision to the

operational creditor and the corporate

debtor if,—

(a) the application made

under sub-section (2) is

complete;

(b) there is no repayment of

the unpaid operational debt;

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 resolution professional

proposed under sub-section

(4), if any.

(ii) reject the application and

communicate such decision to the

operational creditor and the corporate

debtor, if—

(a) the application made

under sub-section (2) is

incomplete;

(b) there has been

repayment of the unpaid

operational debt;

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:

Provided that Adjudicating Authority,

prior to rejecting an application under

sub-clause (a) of clause (ii) of this sub-

section, shall give a notice to the

applicant to rectify the defect in his

application within three days of the date

of receipt of such notice from the

Adjudicating Authority.

(6) The corporate insolvency resolution process

shall commence from the date of admission of the

application under sub-section (5).”

19. The notes on clauses annexed to the Bill are extremely

important and read as follows:

“Notes on Clauses

Clause 6 provides that where a corporate debtor

has defaulted in paying a debt that has become due

and payable but not repaid, the corporate

insolvency resolution process under Part II may be

initiated in respect of such corporate debtor by a

financial creditor, an operational creditor or the

corporate debtor itself.

Early recognition of financial distress is very

important for timely resolution of insolvency. A

default based test for entry into the insolvency

resolution process permits early intervention such

that insolvency resolution proceedings can be

initiated at an early stage when the corporate debtor

shows early signs of financial distress rather than at

the point where it would be difficult to revive it

effectively. It also provides a simple test to initiate

resolution process.

This clause permits any financial creditor to initiate

the corporate insolvency resolution process where

the corporate debtor has defaulted in paying a debt

that has become due and payable but not repaid.

Financial creditors are those creditors to whom a

financial debt (i.e., a debt where the creditor is

compensated for the time value of the money lent)

is owed.

Further, the Code also permits the corporate debtor

itself to initiate the insolvency resolution process

once it has defaulted on a debt. Additionally,

operational creditors (i.e., creditors to whom a sum

of money is owed for the provision of goods or

services or the Central/State Government or local

authorities in respect of payments due to them) are

also permitted to initiate the insolvency resolution

process. This will bring the law in line with

international practices, which permit unsecured

creditors (including employees, suppliers etc. who

fall under the definition of operational creditors) to

file for the initiation of insolvency resolution

proceedings.

Clause 7 lays down the procedure for the initiation

of the corporate insolvency resolution process by a

financial creditor or two or more financial creditors

jointly. The financial creditor can file an application

before the National Company Law Tribunal along

with proof of default and the name of a resolution

professional proposed to act as the interim

resolution professional in respect of the corporate

debtor. The requirement to provide proof of default

ensures that financial creditors do not file frivolous

applications or applications which prematurely put

the corporate debtor into insolvency resolution

proceedings for extraneous considerations. The

adjudicating authority/ Tribunal can, within fourteen

days from the date of receipt of the application,

ascertain the existence of a default from the records

of a regulated information utility. A default may also

be proved in such manner as may be specified by

the Insolvency and Bankruptcy Board of India.

Once the adjudicating authority/Tribunal is satisfied

as to the existence of the default and has ensured

that the application is complete and no disciplinary

proceedings are pending against the proposed

resolution professional, it shall admit the application.

The adjudicating authority/Tribunal is not required to

look into any other criteria for admission of the

application. It is important that parties are not

allowed to abuse the legal process by using

delaying tactics at the admissions stage.

Clause 8 lays down the procedure for the initiation

of the corporate insolvency resolution process by an

operational creditor. This procedure differs from the procedure applicable to financial creditors as

operational debts (such as trade debts, salary or

wage claims) tend to be small amounts (in

comparison to financial debts) or are recurring in

nature and may not be accurately reflected on the

records of information utilities at all times. The

possibility of disputed debts in relation to

operational creditors is also higher in comparison to

financial creditors such as banks and financial

institutions. Accordingly, the process for initiation of

the insolvency resolution process differs for an

operational creditor.

Once a default has occurred, the operational

creditor has to deliver a demand notice or a copy of

an invoice demanding payment of the debt in

default to the corporate debtor. The corporate

debtor has a period of ten days from the receipt of

the demand notice or invoice to inform the

operational creditor of the existence of a dispute regarding the debt claim or of the repayment of the

debt. This ensures that operational creditors, whose

debt claims are usually smaller, are not able to put

the corporate debtor into the insolvency resolution

process prematurely or initiate the process for

extraneous considerations. It may also facilitate

informal negotiations between such creditors and

the corporate debtor, which may result in a

restructuring of the debt outside the formal

proceedings.

Clause 9 On the expiry of the period of ten days

from the date of receipt of the invoice or demand

notice under Clause 8, if the operational creditor

does not receive either the payment of the debt or a

notice of existence of dispute in relation to the debt

claim from the corporate debtor, he can file an

application with the adjudicating authority for

initiating the insolvency resolution process in

respect of such debtor. He also has to furnish proof

of default and proof of non-payment of the debt

along with an affidavit verifying that there has been

no notice regarding the existence of a dispute in

relation to the debt claim. Within fourteen days from

the receipt of the application, if the adjudicating

authority/Tribunal is satisfied as to (a) the existence

of a default, and (b) the other criteria laid down in

clause 9(5) being met, it shall admit the application.

The adjudicating authority/Tribunal is not required to

look into any other criteria for admission of the

application. It is important that parties are not

allowed to abuse the legal process by using

delaying tactics at the admissions stage.”

(Emphasis supplied)

20. The Joint Committee in April, 2016 made certain small

changes in the said Bill, by which the Committee stated:

“17. Mode of delivery of demand notice of

unpaid operational debt – Clause 8

The Committee find that clause 8(1) of the Code

provides that an operational creditor may, on the

occurrence of a default, deliver a demand notice of

unpaid operational debt or copy of an invoice

demanding payment of the amount involved in the

default to the corporate debtor in such form as may

be prescribed, through an information utility,

wherever applicable, or by registered post or

courier or by such electronic mode of

communication, as may be specified.

The Committee are of the view that the details of

the mode of delivery of demand notice can be

provided in the rules. The Committee, therefore,

decide to substitute words “in such form as may be

prescribed, through an information utility, wherever

applicable, or by registered post or courier or by

such electronic mode of communication, as may be

specified” as appearing in clause 8(1) with the

words “in such form and manner, as may be

prescribed”. Besides as a consequential

amendment words “through an information utility or

by registered post or courier or by such electronic

mode of communication as may be specified” as

appearing in clause 8(2) may also be omitted.”

The Committee also revised the time limits set out in various

sections of the Code from 2, 3 and 5 days to a longer uniform

period of 7 days.

21. The stage is now set for setting out the relevant

provisions of the Code insofar as operational creditors and their

corporate debtors are concerned.

“3. Definitions.

In this Code, unless the context otherwise

requires,—

xxx xxx xxx

(12) “default” means non-payment of debt when

whole or any part or instalment of the amount of

debt has become due and payable and is not repaid

by the debtor or the corporate debtor, as the case

may be;

5. Definitions.

In this Part, unless the context otherwise requires,—

(6) “dispute” includes a suit or arbitration

proceedings relating to—

(a) the existence of the amount of debt;

(b) the quality of goods or service; or

xxx xxx xxx

(20) “operational creditor” means a person to whom

an operational debt is owed and includes any

person to whom such debt has been legally

assigned or transferred;

(21) “operational debt” means 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;

8. Insolvency resolution by operational creditor.

(1) An operational creditor may, on the occurrence

of a default, deliver a demand notice of unpaid

operational debt or copy of an invoice demanding

payment of the amount involved in the default to the

corporate debtor in such form and manner as may

be prescribed.

(2) The corporate debtor shall, within a period of ten

days of the receipt of the demand notice or copy of

the invoice mentioned in sub-section (1) bring to the

notice of the operational creditor—

(a) existence of a dispute, if any, and

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 repayment 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.

Explanation.—For the purposes of this section, a

“demand notice” means a notice served by an

operational creditor to the corporate debtor

demanding repayment of the operational debt in

respect of which the default has occurred.

9. Application for initiation of corporate

insolvency resolution process by operational

creditor.

(1) After the expiry of the period of ten days from

the date of delivery of the notice or invoice

demanding payment under sub-section (1) of

section 8, if the operational creditor does not

receive payment from the corporate debtor or notice

of the dispute under sub-section (2) of section 8, the

operational creditor may file an application before

the Adjudicating Authority for initiating a corporate

insolvency resolution process.

(2) The application under sub-section (1) shall be

filed in such form and manner and accompanied

with such fee as may be prescribed.

(3) The operational creditor shall, 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;

financial institutions maintaining

accounts of the operational creditor

confirming that there is no payment of

an unpaid operational debt by the

corporate debtor; and

(d) such other information as may be

specified.

(4) An operational creditor initiating a corporate

insolvency resolution process under this section,

may propose a resolution professional to act as an

interim resolution professional.

(5) The Adjudicating Authority shall, within fourteen

days of the receipt of the application under sub-

section (2), by an order—

(i) admit the application and

communicate such decision to the

operational creditor and the corporate

debtor if,—

(a) the application made

under sub-section (2) is

complete;

(b) there is no repayment of

the unpaid operational debt;

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 resolution professional

proposed under sub-section

(4), if any.

(ii) reject the application and

communicate such decision to the

operational creditor and the corporate

debtor, if—

(a) the application made

under sub-section (2) is

incomplete;

(b) there has been

repayment of the unpaid

operational debt;

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:

Provided that Adjudicating Authority,

shall before rejecting an application

under sub-clause (a) of clause (ii) give a

notice to the applicant to rectify the

defect in his application within seven

days of the date of receipt of such notice

from the Adjudicating Authority.

(6) The corporate insolvency resolution process

shall commence from the date of admission of the

application under sub-section (5) of this section.”

22. Together with Section 8(1), the Insolvency and

Bankruptcy (Application to Adjudicating Authority) Rules, 2016,

speak of demand notices by the operational creditor and

applications by the operational creditor in the following terms:

“5. Demand notice by operational creditor.

(1) An operational creditor shall deliver to the

corporate debtor, the following documents, namely.-

(a) a demand notice in Form 3; or

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

Form 4.

(2) 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,

(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.

(3) 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.

6. Application by operational creditor.

(1) An operational creditor, shall make an

application for initiating the corporate insolvency

resolution process against a corporate debtor under

section 9 of the Code in Form 5, accompanied with

documents and records required therein and as

specified in the Insolvency and Bankruptcy Board of

India (Insolvency Resolution Process for Corporate

Persons) Regulations, 2016.

(2) The applicant under sub-rule (1) 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.

FORM 3

(See clause (a) of sub-rule (1) of rule 5)

FORM OF DEMAND NOTICE / INVOICE

DEMANDING PAYMENT UNDER THE

INSOLVENCY AND BANKRUPTCY CODE, 2016

(Under rule 5 of the Insolvency and Bankruptcy

(Application to Adjudicating Authority) Rules, 2016)

[Date]

To,

[Name and address of the registered office of the

corporate debtor]

From,

[Name and address of the registered office of the

operational creditor]

Subject: Demand notice/invoice demanding

payment in respect of unpaid operational debt

due from [corporate debtor] under the Code.

Madam/Sir,

1. This letter is a demand notice/invoice demanding

payment of an unpaid operational debt due from

[name of corporate debtor].

2. Please find particulars of the unpaid operational

debt below:

PARTICULARS OF

OPERATIONAL DEBT

1. TOTAL AMOUNT OF

DEBT, DETAILS OF

TRANSACTIONS ON

ACCOUNT OF WHICH

DEBT FELL DUE, AND

THE DATE FROM WHICH

SUCH DEBT FELL DUE

2. AMOUNT CLAIMED TO

BE IN DEFAULT AND THE

DATE ON WHICH THE

DEFAULT OCCURRED

(ATTACH THE

WORKINGS FOR

COMPUTATION OF

DEFAULT IN TABULAR

FORM)

3. PARTICULARS OF

SECURITY HELD, IF ANY,

THE DATE OF ITS

CREATION, ITS

ESTIMATED VALUE AS

PER THE CREDITOR.

ATTACH A COPY OF A

CERTIFICATE OF

REGISTRATION OF

CHARGE ISSUED BY THE

REGISTRAR OF

COMPANIES (IF THE

CORPORATE DEBTOR IS

A COMPANY)

4. DETAILS OF RETENTION

OF TITLE

ARRANGEMENTS (IF

ANY) IN RESPECT OF

3. If you dispute the existence or amount of unpaid

operational debt (in default) please provide the

undersigned, within ten days of the receipt of this

letter, of the pendency of the suit or arbitration

proceedings in relation to such dispute filed before

the receipt of this letter/notice.

4. If you believe that the debt has been repaid

before the receipt of this letter, please demonstrate

such repayment by sending to us, within ten days of

receipt of this letter, the following:

(a) an attested copy of the record of electronic

transfer of the unpaid amount from the bank

account of the corporate debtor; or

(b) an attested copy of any record that [name of the

operational creditor] has received the payment.

5. The undersigned, hereby, attaches a certificate

from an information utility confirming that no record

GOODS TO WHICH THE

OPERATIONAL DEBT

REFERS 5. RECORD OF DEFAULT

WITH THE INFORMATION

UTILITY (IF ANY)

6. PROVISION OF LAW,

CONTRACT OR OTHER

DOCUMENT UNDER

WHICH DEBT HAS

BECOME DUE

7. LIST OF DOCUMENTS

ATTACHED TO THIS

APPLICATION IN ORDER

TO PROVE THE

EXISTENCE OF

OPERATIONAL DEBT

AND THE AMOUNT IN

DEFAULT

of a dispute raised in relation to the relevant

operational debt has been filed by any person at

any information utility, (if applicable)

6. The undersigned request you to unconditionally

repay the unpaid operational debt (in default) in full

within ten days from the receipt of this letter failing

which we shall initiate a corporate insolvency

resolution process in respect of [c].

Yours sincerely,

Signature of person authorised to act on

behalf of the operational creditor

Name in block letters

Position with or in relation to the operational

creditor

Address of person signing

Instructions

1. Please serve a copy of this form on the corporate

debtor, ten days in advance of filing an application

under section 9 of the Code.

2. Please append a copy of such served notice to

the application made by the operational creditor to

the Adjudicating Authority.

Form 4

(See clause (b) of sub-rule (1) of rule 5)

FORM OF NOTICE WITH WHICH INVOICE

DEMANDING PAYMENT IS TO BE ATTACHED

(Under Rule 5 of the Insolvency and Bankruptcy

(Application to Adjudicating Authority) Rules, 2016)

[Date]

To,

[Name and address of registered office of the

corporate debtor]

From,

[Name and address of the operational creditor]

Subject: Notice attached to invoice demanding

payment

Madam/Sir,

[Name of operational creditor], hereby provides

notice for repayment of the unpaid amount of INR

[insert amount] that is in default as reflected in the

invoice attached to this notice.

In the event you do not repay the debt due to us

within ten days of receipt of this notice, we may file

an application before the Adjudicating Authority for

initiating a corporate insolvency resolution process

under section 9 of the Code.

Yours sincerely,

Signature of person authorised to act on

behalf of the operational creditor

Name in block letters

Position with or in relation to the operational

creditor

Address of person signing

Form 5

(See sub-rule (1) of rule 6)

APPLICATION BY OPERATIONAL CREDITOR

TO INITIATE CORPORATE INSOLVENCY

RESOLUTION PROCESS UNDER THE CODE.

(Under rule 6 of the Insolvency and Bankruptcy

(Application to Adjudicating Authority) Rules, 2016)

[Date]

To,

The National Company Law Tribunal

[Address]

From,

[Name and address for correspondence of the

operational creditor]

In the matter of [name of the corporate debtor]

Subject: Application to initiate corporate

insolvency resolution process in respect of

[name of the corporate debtor] under the

Insolvency and Bankruptcy Code, 2016.

Madam/Sir,

[Name of the operational creditor], hereby submits

this application to initiate a corporate insolvency

resolution process in the case of [name of corporate

debtor]. The details for the purpose of this

application are set out below:

Part – I

PARTICULARS OF APPLICANT

1. NAME OF OPERATIONAL

CREDITOR

2. IDENTIFICATION NUMBER OF

OPERATIONAL CREDITOR

(IF ANY)

3. ADDRESS FOR

CORRESPONDENCE OF THE

OPERATIONAL CREDITOR

Part - II PARTICULARS OF

CORPORATE DEBTOR

1. NAME OF THE CORPORATE

DEBTOR

2. IDENTIFICATION NUMBER OF

CORPORATE DEBTOR

3. DATE OF INCORPORATION OF

CORPORATE DEBTOR

4. NOMINAL SHARE CAPITAL AND

THE PAID-UP SHARE CAPITAL

OF THE CORPORATE DEBTOR

AND/OR DETAILS OF

GUARANTEE CLAUSE AS PER

MEMORANDUM OF

ASSOCIATION (AS

APPLICABLE)

5. ADDRESS OF THE

REGISTERED OFFICE OF THE

CORPORATE DEBTOR

6. NAME, ADDRESS AND

AUTHORITY OF PERSON

SUBMITTING APPLICATION ON

BEHALF OF OPERATIONAL

CREDITOR (ENCLOSE

AUTHORISATION)

7. NAME AND ADDRESS OF

PERSON RESIDENT IN INDIA

AUTHORISED TO ACCEPT THE

SERVICE OF PROCESS ON ITS

BEHALF (ENCLOSE

AUTHORISATION)

Part-III

PARTICULARS OF THE

PROPOSED INTERIM

RESOLUTION

PROFESSIONAL [IF

PROPOSED]

NAME, ADDRESS, EMAIL

ADDRESS AND THE

REGISTRATION NUMBER OF

THE PROPOSED INSOLVENCY

PROFESSIONAL

Part-IV

PARTICULARS OF

OPERATIONAL DEBT

1. TOTAL AMOUNT OF DEBT,

DETAILS OF TRANSACTIONS

ON ACCOUNT OF WHICH

DEBT FELL DUE,

AND THE DATE FROM WHICH

SUCH DEBT FELL DUE

2. AMOUNT CLAIMED TO BE IN

DEFAULT AND THE DATE ON

WHICH THE DEFAULT

OCCURRED (ATTACH THE

WORKINGS FOR

COMPUTATION OF AMOUNT

AND DATES OF DEFAULT IN

TABULAR FORM)

Part-V

PARTICULARS OF OPERATIONAL DEBT

[DOCUMENTS, RECORDS AND EVIDENCE

OF DEFAULT]

1. PARTICULARS OF SECURITY HELD, IF

ANY, THE DATE OF ITS CREATION, ITS

ESTIMATED VALUE AS PER THE

CREDITOR.

ATTACH A COPY OF A CERTIFICATE OF

REGISTRATION OF CHARGE ISSUED BY

THE REGISTRAR OF COMPANIES (IF THE

CORPORATE DEBTOR IS A COMPANY)

2. DETAILS OF RESERVATION / RETENTION

OF TITLE ARRANGEMENTS (IF ANY) IN

RESPECT OF GOODS TO WHICH THE

OPERATIONAL DEBT REFERS 3. PARTICULARS OF AN ORDER OF A

COURT, TRIBUNAL OR ARBITRAL PANEL

ADJUDICATING ON THE DEFAULT, IF ANY

(ATTACH A COPY OF THE ORDER)

4. RECORD OF DEFAULT WITH THE

INFORMATION UTILITY, IF ANY

(ATTACH A COPY OF SUCH RECORD)

5. DETAILS OF SUCCESSION CERTIFICATE,

OR PROBATE OF A WILL, OR LETTER OF

ADMINISTRATION, OR COURT DECREE

(AS MAY BE APPLICABLE), UNDER THE

INDIAN SUCCESSION ACT, 1925 (10 OF

1925)

(ATTACH A COPY)

6. PROVISION OF LAW, CONTRACT OR

Reference cases

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