CORPORATE INSOLVENCY RESOLUTION PROCESS

FINANCIAL CREDITOR
Under the definition part, The definition of financial creditor is provided under Section 5(7)
of the IB Code defines financial creditor belowas;
Section 5(7) “financial creditor” means any person to whom a financial debt is
owed and includes a person to whom such debt has been legally assigned or
transferred to”.
The IB Code also differentiates between financial and operational creditors. Financial
creditors are those having a relationship with the corporate debtor, that is, purely a financial
contract, such as a loan or debt security whereas, operational creditor are the ones who have
debt against the debtor arising entirely from the transaction(s) on the operations of the
corporate debtor.1
The prevailing jurisprudence in matter of financial debt is that, once there is a debt and the
same has been defaulted upon, there is no consideration to be taken into account, but
application of an application under Section 7 and initiation of resolution process under the IB
Code. Whether the financial creditor had an agreement with the corporate debtor or not is
immaterial if the material engagement has been between the two parties only. The same has
also been held in the case of Ranjan Goyal v. Sharad Vadehra by the NCLAT.
If there is an assignment of debt by the original creditor to another applicant creditor, then the
application under Section 7, IB Code shall be accompanied with a copy of the assignment or
transfer agreement and other relevant documentation to demonstrate the assignment or
transfer.2
Usually, debt is assigned to asset reconstruction companies by the original financial creditor
and the IB Code under Section 5(7) seeks to cover such companies that have been legally
assigned or transferred the financial debt by the original institution(s), allowing them to file
application against the corporate debtor. They can represent their interest as any original
financial creditor would do.
FINANCIAL DEBT
5(8) “financial debt” means a debt along with interest, if any, which is disbursed against the
consideration for the time value of money and includes-
(a) money borrowed against the payment of interest;
(b) any amount raised by acceptance under any acceptance credit facility or its de-
materialised equivalent;
(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes,
debentures, loan stock or any similar instrument;

2
P 210 6
(d) the amount of any liability in respect of any lease or hire purchase contract which is
deemed as a finance or capital lease under the Indian Accounting Standards or such other
accounting standards as may be prescribed;
(e) receivables sold or discounted other than any receivables sold on non-recourse basis;
(f) any amount raised under any other transaction, including any forward sale or purchase
agreement, having the commercial effect of a borrowing;
Explanation for this sub-clause, -
(i) any amount raised from an allottee under a real estate project shall be deemed to be an
amount having the commercial effect of a borrowing; and
(ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively
assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and
Development) Act, 2016 (16 of 2016).
(g) any derivative transaction entered into in connection with protection against or benefit
from fluctuation in any rate or price and for calculating the value of any derivative
transaction, only the market value of such transaction shall be taken into account;
(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond,
documentary letter of credit or any other instrument issued by a bank or financial institution;
(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the
items referred to in sub-clauses (a) to (h) of this clause. (a) – (i).
The reason the definition is exhaustive is because any amount if due and is coupled with a
time value consideration, then the debt is automatically termed as a “financial debt”. The
definition also provides various modes when a transaction can be directly termed as a
“financial debt”. Any other transaction cannot be termed as a financial debt for the purpose of
Section 5(8), IB Code.
Proving the existence of a financial debt is integral to establish the case under Section 7, and
it is also important that the claim of financial creditor must be based on the transaction
between the debtor and creditor and not on the decree issued by a court or a tribunal in any
other case between the debtor and creditor.
It is also important that the claim of a financial debtor must be based on the transaction
between the debtor and creditor and not on the decree issued by a court or tribunal in any
other case between the above two. The same was held in the case of Sushil Ansal v. Ashok
Tripathi, where the court disallowed the CIRP initiated by a decree holder on the ratio that
an “amount claimed under the decree is an adjudicated amount and not a debt disbursed
against the consideration for the time value of money”.
The debt also includes “interest” and not merely the “principal amount” as answered by the
NCLAT in the case of Krishna Enterprise v. Gammon India Ltd., where it was held that if
in terms of any agreement interest is payable to a creditor, then only debt will include
interest; otherwise, the principal amount is to be treated as debt.
TIME VALUE OF MONEY
The most common way of establishing the case of a financial debt is by establishing that the
debt is given for a time value. The ingredient of time value is of crucial importance as held in
the case of B.V.S. Lakshmi v. Geometrix Laser Solutions, where the creditor contended
that she has advanced money to the company and though the terms of debt were not written,
it was evident by an email from the managing director of the debtor company directing that
interest should be added for loans advanced by shareholders as well as the report of the
auditor of the debtor stating that interest has been credited for loans advanced.
The concept of “time value” has also been discussed in the decision of Nikhil Mehta and
Sons (HUF) v AMR Infrastructure Ltd., wherein using the Black’s Law Dictionary, NCLT
held it to mean “the price associated with the length of time that an investor must wait until
an investment matures or the related income is earned”. This prime test to determine time
value of money was consequently and consistently followed in Anil Mahindroo v. Earth
Iconic Infrastructure Ltd., and Kamal Dutta v. Anubhuti Aggarwal.
The interest component also fulfils the existence of a “time value” element as noted down by
NCLAT in the case of G. Sreevidhya v. Karismaa Foundations (P) Ltd. In this case the
appellant paid an advance of Rs. 1.5 crore to the respondent debtor for the construction of a
residential building for a price of Rs 4 crores. The project was however abandoned but the
respondent restrained the money received as loan and started to pay interest thereon. The
NCLAT taking note of these facts had set aside the order of the NCLT wherein it was held
that the appellant is an operational creditor. The NCLAT found financial debt in terms of
Section 5(8) by holding:
…the money was disbursed in pursuance of an agreement in the nature of a financial
transaction against consideration of time value of money as the building raised in pursuance
of such agreement would fetch fortunes for the Appellant. If there were any doubt in the
nature of transaction, same got cleared as even according to Respondent interest was paid
on the advance money….
Time value consideration was said to be satisfied in the case of Suraksha Asset
Reconstruction Ltd. v. Jindal Steel and Power Ltd., where the NCLAT found that the
contractual arrangement clearly stipulated that in event of non-performance, interest at the
rate of 30 per cent on the unadjusted advance payment is to be paid and the arbitral award
was also passed in favour of the respondent-creditor wherein it was held that the respondent-
creditor was entitled to interest at the rate of 30 per cent per annum on the unadjusted
advance payment.
Book of accounts of the corporate debtor can also be produced in order to establish or
disprove the existence of a financial debt through interest component as done in the case of
Rajesh Gupta v. Dinesh Chand Jain. The importance of interest component can also be
seen from the decision in the case of Shakebuddin Irtebatuddin Khan v. Qumruddin
Faizi, wherein the respondent creditor had given an amount of Rs 52 lakhs for purchasing
shares but the same were not issued by the corporate debtor. As section 42 of the Companies
Act 2013 provides that in case of non-allotment of shares, the amount paid for purchasing the
shares shall bear interest at rate of 12 per cent per annum. The NCLAT held that, whether
knowingly or unknowingly there exists a time value of money and the debt is a financial debt.
OPERATIONAL DEBT and OPERATIONAL CREDITOR
The definition of operational creditor and operational debt under Section 5(20) and (21) of
the IB Code respectively as;
5(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.defines finan
5(21) “operational debt” means a claim in respect of the provision of goods or services
including employment or a debt in respect of the [payment] of dues arising under any law for
the time being in force and payable to the Central Government, any State Government or any
local authority.
The operational creditors are those who have due from the debtor on account of transactions
made for the operational working of the debtor. While defining the term “good” the Sale of
Goods Act, 1930 is referred but the term “services” has still not ben concretely defined. A
claim on operational det may be on account of breach of an agreement or a decree of a court
of law and the same must relate to the supply of goods and services.
If the application under Section 9 does not relates to the supply of goods and services, the
same will be rejected as held in the case of Usha Holdings LL.C. v. Francorp Advisors
Ltd., where even after obtaining a decree from a foreign court the application was rejected.
As suggested by the Bankruptcy Law Reforms Committee Reports that definition of
operational creditor and debt includes wholesaler vendors, lesser who rents out space or in
other words operational creditor may include employees, rental obligations, utilities payment
and trade credit. While a landlord could certainly claim to be an operational creditor as in the
case of Annapurna Infrastructure Ltd v. SORIL Infra Resources Ltd., but a tenant in its
tenant-landlord relationship cannot claim to be an operational creditor as been settled in the
case of Jindal Steel and Power v. DCM International.
Even if there is no privity of contract between the “operational creditor” and the “operational
debtor”, the operational creditor can initiate resolution process if the third person carried out
trade in the name and style of the operational creditor and the same was within the knowledge
of the debtor and invoices were raised by the operational creditor with regards to such supply
of goods and services as held in the case of P. Vijay Kumar v. Priya Trading Company.
The Supreme Court in Swiss Ribbons (P) Ltd. v. Union of India explained the difference
between the burden on operational creditor and financial creditor and discussed the terms
“claims”, “debt” and “default” and stated that while claim gives rise to a debt only when it
becomes due, a default occurs only when a debt becomes due and payable and is not paid by
the debtor. The court further added that it is for this reason that a financial creditor has to
prove default as opposed to an operational creditor who merely claims a right to payment of
a liability or obligation in respect of a debt which may be due.
For operational creditors to trigger the IB Code, it was postulated that they must present an
“undisputed bill” which may be filed at a registered information utility as a requirement to
trigger the resolution process.
 COC – The Supreme Court in the case of Swiss Ribbons Ltd. v. Union of India
discussed the importance of financial debts when compared to operational debts in
 why it stands out to be more crucial in purely relative terms and on the touchstone of
pure economic terms of a nation. The court also explained the rationale behind
financial creditors solely constituting the Committee of Creditors. The Bankruptcy
Law Reform Committee report while dealing with the same question held that
operational creditors are neither able to decide on matters regarding the insolvency of
the entity nor willing to take the risk of postponing payment for better future
prospects of the entity and resultantly, for the process to be rapid and efficient, it was
suggested that the IB Code should restrict the Committee of Creditors to only
financial creditors.

SECTION 7 OF THE I&B CODE.

Initiation of corporate insolvency resolution process by financial creditor.
7(1) - —A financial creditor either by itself or jointly with [other financial creditors, or any
other person on behalf of the financial creditor, as may be notified by the Central
Government,] may file an application for initiating corporate insolvency resolution process
against a corporate debtor before the Adjudicating Authority when a default has occurred.
[Provided that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6A)
of section 21, an application for initiating corporate insolvency resolution process against the
corporate debtor shall be filed jointly by not less than one hundred of such creditors in the
same class or not less than ten per cent. of the total number of such creditors in the same
class, whichever is less:
Provided further that for financial creditors who are allottees under a real estate project, an
application for initiating corporate insolvency resolution process against the corporate debtor
shall be filed jointly by not less than one hundred of such allottees under the same real estate
project or not less than ten per cent. of the total number of such allottees under the same real
estate project, whichever is less:
Provided also that where an application for initiating the corporate insolvency resolution
process against a corporate debtor has been filed by a financial creditor referred to in the first
and second provisos and has not been admitted by the Adjudicating Authority before the
commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such
application shall be modified to comply with the requirements of the first or second proviso
within thirty days of the commencement of the said Act, failing which the application shall be
deemed to be withdrawn before its admission.]
(2) The financial creditor shall make an application under sub-section (1) in such form and
manner and accompanied with such fee as may be prescribed.
(3) The financial creditor shall, along with the application furnish—
(a) record of the default recorded with the information utility or such other record or
evidence of default as may be specified;
(b) the name of the resolution professional proposed to act as an interim resolution
professional; and
(c) any other information as may be specified by the Board.
(4) The Adjudicating Authority shall, within fourteen days of the receipt of the application
under sub-section (2), ascertain the existence of a default from the records of an information
utility or on the basis of other evidence furnished by the financial creditor under sub-section
(3).
(5) Where the Adjudicating Authority is satisfied that—
(a) a default has occurred and the application under sub-section (2) is complete, and there is
no disciplinary proceedings pending against the proposed resolution professional, it may, by
order, admit such application; or
(b) default has not occurred or the application under sub-section (2) is incomplete or any
disciplinary proceeding is pending against the proposed resolution professional, it may, by
order, reject such application:
Provided that the Adjudicating Authority shall, before rejecting the application under clause
(b) of sub-section (5), give a notice to the applicant to rectify the defect in his application
within seven days 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).
(7) The Adjudicating Authority shall communicate— (a) the order under clause (a) of sub-
section (5) to the financial creditor and the corporate debtor;
(b) the order under clause (b) of sub-section (5) to the financial creditor, within seven days
of admission or rejection of such application, as the case may be.
A financial creditor may approach an adjudicating authority under Section 7 of the IB Code
or Rule 4, 9, and 10 of the Insolvency and Bankruptcy (Application to Adjudicating
Authority) Rules, 2016. When Section 7 of the IB Code is read with IB Rules, 2016, it
purports that an application filed must be:
1. by a financial creditor or its assignee;
2. for a financial debt;
3. based on such debt that is defaulted upon by the debtor, irrespective of the fact that
the debt is owed towards such applicant creditor or not;
4. in the form prescribed by the Insolvency and Bankruptcy (Application to AA) Rules,
2016;
5. along with the record of default;
6. accompanied by a copy of the assignment deed, if any;
7. having consent of the Interim Resolution Professional proposed and;
8. dispatched by registered post or speed post to the registered office of the corporate
debtor and a confirmation to that effect.
To summarise application under Section 7 of the IB Code stipulates three condition i.e.,
1. there must be a “financial debt”.
2. Such financial debt is owed to a “financial creditor”, or by a person that debt is legally
assigned or transferred to.
 3. Such debt must be due and defaulted upon and a fourth point can be added that;
One more condition may be added i.e.,
4. Such application must be filed against the principle corporate debtor.
Recent Amendments and additions to Section 7.
Following proviso to Section 7 were added by the IB Code (Amendment) Act, 2020.
 For the financial creditors referred in clause (a) and (b) of Sub-section 6-a of section
21, an application for initiating corporate insolvency resolution process shall be filed
jointly by one hundred of such creditors in the same class or not less then 10% of the
total number of such creditor in same class, whichever is less.
 Financial creditors who are allottees under a real estate project, an application for
initiating CIRP shall be filed jointly by no less than 100 of such allottees or not less
than 10% of total allottees, whichever is less.
The amendment helps to prevent small claimants such as debenture holders and also covers
home buyers from taking the corporate debtor to the doors of Adjudicating Authority
mandating a minimum threshold requirement.
HOME BUYER
5(8) “financial debt” means a debt along with interest, if any, which is disbursed against the
consideration for the time value of money and includes-
(f) any amount raised under any other transaction, including any forward sale or purchase
agreement, having the commercial effect of a borrowing;
Explanation for this sub-clause, -
(i) any amount raised from an allottee under a real estate project shall be deemed to be an
amount having the commercial effect of a borrowing; and
(ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively
assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and
Development) Act, 2016 (16 of 2016).
7(1) - —A financial creditor either by itself or jointly with [other financial creditors, or any
other person on behalf of the financial creditor, as may be notified by the Central
Government,] may file an application for initiating corporate insolvency resolution process
against a corporate debtor before the Adjudicating Authority when a default has occurred.
[Provided that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6A)
of section 21, an application for initiating corporate insolvency resolution process against the
corporate debtor shall be filed jointly by not less than one hundred of such creditors in the
same class or not less than ten per cent. of the total number of such creditors in the same
class, whichever is less:
Provided further that for financial creditors who are allottees under a real estate project, an
application for initiating corporate insolvency resolution process against the corporate debtor
shall be filed jointly by not less than one hundred of such allottees under the same real estate
project or not less than ten per cent. of the total number of such allottees under the same real
estate project, whichever is less:
Provided also that where an application for initiating the corporate insolvency resolution
process against a corporate debtor has been filed by a financial creditor referred to in the first
and second provisos and has not been admitted by the Adjudicating Authority before the
commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such
application shall be modified to comply with the requirements of the first or second proviso
within thirty days of the commencement of the said Act, failing which the application shall be
deemed to be withdrawn before its admission.]
25A. Rights and duties of authorised representative of financial creditors. —
(1) The authorised representative under sub-section (6) or sub-section (6A) of section 21 or
sub-section (5) of section 24 shall have the right to participate and vote in meetings of the
committee of creditors on behalf of the financial creditor he represents in accordance with
the prior voting instructions of such creditors obtained through physical or electronic means.
(2) It shall be the duty of the authorised representative to circulate the agenda and minutes of
the meeting of the committee of creditors to the financial creditor he represents.
(3) The authorised representative shall not act against the interest of the financial creditor he
represents and shall always act in accordance with their prior instructions:
Provided that if the authorised representative represents several financial creditors, then he
shall cast his vote in respect of each financial creditor in accordance with instructions
received from each financial creditor, to the extent of his voting share:
Provided further that if any financial creditor does not give prior instructions through
physical or electronic means, the authorised representative shall abstain from voting on
behalf of such creditor.
[(3A) Notwithstanding anything to the contrary contained in sub-section (3), the authorised
representative under sub-section (6A) of section 21 shall cast his vote on behalf of all the
financial creditors he represents in accordance with the decision taken by a vote of more
than fifty per cent of the voting share of the financial creditors he represents, who have cast
their vote:
Provided that for a vote to be cast in respect of an application under section 12A, the
authorised representative shall cast his vote in accordance with the provisions of sub-section
(3).]
(4) The authorised representative shall file with the committee of creditors any instructions
received by way of physical or electronic means, from the financial creditor he represents,
for voting in accordance therewith, to ensure that the appropriate voting instructions of the
financial creditor he represents is correctly recorded by the interim resolution professional
or resolution professional, as the case may be.
POSITION OF LAW PRIOR TO THE AMENDMENT
In Anil Mahindroo v. Earth Iconic Infrastructure Ltd., the question was posed whether
the purchaser of a flat could be construed to be a “financial creditor” and the amount paid for
purchasing the flat could be termed a “financial debt”. In this case the MOU contained an
express promise made on behalf of the builder for a guaranteed return on the investment as
“commitment amount” till the delivery of actual possession. Thee NCLAT held that the
purchaser could be treated as an investor and the amount paid for the purchase of the flat be
construed as financial debt as per the observation made by the Tribunal in the case of Nikhil
Mehta and Sons v. AMR Infrastructure Ltd.
As we can see, even in cases of home buyers the interpretation regarding “time value of
money” was the determining factor in order to ascertain if a debt is a financial debt. Same as
the decision in Nikhil Mehta, the NCLT in Kamal Dutta v. Anubhuti Aggarwal admitted
the application of the purchaser treating the latter as financial creditor. Even prior to the
amendment, the jurisprudence of the NCLAT has consistently maintained that in builder-
allottee cases, the allottees fall under the ambit of the term financial creditor. In Gurcharan
Singh Soni and Kuldeep Kaur Soni v. United Ltd., the appellant had not taken the plea that
they are “financial creditors” covered by the decision in Nikhil Mehta and since they did not
come within the ambit of the term “operational creditor”, the appeal of the purchaser was
dismissed.

AMENDEMENT TO SECTION 5(8)

The case of JP Builders had drawn the limelight when the proceedings against the debtor-
builders stood admitted before the NCLT Allahabad Bench and as a result, several allottees
homebuyers approached the Supreme Court seeking relief. The allottee homebuyers in the
case of Chitra Sharma v. Union of India demanded a representative from their own side if
the resolution process is restored against Jaypee Infratech Ltd. and Jaiprakash Associates Ltd,
which was accepted by the Supreme Court and a person was appointed by the apex court to
“espouse” the cause of the homebuyers (which at that point was not in tandem with the
provisions of the IB Code).
When the proceedings were started before the supreme court, the Court stayed the liquidation
proceedings and among several things also directed that the amount of Rs 750 crores
deposited by the promoters may be distributed on a pro rata basis amongst the homebuyers
and at the same time allowed the option to homebuyers to seek the possession of the flats
purchased instead of the initial choice of seeking a refund.
The most problematic part in all this was the direction of the Supreme Court wherein it
stated: “As far as Rs 750 crores, which is lying in deposit is concerned, it has to be distributed
in pro rate basis amongst the home-buyers”. This direction constituted a patent digression
from the IB Code which elaborately deals with the distribution of the assets of a corporate
debtor. The same mistake was however corrected by the Court in its final order, but it still
formed the major traction for the government to introduce the amendment to the IB Code.
POST AMENDMENT
Same as any other financial creditor, a real estate allottee can not initiate an insolvency
process against the builder-debtor basing its claim on a decree of a court or a recovery
certificate issued by RERA under Real Estate (Regulation and Development) Act 2016 as the
“amount claimed under the decree is an adjudicated amount and not a debt disbursed
against the consideration for the time value of money”, as held in the case of Sushil Ansal v.
Ashok Tripathi.
After the amendment, an issue arose as to whether there is a default by the builder-debtor if
the allottee was not ready to pay the full outstanding amount and the builder was ready to
deliver the possession of the plots provided that the allottee pays the remaining consideration.
In the case of Anil Kumar Tulsiani v. Rakesh Kumar Gupta, the NCLAT stated that
although an allottee comes within the term “financial creditor”, if such an allottee does not
pay the full amount, then it cannot allege default on part of the appellant-debtor (builder).
It was further stated that default occurs in two situations: first if an allottee finds that the
completion has not been made by the corporate debtor-builder within the stipulated time and
the creditor-allottee has already paid or agreed to pay the entire amount; second when if the
allottee requests that the amount be returned as the project is not completed within stipulated
time and the debtor fails to refund the same.
OPERATIONAL DEBT and OPERATIONAL CREDITOR
The definition of operational creditor and operational debt under Section 5(20) and (21) of
the IB Code respectively as;
5(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.defines finan
5(21) “operational debt” means a claim in respect of the provision of goods or services
including employment or a debt in respect of the [payment] of dues arising under any law for
the time being in force and payable to the Central Government, any State Government or any
local authority.
The operational creditors are those who have due from the debtor on account of transactions
made for the operational working of the debtor. While defining the term “good” the Sale of
Goods Act, 1930 is referred but the term “services” has still not ben concretely defined. A
claim on operational det may be on account of breach of an agreement or a decree of a court
of law and the same must relate to the supply of goods and services.
If the application under Section 9 does not relates to the supply of goods and services, the
same will be rejected as held in the case of Usha Holdings LL.C. v. Francorp Advisors
Ltd., where even after obtaining a decree from a foreign court the application was rejected.
As suggested by the Bankruptcy Law Reforms Committee Reports that definition of
operational creditor and debt includes wholesaler vendors, lesser who rents out space or in
other words operational creditor may include employees, rental obligations, utilities payment
and trade credit. While a landlord could certainly claim to be an operational creditor as in the
case of Annapurna Infrastructure Ltd v. SORIL Infra Resources Ltd., but a tenant in its
tenant-landlord relationship cannot claim to be an operational creditor as been settled in the
case of Jindal Steel and Power v. DCM International.
Even if there is no privity of contract between the “operational creditor” and the “operational
debtor”, the operational creditor can initiate resolution process if the third person carried out
trade in the name and style of the operational creditor and the same was within the knowledge
of the debtor and invoices were raised by the operational creditor with regards to such supply
of goods and services as held in the case of P. Vijay Kumar v. Priya Trading Company.
The Supreme Court in Swiss Ribbons (P) Ltd. v. Union of India explained the difference
between the burden on operational creditor and financial creditor and discussed the terms
“claims”, “debt” and “default” and stated that while claim gives rise to a debt only when it
becomes due, a default occurs only when a debt becomes due and payable and is not paid by
the debtor. The court further added that it is for this reason that a financial creditor has to
prove default as opposed to an operational creditor who merely claims a right to payment of
a liability or obligation in respect of a debt which may be due.
For operational creditors to trigger the IB Code, it was postulated that they must present an
“undisputed bill” which may be filed at a registered information utility as a requirement to
trigger the resolution process.

INSOLVENCY RESOLUTION BY AN OPERATIONAL CREDITOR

UNDER THE IB CODE: -
Section 8 - Insolvency resolution by an operational creditor
(1) 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 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, 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 3 [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.
Explanation - For the purposes of this section, a “demand notice” means a notice served by
an operational creditor to the corporate debtor demanding 3 [payment] of the operational debt
in respect of which the default has occurred.
UNDER THE INSOLVENCY AND BANKRUPTCY (APPLICATION TO ADJUDICATING
AUTHORITY) RULES, 2016: -
Rule 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
subsection (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.

NOTICE UNDER SECTION 8, IB CODE

It imposes an obligation over the operational creditor to send a demand notice to the
corporate debtor demanding payment of the amount due. The reason behind this obligation is
that operation debts tend to be small amounts or are recurring in nature and may or may not
be accurately reflected on the records of information utilities at all times. The possibility of
disputed debt in comparison to financial debts is also higher.
In Era Infra Engg. Ltd. v. Prideco Commercial Projects, when no specific notice was
issued by the operational creditor under Section 8, IB Code, but a notice was issued under
Section 271 of the Companies Act for winding up, the NCLAT held that it is incumbent upon
the operational creditor to issue a notice under Section 8. Similarly, in IVRCL Ltd. v.
Sanghvi Movers Ltd., a defective notice was not considered and NCLAT allowed the
respondent to withdraw the insolvency application and file it afresh after filing a proper
notice under section 8.