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Demand Notice Form 3 Of IBC- Legal Opinion

An operational creditor is empowered to invoke the insolvency resolution process in terms of the provisions of the Code only if there is a non-payment or default in payment of goods supplied or services rendered by an operational creditor to the corporate debtor.

To recover the unpaid debt:
  1. seek demand notice as stated under Form 3; or
  2. a copy of an invoice which is supposed to be attached with a notice in Form 4
Has to be made under section 8 of Insolvency & Bankruptcy Code, 2016 by the operational creditor to the corporate debtor before initiating the proceeding before National Company Law Tribunal (NCLT) requiring it to make the payment within a period of 10 (ten) days or send the notice of default.

In case, the payment has not been made or no notice of 'dispute' has been received by the operational creditor within the period of 10 (ten) days, the operational creditor has the right to initiate and conduct the insolvency process by filing up of the application (Form 5) with the relevant bench of the Hon'ble NCLT, which has jurisdiction over the place where the registered office of the corporate debtor is based on.

Default amount:
In the notification passed by the central government on 24th March, 2020 (24.03.2020), the new minimum amount of default has been increased from Rs. 1 lakh to Rs. 1 crore. This notification was passed by the central government by exercising its power conferred by the proviso to section- 4 of the IBC whereby the minimum amount of the default has been increase.
This is a prospective amendment where it shall not be applicable to or affect any pending applications filed before the NCLAT. This will be applicable to those cases filed after 24th March,2020.

Demand Notice:
To recover the debt, NOTICE will be sent under section 8 of Insolvency & Bankruptcy Code, 2016 by the creditor to the operational debtor before initiating the proceeding before national company law tribunal.

If the client is an operational creditor then Form F is not required. Form 3 of the Code is basically an invoice demanding payment in respect of the unpaid operational debt due from the corporate debtor.

Requirements for Form 3:
The notice pertains details such as:
  • the total amount of debt,
  • the details of transactions, [E.g. - bank transactions, receipts]
  • date from which the debt begins accruing,
  • amount claimed by the creditor,
  • securities (if any),
  • certificate of incorporation when a company is concerned,
  • records of previous defaults (if any),
  • legal provisions under which the debt has occurred,
  • documents in support of the claims filed by the creditor,
  • the duly signed copy/copies of record/records that the operational creditor has encashed a cheque which is emanated by the corporate debtor, etc.
The demand notice gives a deadline of 10 days to the debtor to repay the debt. If the debtor fails to pay, the creditor can initiate legal proceedings under section-9 of the code.

The demand notice will be sent under rule 5 of the IBC rule by our client [operational creditor]:
  1. To the corporate debtor, the following documents, namely:
    A demand notices as stated in Form 3; or
    A copy of an invoice which is to be attached with a notice in Form 4.
  2. The demand notice or the copy of the said invoice which demands the payment referred to in sub-section (2) of section 8 of this Code, which may be provided to the corporate debtor,
    By handing over at the registered office, registered post or speed post with acknowledgment due; or
    By electronic mail to a whole-time director or designated partner or key managerial personnel, if any, of the corporate debtor.
  3. A certified copy of demand notice or invoice demanding payment will be duly served under this rule by an operational creditor which will also be filed with an information utility if any.
    Fees for filing Demand notice:
    The application shall be accompanied by such fee as mentioned/addressed in the Schedule.
    Fees: The fee prescribed for the petition with NCLT under Section 9 is Rs. 2,000/-.
Case to support Demand notice under IB code is legal:
  1. In the case of Era Infra Engineering Limited V/s Prideco Commercial Services Private Limited, it was held by the court that the tribunal which advanced on the issue whether the Corporate Insolvency Process Order passed by Hon'ble Adjudicating Authority and later the appointment of Insolvency Resolution Professional and declaration of moratorium period which was on the basis of an application filed by Operational Creditor u/s 9 of I&B Code, 2016 which was correct as the Operational Creditor had failed to issue demand notice as required under Section 8 of the I&B Code 2016.

    The creditor had in past provided with the demand notice under Section 271 of Companies Act, 2013 and thus relied on the said demand notice. It was observed by the NCLAT that providing of notice u/s 271 of Companies Act, 2013 was not considered to be sufficient insolvency notice which is required to be duly served under Section 8(1) of I&B Code 2016 in the prescribed format.

    This Hon'ble tribunal, while deciding this case stated that:
    Certainly, no notice was issued by Operational Creditor stipulated under Rule 5 in Form 3 which has not been served. Therefore, in the non-attendance of any expiry period of tenure of 10 days preferring an application under Section 9 of I&B Code 2016� was non questionable.
  2. In the matter of - Swiss Ribbons Pvt. Ltd. and Ors Vs UOI and Ors, the Honble Supreme Court held that, �the scheme of Section 7 stands in contrast with the scheme under Section 8 where an operational creditor is, on the occurrence of a default, to first deliver a demand notice of the unpaid debt/ defaulted debt, to the operational debtor which is provided in the manner stated under Section 8(1) of the Code��.
  3. In Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., the the Honble Supreme Court held that it has categorically dealt with FORM 3 and FORM 4 and further quoted that the Operational Creditor will be serving a Demand Notice in FORM No. 3 of the IB code or certified copy of the invoice in FORM No. 4 as directed under the Rules, 2016.

When the payment is not done by the company despite of the notice being served:

If the operational creditor does not get the payment from the corporate debtor or notice of the dispute under subsection (2) of section 8, the he/she may file an application before the Adjudicating Authority to begin a corporate insolvency resolution process u/s 9 of the code.

The creditor needs to appoint a resolution professional to act on his behalf and the Adjudicating authority will either admit the application within 14 days of the application[2] or reject it

Further, this insolvency procedure must be resolved within 180 days from the date of admission of the application after which the resolution professional can file an application to extend the period.

The appeal will be made to the NCLA tribunal within 30 days and not under any civil court.

A. Where to apply:
The Centre in June 2016 set up NCLTs in several regions across India to provide a simpler, swifter mechanism for accessible dispute resolution.
NCLT has powers to consider disputes relating to solvency of co, amalgamation, demergers, restricting, etc.

Jurisdiction for Appeal:
The operational creditor has the right to initiate insolvency process by filing its application (Form 5) with the relevant bench of the Hon'ble NCLT, which has jurisdiction over the place where the registered office of the corporate debtor is located.

Due to change in the default amount, any aggrieved person who has to seek redress and whose amount to recover is less than one crore rupees, shall file a summary suit (money recovery suit) before the city civil court.

  1. IB Code
Written by: Riti Gupta,
E mail- [email protected]

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