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Corporate Insolvency Resolution Process by Operational Creditor under IBC 2016

The IBC 2016 i.e. Insolvency and Bankruptcy Code 2016 (hereinafter 'the Code') is regarded as one of the greatest economic reforms in India since it aims to safeguard the interests of small investors and bring in the less cumbersome process of doing business. The Code came into effect after repealing SICA (Sick Industrial Companies Act), SICA was repealed with full effect from 1 December 2016.

Unlike SICA, the Code offers flexibility to financial as well as operational creditors to initiate an insolvency resolution process against those business organisations which have defaulted in making payment of a minimum of rupees one crore or more towards the rightful dues of the financial or operational creditors. It is pertinent to note that the Central Government on March 24 2020, announced an increase in the minimum threshold under section 4 of the Code for initiating the insolvency resolution process from rupees one lakh to rupees one crore provided that the default should not have occurred between 25th March 2020 and 24th March 2021.

Who is an Operational Creditor?

According to the Code, an operational creditor refers to a person to whom an operational debt is owed including the debt that has been legally assigned or transferred. An operational creditor( claimant) is the one who has provided any type of goods and services to the corporate debtor(defaulter) for which the sum of payment is outstanding.

Section 5(20) of the Code defines the term 'operational creditor' as follows:

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.

Section 5(21) of the Code defines the term 'operational debt' as follows:

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.

Right of Operational Creditor to Initiate the Resolution Process

Operational creditors possess the right to submit a resolution application like the financial creditors. As per the Code, in case of default of debt by the corporate debtor, the operational creditor (as also by the financial creditor and the corporate debtor himself) can prepare an application to the respective authority such as National Company Law Tribunal (NCLT) for initiating the Corporate Insolvency Resolution Process. This simply implies that the operational creditor can itself file an insolvency resolution application.

Filing of Application before the National Company Law Tribunal

An operational creditor has been empowered to initiate the insolvency resolution process in terms of the provisions of the Code given that there should be a default on the part of the corporate debtor in making the payment of goods supplied or services rendered by an operational creditor to the corporate debtor. As per section 8, when a default arises, an operational creditor is required to serve the demand notice/invoice demanding payment (Form-3) to the corporate debtor instructing it to make the payment within 10 days.

Let's say the payment has not been made or no notice of dispute has been received by the operational creditor within the aforementioned statutory period of 10 days, the operational creditor retains the right to initiate the insolvency process by filing its application (Form-5) with the suitable bench of the NCLT, which has jurisdiction over the area where the registered office of the corporate debtor is situated.

The aforementioned application (Form-5) is mandated to be submitted with the NCLT along with the following documents:

A copy of the invoice demanding payment or the proof of delivery of demand notice (Form-3).

An affidavit to the effect that no notice of dispute regarding outstanding operational debt has been delivered by the corporate debtor.

A certificate from the bank in which the account of the operational creditor is maintained confirming that there is no receipt of the payment due to the corporate debtors as well as the bank account statements where credits are generally received by the operational creditor confirming non-receipt of the payment due to the corporate debtor. (In the case of Macquarie Bank Limited Vs. Shilpi Cable Technologies Ltd., the Hon'ble Supreme Court of India held that the requirement of the bank certificate is a directory in nature).

Existence of a Dispute

The corporate debtor must inform about any existence of a dispute to the operational creditor. When it comes to the existence of a dispute, rejection of the application by the NCLT on account of 'existence of dispute' between the operational creditor and the corporate debtor is one of the highly debatable matters in relation to initiating an insolvency resolution process by an operational creditor.

Section 5(6) of the Code defines the term 'dispute' as follows:

"dispute" includes a suit or arbitration proceedings relating to:
  1. the existence of the amount of debt;
  2. the quality of goods or service; or
  3. the breach of a representation or warranty.
Now, a question arises that what will qualify as an 'existence of dispute'. The term 'dispute' under the Code is to be understood as illustrative and not exhaustive. It cannot be read exclusively restricted to the dispute in relation to a suit or arbitration proceedings. The NCLT needs to examine and look into the matter to an extent required to verify whether or not an actual dispute exists, or the dispute raised is just a tool to avoid the insolvency resolution process before admitting the application.

Acceptance of Application

After the application (Form 5) for initiating the insolvency resolution process is filed, the NCLT will accept the application provided that the below-mentioned conditions are satisfied wit

The application as filed should be complete,
There must not be any repayment of the operational debt,
The notice for the payment of the debt has been sent by the operational creditor,
There is no notice of dispute which has been obtained by the operational creditor,
There are no disciplinary proceedings pending against the proposed interim resolution professional.

The NCLT will dismiss or refuse the application if any of the aforementioned conditions are not fully met or if there is any pending dispute between the operational creditor and the corporate debtor as highlighted above.

Procedure after Acceptance of the Application

When acceptance of the application is made by the NCLT, the NCLT shall declare the moratorium period of 180 days, confirm the appointment of an Interim Resolution Professional (IRP) and mention the insolvency commencement date in its order. The moratorium period is a period during which no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or proceeded against the corporate debtor.

The IRP will take charge of the management of the corporate debtor and will make a public declaration in relation to the initiation of the corporate insolvency resolution process with inviting claims from the creditors if there is any. After all the claims are received against the corporate debtor, the IRP is expected to form a committee of creditors (COC) and call together its meetings for taking actions on the insolvency resolution process which includes preparing an information memorandum, appointing a resolution professional and discussing other relevant agenda items of the COC meeting.

Afterwards, the resolution professional appointed in the first COC meeting shall take such steps as may be required for the revival of the corporate debtor as per the provisions of the Code including preparation of the information memorandum, inviting expressions of interest for a resolution plan, convening meetings of the COC according to when required, etc.

However, in a situation where no resolution plan is agreed upon in the meeting of the COC or it is not approved by the NCLT within the aforesaid moratorium period of 180 days (which is extendable by another 90 days at the discretion of the NCLT), the NCLT may now allow commencement of the liquidation process in relation to such corporate debtor.

The Code ensures the protection of operational creditors by providing a robust mechanism for recovery. The operational creditors are empowered to initiate the corporate insolvency resolution process against a corporate debtor given that there is nonpayment of debt owed by such debtor. The Code precisely specifies steps to be taken by an operational creditor to initiate the insolvency resolution process by filing a case before the NCLT for speedy resolutions. Hence, the Code proves to be a step in the right direction as it significantly helps to recover payment from corporate debtors.

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