In this article, provision of the Code, rules & regulations on admission of application for insolvency of a Corporate Debtor under section 9 of the Code will be discussed from the perspective of Board of Directors of the CD. This is a crucial point where the Board of Directors of CD loses all powers.
Provisions of the Code;
# Section 8. Insolvency resolution by 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 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 payment of the operational debt in respect of which the default has occurred.
# Section 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;
- (c) a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available;
- (d) a copy of any record with information utility confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available; and
- (e) any other proof confirming that there is no payment of any unpaid operational debt by the corporate debtor or such other information, as may be prescribed.
(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 payment of the unpaid operational debt;
- (c) the invoice or notice for 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 payment of the unpaid operational debt;
- (c) the creditor has not 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.
# Section 238A. Limitation. –
The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.]
# 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 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.
# Rule 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.
Broadly speaking, application under section 9 can be contested on the following grounds;
1. Incomplete application. However the applicant (OC) is granted seven days time to complete the application.
2. Creditor has not delivered the invoice or notice for payment to the corporate debtor.
3. Ineligibility of the IRP, proposed by the applicant (OC), if any.
- Disciplinary proceeding is pending against any proposed resolution professional.
- Proposed resolution professional do not hold AFA as per regulations.
- Conflict of interest. Proposed resolution professional is related party of the applicant (OC)
or had been the employee / auditor / advocate of the applicant (OC) in the past..
- Ineligible in terms section 203(3) of “The Companies Act, 2013.”
4. Application is beyond the limitation period.
5. Claim is disputed.
Application is beyond the limitation period.
Following is an important judgement of Hon’ble SCI, on this aspect.
Hon’ble SCI (11.10.2018) in B.K. Educational Services Pvt. Ltd Vs Parag Gupta and Associates ( Civil Appeal no. 23988 of 2017) held that; a). Limitation Act is applicable from the inception of the Code. b). Article 137 of the Limitation Act gets attracted for applications filed under Sections 7 and 9 of the Code. c). “The right to sue”, therefore, accrues when a default occurs.
# 27. It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. “The right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.
Claim of the Operational Creditor is disputed & dispute was raised prior to the receipt of Demand Notice / Invoice under section 8.
Following judgements of Hon’ble SCI defines the case law, on this aspect.
i). SCI (31.8.2017) in Innoventive Industries Ltd. v. ICICI Bank & Anr. (Civil Appeal Nos. 8337 - 8338 of 2017) held as under;
“27. The scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. Default is defined in Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and payable, which includes non-payment of even part thereof or an instalment amount. For the meaning of “debt”, we have to go to Section 3(11), which in turn tells us that a debt means a liability of obligation in respect of a “claim” and for the meaning of “claim”, we have to go back to Section 3(6) which defines “claim” to mean a right to payment even if it is disputed. The Code gets triggered the moment default is of rupees one lakh or more (Section 4). The corporate insolvency resolution process may be triggered by the corporate debtor itself or a financial creditor or operational creditor. A distinction is made by the Code between debts owed to financial creditors and operational creditors. A financial creditor has been defined under Section 5(7) as a person to whom a financial debt is owed and a financial debt is defined in Section 5(8) to mean a debt which is disbursed against consideration for the time value of money. As opposed to this, an operational creditor means a person to whom an operational debt is owed
and an operational debt under Section 5(21) means a claim in respect of provision of goods or services.
“29. 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 to the operational debtor in the manner provided in Section 8(1) of the Code. Under
Section 8(2), the corporate debtor can, within a period of 10 days of receipt of the demand notice or copy of the invoice mentioned in sub-section (1), bring to the notice of the operational creditor the existence of a dispute or the record of the pendency of a suit or arbitration proceedings, which is pre existing – i.e. before such notice or invoice was received by the corporate debtor. The moment there is existence of such a dispute, the operational creditor gets out of the clutches of the Code.
ii). SCI (21.09.2017)in Mobilox Innovations Private Limited Vs. Kirusa Software Private Limited (Civil Appeal 9405 of 2017) held that;
# 25. Therefore, the adjudicating authority, when examining an application under Section 9 of the Act will have to determine:
- (i) Whether there is an “operational debt” as defined exceeding Rs.1 lakh? (See Section 4 of the Act)
- (ii) Whether the documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has not yet been paid? And
- (iii) Whether there is existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute?
If any one of the aforesaid conditions is lacking, the application would have to be rejected.
Apart from the above, the adjudicating authority must follow the mandate of Section 9, as outlined above, and in particular the mandate of Section 9(5) of the Act, and admit or reject the application, as the case may be, depending upon the factors mentioned in Section 9(5) of the Act.
# 29 ……… We have also seen that one of the objects of the Code qua operational debts is to ensure that the amount of such debts, which is usually smaller than that of financial debts, does not enable operational creditors to put the corporate debtor into the insolvency resolution process prematurely or initiate the process for extraneous considerations. It is for this reason that it is enough that a dispute exists between the Parties.
# 40. It is clear, therefore, that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is clear that such notice must bring to the notice of the operational creditor the “existence” of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.
# 45. Going by the aforesaid test of “existence of a dispute”, it is clear that without going into the merits of the dispute, the appellant has raised a plausible contention requiring further investigation which is not a patently feeble legal argument or an assertion of facts unsupported by evidence. The defense is not spurious, mere bluster, plainly frivolous or vexatious. A dispute does truly exist in fact between the parties, which may or may not ultimately succeed, and the Appellate Tribunal was wholly incorrect in characterizing the defense as vague, got-up and motivated to evade liability.
iii). SCI (14.08.2018) in K. Kishan Vs. M/S Vijay Nirman Company Pvt. Ltd.(Civil Appeal No. 21824 of 2017)held as under;
# 18. We repeat with emphasis that under our Code, insofar as an operational debt is concerned, all that has to be seen is whether the said debt can be said to be disputed, and we have no doubt in stating that the filing of a Section 34 petition against an Arbitral Award shows that a pre-existing dispute which culminates at the first stage of the proceedings in an Award, continues even after the Award, at least till the final adjudicatory process under Sections 34 & 37 has taken place.
# 19. We may hasten to add that there may be cases where a Section 34 petition challenging an Arbitral Award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the Court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition under Section 34 has been filed or a belated petition under Section 34 has been filed. It is only in such clear cases that the insolvency process may then be put into operation.
# 20. We may hasten to add that there may also be other cases where a Section 34 petition may have been instituted in the wrong court, as a result of which the petitioner may claim the application of Section 14 of the Limitation Act to get over the bar of limitation laid down in Section 34(3) of the Arbitration Act. In such cases also, it is obvious that the insolvency process cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act.
# 23. We are also of the view that the Appellate Tribunal, when it relied upon Form V Part 5 of the 2016 Rules to state that the operational debt would, therefore, be said to have been proved, missed the vital sub-clause (iii) in para 34 of Mobilox Innovations (supra). Even if it be clear that there be a record of an operational debt, it is important that the said debt be not disputed. If disputed within the parameters laid down in Mobilox Innovations (supra), an insolvency petition cannot be proceeded with further.
Application under Sec. 34 of ACA, 1996 is evidence of pending dispute.
High Court of Calcutta (10.01.2020) in Sirpur Paper Mills Ltd. Vs. I.K. Merchants Pvt. Ltd. (A.P. No.550 of 2008) held that Once the Award is challenged in arbitration, the debt became disputed and subject to a decision in the Sec. 34 of ACA, 1996 proceedings.
#10 …………………. It would be evident from the dates since above that the impugned Award of 7th July, 2008 is a culmination of a dispute between the parties which existed before the initiation of corporate insolvency proceedings against the petitioner. It is also true that once the Award was challenged by the petitioner (Award Debtor) in 2008, the debt became disputed and subject to a decision in the Section 34 proceedings). This court is not inclined to agree with the contentions of the petitioner that the challenge to the Award cannot be considered by reason of the proceedings under the IBC. This is by reason of the fact that the respondent award-holder could not have filed a claim before the NCLT/IRP since the Section 34 proceedings had not been decided in favour of the said respondent in 2017 and hence there was no final or adjudicated claim as on that date.
References;-
1. Insolvency and Bankruptcy Code, 2016
2. The Companies Act, 2013
3. eBook "Claims of Creditors" by Arvind Mangla, a publication of Amazon Kindle Store..
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