Section 9 Requirements Under The Insolvency And Bankruptcy Code (IBC)

Written By: Radhika Deekshay, Intern, Jindal Global Law School

The Insolvency and Bankruptcy Code 2016 (further amended in 2019) provides for a speedy and efficient dispute mechanism for corporate insolvency resolution process. Under the IBC, different classes of people may initiate a corporate resolution insolvency process – one of whom are operational creditors.

Who are Operational Creditors? As per Section 5(20) and (21), operational creditors are those to whom corporate debtors owe an “Operational Debt” i.e. one that has been incurred with respect to provision of goods and services, including employment or with respect to payment of dues under any law to the government. While financial debts are owed with respect to money, operational debts are owed with respect to provision of goods and services.

Under the IBC, the procedure for initiating Corporate Resolution Insolvency Process against a corporate debtor differs for financial and operational creditors. For the latter, the procedure is laid down vide Section 9 of the IBC.

An operational creditor may file an application for corporate resolution insolvency process under Section 9(1) of the IBC, before the Adjudicating Authority i.e. the National Company Law Tribunal (NCLT). However, before doing so, it is the duty of the operational creditor to first fulfill the requirements laid down under Section 8 of the Code. This is to say that on occurrence of a default with respect to an operational debt, the operational debtor must first and foremost send a notice to the corporate debtor demanding payment, under Section 8.

A corporate debtor is required to respond to this demand notice within 10 days, and apprise the operational debtor of (a) either the payment of the debt or (b) the existence of a dispute, if any, with regards to the debt. Only if, on the expiry of the 10 days, the operational creditor does not receive (a) the payment or (b) the notice of a dispute by the corporate debtor, that the former may file an application in the NCLT under Section 9, either on his own or through an NCLT lawyer to initiate insolvency process against the latter.

Here lies the difference between procedural requirements expected out of a financial creditor and an operational debtor. While a financial creditor is not required to send any notice to the corporate debtor and may straightaway approach the NCLT for insolvency proceedings, even on behalf of other financial creditors, when it comes to operational creditors, the law, at first, leans in favour of the corporate debtors by giving them a period of 10 days to settle the debt out of court, before any application is made in the NCLT.

Along with an application under Section 9(1), the operational creditor is also required to furnish certain documents to the Adjudicating Authority (that is, the NCLT) under Section 9(3). Some of these documents are inherently mandatory, while the requirement of others depends on their availability.

The below mentioned documents are mandatory to be submitted along with the application –

  1. a copy of the demand notice sent by the operational creditor to the corporate debtor,
  2. an affidavit signed by the operational creditor, stating that no notice of dispute has been given by the corporate debtor.

The following documents may also be submitted, as per the requirement, namely:

  1. a copy of the certificate from financial institutions confirming that there is no payment of the operational debt, if available,
  2. a copy of any record with information utility confirming non-payment of operational debt, if available.
  3. any other proof of non-payment or such other information, as may be prescribed.

The operational creditor may also, under Section 9(4) propose the name of an interim resolution professional. Based on the application made out by the operational creditor along with the details furnished by him under sub-section (3), the Adjudicating Authority may either admit or reject the application within a time period of 14 days, under Section 7(5).

An application is admitted under clause (i) on the fulfillment of four requirements – the application must be complete, the operational debt must be unpaid, the demand notice under Section 8 has been delivered to the corporate debtor, no notice of dispute is received from the corporate debtor nor is there any record of a dispute in the information utility. An additional fifth requirement arises if the operational creditor has also proposed an interim resolution professional – in that case, the success of an application also requires that no disciplinary proceeding must be pending against the said interim resolution professional. If all these requirements are fulfilled, the NCLT will accept the application and notify the same to the parties involved.

However, if even one of the above requirements remains unfulfilled, the application may be rejected under clause (ii). To the benefit of the operational creditors, however, they are given a period of 7 days to rectify any mistake in their application, before a rejection can take place.

If the application is admitted, the corporate insolvency resolution process initiated by the operational creditor against the corporate debtor commences from the date of said admission.

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