An operational creditor to a corporate  debtor, demanding payment of an unpaid operational debt – What is a Demand Notice? 

“This document basically lays out a checklist of what needs to be in place before filing an application Section 9 of the IBC, like the minimum default amount, how to deal with pre-existing disputes, how and in what form the demand notice needs to be served, and other key procedural points.”

A Demand Notice is a formal communication issued by an operational creditor to a corporate  debtor, demanding payment of an unpaid operational debt before initiating insolvency proceedings  under Section 9 of the IBC. This step is mandatory under Section 8(1) of the IBC.

Under Section 8(1) IBC, 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.

An Operational creditor refers to a person to whom an operational debt is owed and includes any  person to whom such amount has been legally assigned or transferred for goods or services done by  them. An Operational Debt means debt incurred in exchange for the provision of goods or services or debt in respect of the payment of dues arising under any law for the time being in force payable to  the Central Govt., any State Govt. or any regulator.

The format and details regarding demand notice are laid down in Form 3 and Form 4 of the Insolvency  and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. In Tejinder Pal Setia Vs. Kone  Elevator India Pvt. Ltd. and Ors.(2023), The NCLAT referring the judgment in Neeraj Jain held  that the Operational Creditor is at liberty to submit Demand Notice either in Form-3 or Form-4.  When Notice is issued in Form-4, copy of the Invoice is required to be attached with the Notice.

The purpose of the Demand Notice is to inform the corporate debtor of the default, to give them 10  days to pay or dispute the claim and to establish that the creditor made a formal attempt to recover  the debt before approaching the NCLT.

Once a demand notice is made and if the corporate debtor pays within 10 days, then the matter ends. Conversely, if the debtor disputes the claim within 10 days, then the creditor may not proceed under  IBC. However, if the debtor fails to respond, the Operational creditor can file a case under Section 9.

And it was held in Shri Karvir Nivasini Mahalaxmi Ispat Pvt. Ltd. Vs. Vistacore Infraprojects  Pvt. Ltd. that “The service of the Demand Notice u/s 8 of the Code is a sine qua non of an application  u/s 9 of the IBC.” Thus, Demand Invoice under Section 8 forms as a basis for making an application

under Section 9 for initiating insolvency proceedings against the corporate debtor and acts as a relief  to the creditor.

It has been held with repect to part-payments in the case of Entertainment Network India Ltd. Vs.  Praise Communications Pvt. Ltd. that there is a requirement of fresh Demand Notice u/s 8 of  IBC in case of part payments made by Corporate Debtor, after issuing the first Demand Notice.

APPLICATION TO ADJUDICATING AUTHORITY:

Section 9 of the Insolvency and Bankrupcy Code talks about Application to Adjudicating Authority.  According to this section, if the debt remains unpaid after 10 days and no valid dispute exists, the  operational creditor may file an application before the Adjudicating Authority (NCLT) to initiate  insolvency proceedings. Upon receipt of the application, the NCLT must ensure that no pre-existing  dispute exists and must admit or reject the application within 14 days of filing. If admitted, the CIRP  begins, and a moratorium is imposed on the debtor’s assets and legal proceedings.

Section 9 of the IBC provides operational creditors with an effective mechanism to recover their dues  from corporate debtors. It offers a time-bound and transparent process to initiate the insolvency  resolution, thereby preventing prolonged recovery battles. Section 9 strikes a balance between  protecting the interests of operational creditors and preventing its misuse by incorporating stringent  timelines and requirements. This ensures that operational creditors cannot initiate the CIRP arbitrarily  without a valid claim. Section 9 encourages corporate debtors to make timely payments to operational  creditors. The provision of a ten-day notice period incentivizes debtors to address and resolve  payment disputes promptly.

WHO CAN CLAIM THIS RELIEF:

According to Section 8(1) of the IBC Code, it is clear that Operational Creditors may claim this relief.  An Operational Creditor as discussed above refers to a person to whom an operational debt is owed  and includes any person to whom such amount has been legally assigned or transferred for goods or  services done by them. Examples of Operational Creditors include Suppliers, service providers,  employees and government authorities.

WHO CANNOT CLAIM THIS RELIEF/RESTRICTIONS:

Only the Operational Creditors can claim this relief. Thus, other persons, like a financial creditor like  a Bank, cannot send a demand notice under Section 8 of IBC for a debt.

Secondly, if there exists a pre-existing dispute regarding the debt prior to the issuance of the demand  notice, the application under Section 9 will be rejected. Moreover, the minimum amount of default  required to initiate corporate insolvency proceedings under Section 9 is ₹1 crore for corporate debtors. Thus, an operational creditor cannot issue a valid demand notice under Section 8 if the outstanding  debt is less than ₹1 crore.

This relief applies only when the debtor is a corporate person like a company, etc. But, if the debtor  is an individual, sole proprietor, or partnership firm, the creditor cannot initiate proceedings under  Sections 8 & 9.

Creditors whose debt is barred by limitation (usually 3 years under the Limitation Act, 1963) cannot  initiate insolvency. A demand notice based on a time-barred claim is invalid.

The demand notice or copy of invoice must be sent in the prescribed Form 3 or Form 4 under the  IBC (Application to Adjudicating Authority Rules, 2016). Improper service or sending it without  proper authority can invalidate the notice.

In Winntus Scaffolding Pvt. Ltd. Vs. Aishwarya Business Corporation Pvt. Ltd., it was held that  the Adjudicating Authority held that the Rule 6 of Insolvency and Bankruptcy (Application to  Adjudicating Authority) Rules 2016 prescribed form 5 for filing petition under section 9 IBC 2016 by  operational creditors. In the form Part IV Serial No.2 specifically required to mention the date of  default, so furnishing the date of default is must. In these circumstances, it is answered that non

mentioning of date of default in the petition is fatal to the petition.