Initiating Insolvency as an Operational Creditor

Insolvency and Bankruptcy Code, 2016 (Application to Adjudicating Authority) Rules – Summary for Operational Creditors

Objective of IBC, 2016
The Insolvency and Bankruptcy Code, 2016 (IBC) is a comprehensive legislation that consolidates and streamlines laws relating to insolvency and bankruptcy for companies, partnership firms, and individuals. It aims to ensure a time-bound process for resolving insolvency and encourages credit discipline among borrowers.

Key Definitions
Under Section 5(21), Operational Debt refers to claims arising from the provision of goods or services (including employment) or statutory dues such as taxes.
Section 5(20) defines an Operational Creditor as any person to whom an operational debt is owed, including assignees or transferees. Typical examples include suppliers, service providers, employees, and government departments.

Step 1: Demand Notice (Section 8 of IBC)
Before initiating insolvency proceedings, an operational creditor must deliver to the corporate debtor:

• A demand notice in Form 3, or

• An invoice demanding payment in Form 4.

This notice should contain:

• The total amount of debt in default.

• The due date of the debt.

• Details of the transaction.

• Supporting documents such as invoices, purchase orders, or delivery receipts.

The debtor has 10 days to respond—either by repaying the debt or by raising a dispute or showing proof of payment.

Step 2: Filing Application to NCLT (Section 9 of IBC)
If there is no response or if the response is unsatisfactory, the operational creditor may file an application under Section 9 to initiate the Corporate Insolvency Resolution Process (CIRP).

The application must be submitted in Form 5 along with:

• A copy of the demand notice or invoice.

• An affidavit (Rule 6(1)(b)) confirming that no notice of dispute was received.

• A certificate from a financial institution (if available) confirming non-payment.

• Additional proof of default (e.g., email correspondence, bounced cheques).

• The proposed name of an Interim Resolution Professional (IRP).

Adjudicating Authority (NCLT) and Its Role
The National Company Law Tribunal (NCLT) must decide on the application within 14 days.

If the application is admitted:

• A moratorium is declared under Section 14, halting legal proceedings and debt recovery actions.

• An Interim Resolution Professional (IRP) is appointed.

• The Corporate Insolvency Resolution Process (CIRP) commences.

If the application is rejected, the operational creditor is informed with reasons and retains the right to explore other legal remedies such as civil suits or arbitration.

Conditions for a Valid Section 9 Application

• The operational debt must exceed ₹1 crore (threshold revised post-COVID amendments).

• The debt must be due and not disputed, contingent, or future.

• The default must be clearly established.

• There should be no pre-existing dispute regarding the goods/services provided.

Relevant Rules and Forms

• IBC (Application to Adjudicating Authority) Rules, 2016 – Govern the filing process for operational creditors.

• Key Forms:

  • Form 3 – Demand Notice.

  • Form 4 – Invoice Demanding Payment.

  • Form 5 – Application to Adjudicating Authority (NCLT) under Section 9.

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