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IBC – A TOOL FOR RECOVERY BY OPERATIONAL CREDITORS

January 8, 2019     by Ridhima Chachra

It is well established fact that civil recovery matters take long time to decide. Because of low recoverability, there is a low credit discipline in trade. This has affected businesses as it often leads to large working capital requirement and thus more stress on margins.

There was an option to initiate winding up petitions before High Courts under earlier Companies Act, 1956.The prohibitive cost of litigation often acted as dampener for actions by Creditors. The fact that the petition if admitted would lead to liquidation through the office of Official Liquidator and depending upon the Company, the matter used to stretch for two to three years during which the corporate debtor (company) would remain in control of the same management.

There has been a major shift with Insolvency & Bankruptcy Code (IBC), and now an operational creditor can initiate action under IBC for recovery of its dues under very cost effective manner.

Who is an Operational Creditor?

Section 5(20) of the Insolvency and Bankruptcy Code, 2016, defines “Operational Creditor” as a person to whom operational debt[1] is owed and includes such person to whom such debt has been legally assigned or transferred.

It is pertinent to note that, a creditor would fall into the category of operational creditor only if an operational debt is owed to him. What exactly will fall under operational debt becomes clear from the case of Vinod Awasthy v A.M.R Infrastructures Limited. In this case, the NCLT has laid down that ‘operational debt’ under the code only covers four categories viz. goods, services, employment and government dues. If the debt owed to the operational creditor does not fall in any of these four categories, the creditor cannot be called ‘operational creditor’ and hence he cannot initiate corporate insolvency resolution process against the corporate debtor.

How to make an application for initiation of corporate insolvency resolution process (CIRP) against defaulting Corporate Debtor for a debt of more than Rs.100,000/- (Rupees one lakh)

An operational creditor may make an application to the Adjudicating Authority for initiation of CIRP in accordance to Section 9 of the Insolvency and Bankruptcy Code, 2016 and Regulation 7 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Steps to be followed by the Operational Creditor have been enumerated below:

Step 1: An operational creditor may deliver a demand notice upon the corporate debtor demanding payment in respect of the operational debt in respect of which the default has occurred. The demand notice shall bein prescribed Form 3 or a copy of an invoice with a notice in Form 4(under Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016)

Step 2: The Corporate Debtor shall within 10 days of receipt of the demand notice, communicate to the operational creditor the existence of any dispute or payment of the unpaid operational debt. It is important to note that the dispute raised by corporate debtor has to be pre-existing to the demand notice issuance date.

Step 3: At the expiry of 10 days of delivering the demand notice to the corporate debtor, if the operational creditor does not receive any payment or notice of dispute, the operational creditor may make an application to the Adjudicating authority for initiation of CIRP under Section 9 of the code in Form 5 along with the documents evidencing the amount of debt claimed along with a copy of certificate from the financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor.

The operational creditor may propose the name of a resolution professional to act as an Interim Resolution Professional.

Step 4: The applicant (operational creditor) shall then serve to the corporate debtor at his   registered office by speed post or registered post, a copy of the application made to the adjudicating authority (NCLT)

There is only a nominal filing fee of Rs. 2000/- for filing petition in NCLT. CIRP thus gets initiated against a corporate debtor by an operational creditor.

Admission of matter by Adjudicating Authority (NCLT)

The Adjudicating Authority shall within fourteen days of receipt of application admit and communicate such decision to the operational creditor, if all the documents submitted along with the application are found in order and are complete in all respects.

Conclusion

The CIRP shall commence from the date of admission of application by the Adjudicating Authority. On admittance, the control of the Corporate Debtor shall shift from Debtor’s control to IRP’s control, which is not a very comfortable position for promoters/ directors of the company. Therefore, urgency is often shown in most of the cases by the corporate debtor/ promoters to settle with such operational creditor who has initiated Section 9 petition under IBC.As per recent trends, NCLTs have facilitated such settlements effectively meaning that IBC will go a long way in bringing credit discipline in trades in India. Thus, IBC has significantly brought down effective litigation cost for recoveries by Trade/ Operational Creditors.

Formats

The formats of respective forms to be submitted by the Operational Creditors are provided in the following links:

Form3-DemandNotice

Form 5- Application to Adjudicating Authority to initiate CIRP  

[1] ‘Operational debt’ refers to claim in respect of provision of goods and services including employment or 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.

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