INITIATION OF CIRP BY OPERATIONAL CREDITOR UNDER SECTION 9 OF IBC, 2016

WHO IS AN OPERATIONAL CREDITOR?

According to Section 5(20) of the Insolvency and Bankruptcy Code (IBC), an operational creditor refers to any person who is owed an operational debt, which includes debts that have been legally assigned or transferred to them. To determine if someone qualifies as an operational creditor, the debt they are owed must meet the definition of an operational debt outlined in Section 5(21) of the IBC. For example Suppliers of services to a company, Suppliers of raw materials or other finished products to a company, Employees and workmen, and Contractors.

WHAT IS AN OPERATIONAL DEBT?

Section 5(21) of the IBC defines an operational debt as a claim for the provision of goods or services, including employment-related obligations, or a debt that arises from any law currently in effect and is payable to the Central Government, State Government, or a local authority.

INSOLVENCY RESOLUTION BY OPERATIONAL CREDITOR

• According to section 8 of the Insolvency and Bankruptcy Code (IBC), if an operational creditor faces a default by a corporate debtor in payment, as specified in section 4 along with Gazette Notification S.O. 1205(E) (where the minimum default amount is one crore rupees or more), the operational creditor can send a demand notice to the corporate debtor. The demand notice should request payment for the outstanding amount in the prescribed format. The corporate debtor is required to respond within ten days of receiving the demand notice or invoice.

• In their response, the corporate debtor should inform the operational creditor if there is an ongoing dispute related to the payment or if any legal proceedings, such as a lawsuit or arbitration, are already in progress regarding the dispute.

• Additionally, the corporate debtor can demonstrate repayment of the unpaid operational debt by providing either an attested copy of the record of the electronic transfer of the unpaid amount from the corporate debtor's bank account or an attested copy showing that the operational creditor has successfully cashed a cheque issued by the corporate debtor.

APPLICATION FOR INITIATION OF CIRP BY OPERATIONAL CREDITOR

• Section 9(1) of the Insolvency and Bankruptcy Code, 2016 (IBC) spells out that after 10 days have passed from the date of delivery of notice or invoice that demands payment under section 8 of IBC, if the operational creditor does not receive any payment or notice of the dispute under Section 8(2) from the corporate debtor, then, the operational creditor may file an application before the Adjudicating Authority for initiating

• Section 9(2) of the Insolvency and Bankruptcy Code, 2016 (IBC) states that the application under section 9(1) shall be filed by Form 5 as prescribed under the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

• Section 9(3) of IBC read with section 8 also lays down the procedure and formalities of filing the application containing the relevant information which must be accompanied by the prescribed fee.
• There are certain documents to be attached to the application, namely:
  • A copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor.
  • An affidavit that there is no notice of Dispute given by the corporate debtor unpaid operational debt.
  • A copy of the certificate from the financial institutions confirming that there is no payment of an unpaid operational debt by the corporate debtor.

• According to section 9(4), an operational creditor initiating a corporate insolvency resolution process under section 9 of the insolvency and bankruptcy code may propose a resolution professional to act as an interim resolution professional.

• Section 9(5) of IBC code 2016 mandates that within 14 days of the receipt of the application, the Adjudicating Authority shall:
• Admitting the application and prior communication to the operational creditor and the corporate debtor if-
  • The application is complete
  • No repayment of operational debt
  • The invoice for payment or notice of dispute delivered to the corporate debtor
  • No Receipt of notice of dispute by the operational creditor or there is no record of dispute in the information utility
  • There is no disciplinary proceeding awaiting against any RP

• If the the above condition is not complied with, Reject the application and communication to the operational and corporate debtors.

Provided that, before rejecting an application, the Adjudicating Authority has to give notice to the applicant, directing him to rectify their mistakes within 7 days of receiving the notice.

WHAT ARE THE PREREQUISITES TO FILING AN APPLICATION FOR CIRP UNDER SECTIONS 7 AND 9 OF THE CODE?

Prerequisites to filing an application Section 7 by financial creditor:

• Existence of a financial debt;
• Financial debt has become due;
• default of debt committed;
• a fee of Rs.25000/- has to be paid with the application.

Prerequisites to filing an application Section 7 by Operational creditor:

• Existence of an operational debt;
• Operational debt has become due;
• default of the debt;
• no pre-existing dispute about the existence of debt; and
• demand notice served to corporate debtor;
• a fee of Rs.2000/- is required to be paid with the application.

FURTHER PROCEDURE AFTER ADMISSION OF APPLICATION

When an application for insolvency resolution of a corporate debtor is admitted, an Interim Resolution Professional (IRP) is appointed as per Section 16 of the Insolvency and Bankruptcy Code. If a financial creditor applies to Section 7, the name of the proposed IRP must be mentioned in the application. However, if the application is filed by an operational creditor under Section 9, there is no requirement to propose an IRP.

In such cases, the adjudicating authority instructs the Insolvency and Bankruptcy Board of India (IBBI) to appoint a resolution professional for the application. The IRP or resolution professional plays a crucial role in managing the insolvency resolution process of the corporate debtor.

The CIRP under the IBC involves key steps and timelines. After the admission of the application, an Interim Resolution Professional (IRP) is appointed, a moratorium is imposed, and a Committee of Creditors (COC) is formed. The COC selects a resolution plan within specific timeframes, which is then submitted to the adjudicating authority for approval. If no plan is received or approved, or the COC decides by a 66% vote, the corporate debtor may be ordered into liquidation. These steps aim to resolve insolvency and achieve the best possible outcome within a defined timeline.