Forms 3 and 4 of the IBC Trigger Refined
Table of Contents
The Insolvency and Bankruptcy Code, 2016 (IBC) established a time-bound and creditor-driven framework for resolving corporate insolvency, with the objective of maximising asset value and promoting entrepreneurship. A crucial component in initiating the corporate insolvency resolution process (CIRP) is the proper use of statutory forms—particularly Forms 3 and 4 of the IBC, which are fundamental for operational creditors. These forms serve as the formal mechanism for issuing demand notices and validating claims before approaching the Adjudicating Authority. Forms 3 and 4 of the IBC Trigger Refined procedures ensure that the insolvency process is initiated only on the basis of genuine, undisputed operational debt. Without the correct submission and compliance of these forms, a creditor’s claim may be deemed invalid for triggering CIRP, thereby safeguarding the integrity, discipline, and transparency of the IBC framework.
Understanding Forms under the IBC
IBC forms serve multiple purposes across different stages of the insolvency process. They are used for initiating proceedings, managing the process, verifying claims, and monitoring the performance of insolvency professionals (IPs). For instance, Form 1 is used by a financial creditor to apply for the initiation of CIRP under section 7 of the IBC, requiring detailed information about the corporate debtor, the financial debt, and supporting documentation like court orders or record of default. The purpose of these reforms extends beyond mere documentation. They are legally significant as they constitute formal applications and notifications that trigger specific legal actions under the IBC. Forms like Form A are used for public announcements, informing stakeholders that the corporate debtor is undergoing insolvency proceedings and inviting claims from creditors. read more Section 34 of Arbitration Act
Role of Operational Creditors in Triggering CIRP
Operational creditors play a crucial role in initiating the CIRP under sections 8 and 9 of the IBC by serving a demand notice and filing an application after a default. The process is mandatory and requires strict adherence to procedural steps, including the use of specific forms for notice delivery. An operational creditor must serve a demand notice under section 8 of the IBC, which can be delivered in Form 3 or Form 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, depending on the nature of the operational debt. The choice between Form 3 and Form 4 is not discretionary but based on whether an invoice was generated during the transaction.
Form 3 of the IBC: Demand Notice by Operational Creditor
The key purpose of Form 3 is to serve as a formal demand notice form an operational creditor to a corporate debtor, requiring payment of an unpaid operational debt, which is a prerequisite for initiating CIRP under section 9 of the IBC. Essential contents of this form include the total amount of the debt, details of the transactions leading to the debt, the date from which the debt began accruing, the amount claimed, any securities held, the certificate of incorporation, records of previous defaults, the legal provisions under which the debt arose, and documents supporting the claim. Form 3 should be used when the operational debt is undisputed and the creditor possesses documentary proof of the debt, such as invoices, contracts, or bank statements, which can be attached to the notice. The scenario where documentary proof is available is critical, if the creditor relies on a demand notice in Form 3, they must attach documents proving the debt, and the notice must not be issued by a lawyer on behalf of the creditor, as such a notice is not considered valid under section 8(1) of the IBC.
Form 4 of the IBC: Notice of Unpaid Operational Debt with Invoice
Form 4 is designed for situations where the operational debt is based on an invoice. The essential contents of Form 4 include the invoice details, the amount to be in default, the date on which the default occurred, and a statement that the right to make an application is not barred by limitation. It also requires a statement that if the corporate debtor does not pay the unpaid debt within ten days of receiving the notice, an insolvency resolution process will be initiated. Form 4 should be used when the operational debt is based on a transaction that generates an invoice, and the invoice itself acts as the proof of liability. In such cases, the copy of the invoice must be attached to the notice in Form 4. The demand notice or the copy of the invoice demanding payment must be delivered to the corporate debtor at its registered office, registered post, speed post with acknowledgement due, or by electronic mail to a whole-time director, designated partner, or key managerial personnel. A copy of the notice or invoice must also be filled with an information utility, if any.
Differences Between Form 3 and Form 4 of the IBC in tabular form
| Aspect | Form 3 | Form 4 |
| Basis | A demand notice for unpaid operational debt, during the date of the default to be explicitly mentioned to ascertain the debt amount and default date from documents. | A form for filing a claim by an operational creditor when, such as a homebuyer, when the debt is not covered by Form 3. |
| Documentation | Must include the date of default and supporting proving the purchase and supply of goods or services for which the operational debt is claimed. | Requires documentation to substantiate the claim, such as invoices or contracts, but does not require the specific date of default as a mandatory element. |
| Applicability | Applicable to operational creditors seeking to initiate CIRP for an unpaid operational debt. | Applicable to operational creditors who need to file a claim but are not covered by the specific requirements of Form 3 |
| When it should be chosen | Should be chosen when an operational creditor intends to initiate CIRP under section 9 of the IBC by sending a demand notice for an unpaid operational debt. | Should be chosen when an operational creditor needs to file a claim against a corporate debtor, particularly when the claim does not fall under the specific mandate of Form 3. |
Impact of Improper Use of Forms
The improper use of forms in any application can lead to legal consequences of filing an application with inaccurate or incomplete forms, including the potential rejection of the application under section 9(5)(ii)(d) of the IBC. The importance of accuracy in filing cannot be overstated, as even minor errors or omissions in forms can result in the application being dismissed without consideration of the merits, especially since the Adjudicating Authority is required to assess the existence of a despite or the validity of the default claim based on the information provided.
Best Practices for Operational Creditors
It is important for operational creditors to maintain accurate records and timely submissions is essential to avoid procedural delays and to strengthen the application’s validity, which can be accomplished by:
- Choosing the correct form.
- Ensuring compliance with timelines in the IBC and its rules or regulations.
- Maintaining comprehensive supporting evidence.
Conclusion : Forms 3 and 4 of the IBC
The importance of Form 3 and Form 4 lies in their role as a mandatory pre-condition, ensuring that the corporate debtor is formally notified of the default before the CIRP process begins, thereby upholding the principle of due process. A failure to properly service the demand notice, especially if the debtor’s existence at the given address is doubtful, can render the operational creditor’s application invalid. Therefore, operational creditors must exercise rigorous legal diligence in selecting the correct form, ensuring proper service of the notice, and attaching all necessary supporting documents, to avoid the risk of the insolvency application being rejected.
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