Section 8 of IBC – Insolvency and Bankruptcy Code, 2016
Table of Contents
Briefly introduce the Insolvency and Bankruptcy Code, 2016 (IBC) is India’s unified law for resolving insolvency and bankruptcy cases in a time-bound manner. Section 8 of IBC enables operational creditors, such as suppliers, service providers, etc. to initiate the insolvency resolution process against a defaulting company by issuing a formal demand notice. This is significant because it streamlines a complex, multi-layered process, ensuring that operational creditors have a clear legal pathway for timely payment of their dues, thereby protecting smaller businesses and service providers. Let’s explore the provisions, procedure, and judicial interpretation of Section 8 under the IBC.
Understanding Section 8 of the IBC, 2016
Section 8 of IBC, establishes the procedural requirement for an operational creditor to deliver a demand notice of unpaid operational debt or a copy of an invoice to the corporate debtor upon the occurrence of a default, serving as the mandatory first step towards initiating the insolvency process. This notice must be issued in the prescribed form and manner, clearly stating the amount due and supported by relevant documentation such as invoices. The provision mandates that the corporate debtor must respond within 10 days of receiving the existence of a pre-existing dispute or the record of pending litigation or arbitration proceedings, or by proving that the debt has been paid. This notice and response mechanism is crucial as it ensures due process, prevents frivolous applications, and allows the corporate debtor a fair opportunity to resolve the matter before insolvency proceedings are initiated under section 9 of the IBC.
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Key Provisions of Section 8 of IBC
Section 8(1): Demand Notice or Invoice of Unpaid Operational Debt
The operational creditor must deliver a demand notice or a copy of invoice demanding payment to the corporate debtor. Under Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, an operational creditor issues a demand notice in either Form 3 or Form 4 for unpaid operational debt. Form 3 is a detailed notice, while Form 4 is a simpler notice requiring an attached copy of the unpaid invoice. Both forms must include details of the creditor and debtor, the debt amount, transaction specifics, and the date of default. The notice must be delivered to the corporate debtor’s registered office, allowing a 10 day period for payment or dispute resolution.
Section 8(2): Corporate Debtor’s Response
The corporate debtor must respond to a demand notice within 10 days. The response must either show proof of payment or highlight a pre-existing dispute. This communication, or lack thereof, is a criticail factor for the Adjudicating Authority when determining the admissibility of a section 9 application. Without a proper reply, the operating creditor gains the right to file for insolvency.
Objective Behind Section 8 of the IBC
- Section 8 ensures fairness and transparency before initiating insolvency proceedings.
- By mandating a demand notice and response period, it provides a chance to settle disputes outside the tribunal.
- This provision creates a jurisdictional filter, it prevents frivolous or malicious insolvency applications.
Procedure for Operational Creditors under Section 8 of IBC
For a successful application under section 8 of the IBC, an operational creditor must follow these steps:
- Identify default in payment by the corporate debtor: The operational creditor must establish that a minimum threshold of debt is due and has not been paid by the corporate debtor.
- Issue demand notice or invoice copy in Form 3 or Form 4: The creditor must deliver a formal demand notice to the debtor requesting payment of the unpaid operational debt.
- Wait for 10 days for the debtor’s response: The corporate debtor has a 10 day period from receiving the notice to either repay the debt or notify the creditor of a pre-existing dispute.
- If payment is not made and no dispute exists, the creditor can proceed to file a Section 9 application: After the 10 day period expires, if the debt remains unpaid and there is no record of a prior dispute, the credit can initiate the insolvency process by filing an application with the NCLT.
Importance of ‘Pre-Existing Dispute’
Proving that there is a “pre-existing dispute” is necessary to prevent the misuse of insolvency proceedings for debt recovery where a genuine dispute exists. It provides a corporate debtor an opportunity to respond to a demand notice by proving the existence of a dispute before the case can be admitted by the NCLT. According to the Supreme Court’s judgment in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., the existence of a plausible dispute before the notice date is a valid defense for a corporate debtor against an insolvency application. The ruling clarified that section 8 of the IBC is intended for genuine insolvency resolution, not as a debt recovery tool, and applications must be rejected if a true dispute exists.
Role of the Demand Notice under Section 8 of IBC
The demand notice is important for the insolvency process, particularly:
- Acts as formal communication of default.
- Serves as evidence in NCLT proceedings.
- Allows the corporate debtor a final opportunity to resolve or dispute the claim before the insolvency process.
Case Laws Interpreting Section 8 of IBC
The Supreme Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. clarified that an “existence of dispute” under the IBC does not require a pre-existing suit or arbitration. A plausible and credible dispute before the receipt of a demand notice is sufficient to reject an insolvency application from an operational creditor. Further in Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd., the court ruled that a demand notice for an unpaid operational debt can be issued by an advocate on behalf of the operational creditor. This overturned previous rulings and affirmed an advocate’s right to act for their client in preparatory steps for insolvency proceedings. In the Transmission Corporation of A.P. Ltd. v. Equipment Conductors and Cables Ltd. the court held that the IBC cannot be used as a substitute for debt recovery mechanism and reiterated the importance of a pre-existing dispute. It emphasised that operational creditors must strictly comply with the requirements of section 8, including showing the absence of a genuine dispute, before initiating insolvency proceedings.
Common Mistakes to Avoid
To ensure that their Section 8 of IBC application is admitted, operational creditors needs to avoid these mistakes:
- Not sending the notice in correct form (Form 3 or 4).
- Failure to provide supporting invoices or proof of delivery.
- Ignoring the existence of pre-litigation disputes.
- Filing a Section 9 application prematurely.
Practical Tips for Operational Creditors
To avoid any procedural or statutory steps, it is important for operational creditors to:
- Maintain documented communication and invoices.
- Conduct due diligence before sending a notice.
- Clearly mention the amount of debt, date of default, and payment instructions.
- Always retain proof of delivery (email, registered post, etc.).
Conclusion
Section 8 of the IBC mandates that an operational creditor must deliver a demand notice to the corporate debtor, offering an opportunity for resolution before formal insolvency proceedings begin. This critical pre-insolvency step promotes fairness by allowing the debtor to either settle the debt or raise a genuine dispute. An operational creditor’s compliance with section 8 is a jurisdictional prerequisite for a successful application under section 9. A well-drafted demand notice under Section 8 often becomes the decisive step in enforcing operational creditor rights under the IBC.
FAQs
Q1. What is Section 8 of the Insolvency and Bankruptcy Code, 2016?
Section 8 of IBC provides for an operational creditor to send a formal demand notice to a corporate debtor for the repayment of an unpaid operational debt.
Q2. How many days does a corporate debtor have to respond to a Section 8 notice?
A corporate debtor has 10 days to respond to a section 8 notice under the IBC.
Q3. What happens if no response is received under Section 8 of IBC?
If the debtor fails to pay the debt or fails to notify the creditor of a pre-existing dispute, the operational creditor is legally entitled to file an application before the NCLT under section 9 to initiate the insolvency process.
Q4. Can an advocate issue a Section 8 notice?
An advocate can issue a section 8 notice under the IBC if they are duly authorized by the operational creditor and hold a position with or in relation to the operational creditor.
Q5. What is the importance of a “pre-existing dispute”?
A pre-existing dispute can prevent the initiation of the insolvency process if it existed before the operational creditor served a demand notice, ensuring that frivolous or post-notice disputes cannot derail legitimate claims.
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