Importance of Demand Notice under the Insolvency & Bankruptcy Code

The Insolvency and Bankruptcy Code, 2016 (IBC) mandates it for a complainant to send a demand notice under ibc to a creditor before initiating corporate insolvency resolution proceedings. The Code along with Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 lays certain legal provisions which guide the procedure for filing insolvency proceedings of a company by a creditor. Insolvency proceeding before NCLT can be filed through corporate lawyers.

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According to the insolvency law, a financial creditor and operational creditor can file insolvency proceedings against a defaulter company after establishing that a dispute exists between the parties. The first step is to send a demand notice (Form 3 of ibc) to the corporate defaulter for recovery of operational debt under insolvency code. For creditors who are not financial creditors and operational creditors, example: homebuyers, a “Form F” is required to be submitted in order to file a claim. Good corporate lawyer will draft a demand notice on your behalf based on the facts and details of the operational debt to be recovered.

Form 3 of the Insolvency and Bankruptcy Code, 2016 is basically an invoice demanding payment in respect of the unpaid operational debt due from the corporate debtor. The notice pertains details such as the total amount of debt, the details of transactions, date from which the debt begin accruing, amount claimed by the creditor, securities (if any), certificate of incorporation in case of a company, records of previous defaults (if any), legal provisions under which the debt has arisen, documents supporting the claim filed by the creditor, etc.

The demand notice under insolvency & bankruptcy code also gives a deadline of 1o days to the debtor to repay the debt. If the debtor fails to do so, then insolvency proceedings shall be initiated against him. A copy of the said demand notice by financial creditor is also sent to the relevant Adjudicating Authority. For sending the notice consult corporate lawyer online

Section 8 of the Insolvency and Bankruptcy Code further stipulates the following:

1. An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.

2. The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor—

• The existence of a dispute, if any, and record of the pendency of the suit or

• Arbitration proceedings filed before the receipt of such notice or invoice in relation to

• Such dispute;

• The repayment of unpaid operational debt—

1. By sending an attested copy of the record of the electronic transfer of the unpaid amount from the bank account of the corporate debtor; or

2. By sending an attested copy of the record that the operational creditor has encashed a cheque issued by the corporate debtor.

Explanation—For the purposes of this section, a "demand notice" means a notice served by an operational creditor to the corporate debtor demanding repayment of the operational debt in respect of which the default has occurred.”

Rule 5 of the IBC Rules 2016 states as follows:

“Demand notice by operational creditor.—

1. An operational creditor shall deliver to the corporate debtor, the following documents, namely.-

• A demand notice in Form 3; or

• A copy of an invoice attached with a notice in Form 4.

2. The demand notice or the copy of the invoice demanding payment referred to in sub-section (2) of section 8 of the Code, may be delivered to the corporate debtor,

• At the registered office by hand, registered post or speed post with acknowledgment due; or

• By electronic mail service to a whole-time director or designated partner or key managerial personnel, if any, of the corporate debtor.

3. A copy of demand notice or invoice demanding payment served under this rule by an operational creditor shall also be filed with an information utility if any.”

A reading of Section 9 of the Code reveals that a financial creditor has the right to initiate insolvency proceedings against the debtor after the expiry of 10 days. The creditor has to file all the documents before the National Company Law Tribunal along with a copy of the demand notice sent to the debtor company.

The text of the section reads as follows:

1. After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8 of ibc, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8 of ib code, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.

2. The application under sub-section (1) shall be filed in such form and manner and accompanied by such fee as may be prescribed.

3. The operational creditor shall, along with the application furnish—

• A copy of the invoice demanding payment or insolvency notice delivered by the operational creditor to the corporate debtor

• An affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt

• A copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor

• And such other information as may be specified

4. An operational creditor initiating a corporate insolvency resolution process under this section may propose a resolution professional to act as an interim resolution professional.

5. The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order-

    a) admit the application and communicate such decision to the operational

             the creditor and the corporate debtor if,—

• the application made under subsection (2) is complete;

• there is no repayment of the unpaid operational debt;

• the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor;

• no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility; and

• there is no disciplinary proceeding pending against any resolution professional proposed under subsection (4) if any.

    b) reject the application and communicate such decision to the operational creditor and the corporate debtor, if—

• the application made under subsection (2) is incomplete

• there has been repayment of the unpaid operational debt

• the creditor has not delivered the invoice or notice for payment to the corporate debtor

• notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility

• any disciplinary proceeding is pending against any proposed resolution professional

Provided that Adjudicating Authority, shall before rejecting an application under sub clause (a) of clause (ii) give a notice to the applicant to rectify the defect in his application within seven days of the date of receipt of such notice from the Adjudicating Authority. (6) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5) of this section.” For safeguard and protection of interest it is imperative that famous corporate lawyers are consulted. With the online legal aggregators, you can find lawyer online.

In the matter of Era Infra Engineering Limited V/s Prideco Commercial Services Private Limited, the National Company Law Appellate Tribunal (NCLAT) propounded on the issue whether the Corporate Insolvency Process Order passed by Hon'ble Adjudicating Authority and subsequent appointment of Insolvency Resolution Professional and declaration of moratorium period on the basis of an application filed by Operational Creditor under Section 9 of I&B Code 2016 was correct as the Operational Creditor had failed to issue demand notice as required under Section 8 of the I&B Code 2016. The creditor had in past served demand notice under Section 271 of Companies Act, 2013 and was relying on the said demand notice.

NCLAT observed that serving of notice under Section 271 of Companies Act, 2013 cannot be considered as sufficient insolvency notice as required to be served under Section 8(1) of I&B Code 2016 in the prescribed format. The Hon'ble tribunal, while deciding, observed that-

"Admittedly no notice was issued by Operational Creditor stipulated under Rule 5 in Form 3 has not been served. Therefore, in the absence of any expiry period of tenure of 10 days, there was no question of preferring an application under Section 9 of I&B Code 2016".

For more queries or confusion regarding the legal nitty-gritty of the importance of demand notice under the insolvency and bankruptcy code, ask for expert legal advice from us now!

The Authority further held that-

"The Adjudicating Authority has failed to notice therefore said facts and the mandatory provisions of law as discussed above. Though the application was not complete and there was no other way to cure the defect, the impugned order cannot be upheld".

Creditors other than financial and operational are required to submit a “proof of claim” to the interim resolution professional or resolution professional in person, by post or by electronic means, as per Section 9A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2017. This proof of claim is to be submitted under the Form F of the Schedule. The existence of the claim of the creditor referred under Form F may be proved on the basis of –

a) the records available in an information utility, if any, or b) other relevant documents sufficient to establish the claim, including any or all of the following:-

• documentary evidence demanding satisfaction of the claim;

• bank statements of the creditor showing non-satisfaction of a claim;

• an order of court or tribunal that has adjudicated upon non-satisfaction of claim, if any.

Homebuyers have to submit Form F to file a claim against builders in order to recover their money. The form enumerates some details like the name, address and other details of the creditor, amount of claim, documents in support of the claim and their details, particulars as to how the debt arose, details of set-off or any other mutual debts between parties, securities held (if any), account details where claim money shall be deposited, notarized affidavit & verification, etc. This amendment ensures that home buyers are able to claim their lost money.

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