Demand Notice Under IBC

DEMAND NOTIE UNDER IBC

WHAT IS THE PROVISION FOR DEMAND NOTICE?

Insolvency & Bankruptcy Code (for brevity “the Code”) provides a mechanism for demand of unpaid debt from a corporate debtor.

An operational creditor is required to serve a demand notice to the corporate debtor, under Section 8(1) of the Code, towards an unpaid operational debt.

In Swiss Ribbons Pvt. Ltd. and Ors Vs UOI and Ors (2019) 4 SCC 17, the SC held that,

“the scheme of Section 7 stands in contrast with the scheme under Section 8 where an operational creditor is, on the occurrence of a default, to first deliver a demand notice of the unpaid debt to the operational debtor in the manner provided in Section 8(1) of the Code…”

Under Explanation to Section 8 of the Code a “demand notice” means a notice served by an operational creditor to the corporate debtor demanding payment of the operational debt in respect of which the default has occurred.

Section 5(20) defines “operational creditor“

as a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;

A financial creditor can trigger insolvency by filing an application directly under Section 7 of the Code. It is not required to serve any demand notice.

in Innoventive Industries Ltd. Vs ICICI Bank and Anr. (2018) 1 SCC 407, SC held that “the scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins.”

Default is defined in Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and payable, which includes non-payment of even part thereof or an instalment amount. The Code gets triggered the moment default is of rupees one lakh or more. (Section 4).

The term debt under Section 3(11), treats it to be a liability or obligation in respect of a “claim” and for the meaning of claim.

For claim we have to go back to Section 3(6) which defines claim to mean a right to payment even if it is disputed, undisputed, secured, unsecured, right to remedy for breach of contract, etc.

The claim which is un-disputed or clean debt or a dispute free debt can be demanded under a demand notice in terms of the provisions of the Code.

WHY IS THERE A NEED FOR FORM 3 & FORM 4?

A demand notice is to be served in FORM No. 3 or FORM No. 4 as prescribed under the Rule 5 of Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (for brevity “Rules, 2016“).

Ultimately, the purpose of these Forms is to inform about the details of a transaction, an existence of a debt, amount of debt, date of default, details of such default and debt, documents, etc.

In Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353, the SC has categorically dealt with FORM 3 and FORM 4 and held that the Operational Creditor shall serve a Demand Notice in FORM No. 3 or copy of the invoice in FORM No. 4 as contained in the Rules, 2016.

These forms are very crucial in as much as it forms the bedrock i.e demand notice,  for an initiation of IBC proceedings. Hence, every due care has to be taken in intimating the date of default and amount of operational debt.

IS THERE ANY MANDATORY REQUIREMENT TO REQUIREMENT TO ENCLOSE INVOICES ALONGWITH A DEMAND NOTICE?

It is pertinent to refer the heading of FORM No. 3 which reads as “Form of Demand Notice/Invoice Demanding Payment under the Insolvency and Bankruptcy Code, 2016”.

The answer lies in sr. no. 7 of FORM No.3 which calls for attaching documents to prove an existence of operational debt and default.

The header of FORM No. 4 reads as “Form of notice with which the invoice demanding payment is to be attached”.

Therefore, it is categorically mandated to provide an invoice if raised along with the Demand Notice under IBC.

To know more about the demand notice and other aspects related to demand notices under IBC, please feel free to connect with our IBC expertised law firm in Mumbai & Ahmedabad.

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