In the dynamic world of commerce, defaults in payments and unresolved dues often become inevitable. While traditional civil remedies through civil suits or arbitration mechanisms remain available, they can be time-consuming and uncertain. In such cases, the Insolvency and Bankruptcy Code, 2016 (IBC) offers a robust, time-bound mechanism for creditors to initiate insolvency proceedings against defaulting corporate entities and seek resolution or liquidation.
This article delves into a hypothetical scenario of a commercial default and provides a comprehensive, step-by-step analysis of how an aggrieved party may seek a remedy under the IBC.
Hypothetical Scenario
Let us consider a fictional but plausible case:
Parties Involved:
- Company A (Operational Creditor): A supplier of high-quality electrical components.
- Company B (Corporate Debtor): A reputed automobile parts manufacturer operating across India.
The Default:
Company A entered into a valid and enforceable contract with Company B for the supply of electrical components worth ₹1.2 crore. Despite the successful delivery and issuance of invoices, Company B defaulted on the payments. Several email reminders and formal legal notices were sent by Company A, but no payment was forthcoming. Six months later, it became clear that Company B was undergoing financial stress and was unable to meet its obligations.
Company A, determined to recover its dues, decided to proceed under the Insolvency and Bankruptcy Code, 2016, recognising it as a more effective tool to secure repayment or restructure the debtor company.
Legal Recourse Under the IBC: Step-by-Step Procedure
The IBC offers a structured process for operational creditors to initiate insolvency proceedings against a corporate debtor. The steps below outline the complete lifecycle of a typical insolvency resolution process.
Step 1: Ascertain Eligibility and Default
Under Section 9 of the IBC, an Operational Creditor can initiate insolvency proceedings if the amount in default exceeds ₹1 crore (increased from ₹1 lakh by notification dated 24.03.2020).
- Company A’s defaulted amount is ₹1.2 crore.
- The debt is undisputed and backed by documentary evidence (invoices, delivery challans, email correspondence).
Conclusion: Company A qualifies as an operational creditor, and the default exceeds the statutory threshold.
Step 2: Issue Demand Notice (Section 8)
Before filing a formal application, the creditor must serve a demand notice on the corporate debtor, demanding payment of the outstanding debt.
- Notice must be sent in Form 3, accompanied by copies of invoices and supporting documents in Form 4.
- The corporate debtor has 10 days to either:
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- Pay the outstanding amount, or
- Dispute the debt by showing the existence of a prior dispute.
Note: If a dispute is raised, NCLT may refuse to admit the application.
Step 3: Filing Application Before NCLT (Section 9)
If the debtor neither pays nor disputes the debt within 10 days, the creditor may file an application for initiating Corporate Insolvency Resolution Process (CIRP) before the National Company Law Tribunal (NCLT).
The application must include:
- Copy of demand notice
- Proof of delivery of the demand notice
- Copy of invoices and work orders
- An affidavit under Rule 6 of the Adjudicating Authority Rules stating that there is no dispute
- Bank statements showing default
- Any other relevant documents
Jurisdiction: Application must be filed before the NCLT bench having territorial jurisdiction over the registered office of the debtor company.
Step 4: Admission of Application by NCLT
NCLT will verify:
- Whether the debt is operational in nature
- Whether the default has occurred
- Whether the demand notice was properly served
- Whether there exists any prior dispute
If satisfied, the NCLT:
- Admits the application
- Declares a moratorium under Section 14:
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- Prohibits the institution of suits or recovery proceedings
- Prohibits the transfer of assets or encumbrances
- Suspends any pending execution proceedings
- Appoints an Interim Resolution Professional (IRP)
Significance of Moratorium: It provides a breathing period to the debtor and prevents a scramble among creditors.
Step 5: Commencement of CIRP
Once admitted, the CIRP formally begins:
Role of the IRP:
- Takes control of the management and operations of the debtor company.
- Makes a public announcement inviting all creditors to submit their claims (Form B for operational creditors).
- Collates claims and constitutes the Committee of Creditors (CoC).
Committee of Creditors (CoC):
- Comprises only financial creditors, but operational creditors can attend meetings without voting rights if their dues exceed a prescribed threshold.
- CoC has the power to appoint a Resolution Professional (RP) to replace the IRP.
Timeline: CIRP must be completed within 180 days, extendable by a maximum of 90 days.
Step 6: Submission of Resolution Plans
The Resolution Professional invites potential Resolution Applicants (RAs) to submit Resolution Plans for the revival/restructuring of the debtor.
- Plans are evaluated on parameters such as feasibility, viability, and repayment to stakeholders.
- The CoC can approve a resolution plan by at least 66% voting shares.
- If approved, the plan is submitted to the NCLT for final approval.
Objective: Ensure revival of the company as a going concern and maximise value for stakeholders.
Step 7: If No Resolution Plan is Approved
If no resolution plan is approved within the stipulated timeline:
- The debtor company is directed to undergo compulsory liquidation under Section 33 of the IBC.
- A liquidator is appointed to sell the assets of the company.
- The proceeds are distributed as per the waterfall mechanism under Section 53.
Priority of Distribution:
- Insolvency resolution process costs
- Secured creditors and workmen’s dues (pari passu)
- Unsecured financial creditors
- Government dues and remaining employees
- Operational creditors (like Company A)
- Equity shareholders (last)
Caution: Operational creditors often receive a lower recovery in liquidation compared to financial creditors.
Final Remedy for the Operational Creditor (Company A)
Company A’s recovery depends on whether:
- A Resolution Plan is approved: it may receive negotiated payment terms, haircuts, or equity participation.
- The company goes into liquidation: Company A may receive a share of the liquidation proceeds, though it ranks lower in priority.
Despite the ranking, the IBC gives operational creditors a time-bound forum and statutory recognition to assert their claims, which was missing under previous civil and contract law mechanisms.
Key Takeaways for Legal and Business Professionals
- IBC provides speedy redressal and a credible deterrent against wilful defaulters.
- Operational creditors must maintain strong documentation (invoices, delivery receipts, emails) to avoid rejection on the grounds of “pre-existing dispute.”
- The process is highly technical and procedural, and legal assistance is often necessary.
- While the primary goal is insolvency resolution, early settlements often occur once a demand notice is issued, making IBC a strategic tool.
Conclusion
The Insolvency and Bankruptcy Code, 2016, has fundamentally reshaped the creditor-debtor dynamic in India by introducing time-bound and creditor-friendly remedies. For operational creditors, invoking the IBC is not just about recovery—it’s about asserting commercial discipline, enforcing accountability, and catalysing financial restructuring.
Whether you are a commercial enterprise, a legal practitioner, or a policy enthusiast, understanding the practical application of IBC is essential in navigating today’s complex financial ecosystem.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. The content may not reflect the most current legal developments and is not guaranteed to be accurate, complete, or up-to-date. Readers should consult a qualified legal professional before taking any action based on the information provided. The authors and publishers disclaim any liability for any loss or damage incurred as a result of reliance on this article. This article does not create an attorney-client relationship.