An Overview of Section 8- Demand Notice

The Insolvency and Bankruptcy Code of 2016 provides for the demand of an unpaid debt from a corporate debtor. The corporate debtor is given a chance to settle any outstanding debts before the insolvency proceedings commence. A notice is sent by the operational creditor to the corporate debtor as provided in Section 8 of the Insolvency and Bankruptcy Code of 2016, or IBC, for this very reason. The creditor can send a claim notice under Section 8 to the corporate debtor along with invoices from unpaid operational and financial debts. The corporate debtor is required to reply before the expiry of ten days from the receipt of the notice, failing which a petition for insolvency and liquidation shall be filed.

Insolvency and Bankruptcy Code allows the creditor to file insolvency proceedings against a defaulting debtor after establishing that a dispute exists between the parties. This is done by sending a demand notice to the corporate debtor from the operational creditor for the recovery of unpaid operational debt. The demand notice is to be sent under Form 3 of the Insolvency and Bankruptcy Code. Form 3 is an invoice sent to the corporate debtor demanding payment for the unpaid operational debt to the creditor. The notice shall contain details like, among other things, the total amount of debt, further information pertaining to the transaction, the date from which the debt accrued, amount claimed.

Demand Notice

A demand notice is defined under the explanation for Section 8 of IBC, 2016 as a notice which has been served by the operational creditor to the corporate debtor in order to demand payment of the unpaid operational debt pertaining to which a default has occurred. Demand notice also provides a deadline of 10 days for the corporate debtor to pay the amount of the operational debt. A copy of the demand notice, which has been sent to the corporate debtor, shall also be sent to the concerned adjudicating authority.

Section 8 of the Insolvency & Bankruptcy Code of 2016

The corporate debtor is required to inform the operational creditor by way of notice of the existence of any dispute or record of the pendency of any suit or arbitration proceedings in relation to the conflict, which was filed before the receipt of the notice or the invoice in relation to the dispute or the payment of an unpaid operational debt. The corporate debtor can also bring to the notice of the operational creditor of the payment of the outstanding operational debt either by sending an attested copy of the record showing proof of electronic transfer of the amount from the corporate debtor’s bank account or by sending a certified copy of a record that the operational creditor has encashed the cheque sent by the corporate debtor.

The notice to the operational creditor mentioned here is required to be sent within ten days of the receipt of the demand notice. If the operational creditor has not obtained the notice of the dispute within the period as mentioned above of 10 days or the payment has not been made, the operational creditor has the right to initiate insolvency proceedings by filing the application. The application shall be filed as per Form 5 at the relevant bench of the Hon’ble National Company Law Tribunal with jurisdiction over the registered office of the corporate debtor. The operational creditor is required to appoint a resolution professional to act on her behalf, and the adjudicating authority shall either reject the application or admit it within 14 days from the date of receipt of the notice. It is also mandated that the insolvency proceedings be completed before the expiry of 180 days from the date on which the application was admitted. After the expiry of 180 days, the resolution professional has the option to file an application to extend the aforementioned. Any appeal from the National Company Law Tribunal will lie to the National Company Law Appellate Tribunal before the expiry of 30 days from the date of passing of the order or decree.

Who is an Operational Creditor?

The term “operational creditor” is defined under Section 5(20) of the Insolvency & Bankruptcy Code of 2016 as someone to whom an operational debt is owed by a corporate debtor and includes any individual to whom a debt has been assigned or transferred legally.

The term “operational debt” is defined under Section 5(21) of the Insolvency & Bankruptcy Code of 2016 as “ claim in respect of the provision of goods and services including employment what are that respected the payment of dues arising country any law the time being in force impeccable the central government or any state government or a local authority”.

Operational creditors can be persons who have supplied goods and rendered services and are entitled to payment or employees who have rendered services for which they are entitled to payment or central government, state government or any local authority which has not yielded any benefits but is entitled to statutory dues. Statutory dues are payable under statutes like the Goods and Service Tax Act and shall be considered operational debts.

This is in contrast with a financial creditor. The term “financial creditor” is defined under Section 5(7) of the Insolvency & Bankruptcy Code of 2016 as ” any person to whom a financial debt is owed”. The term “financial debt” is defined under Section 5(8) of the Insolvency & Bankruptcy Code of 2016 as ” A debt along with which interest is accrued, if any, which is disbursed against the consideration for the time value of money”.

A financial debt is a debt which is owed to the financial creditor by the corporate debtor. It shall include an amount which the corporate debtor has borrowed against the payment of interest or an amount which has been raised against the issue of, among other things, bonds, stocks or liability incurred under a hire or lease purchase contract.

Who is a Corporate Debtor?

A corporate debtor is defined under Section 3(8) of the Insolvency and Bankruptcy Code of 2016 as any person who owes a debt to another. A corporate debtor can be a person, company, a limited liability partnership owing a debt to its creditors. A corporate debtor is liable to pay the amount of the unpaid debt owed to financial creditors and operational creditors.

If a corporate debtor is unable to make good on the promise to repay unpaid debt, the creditors can initiate insolvency and liquidation proceedings under the Insolvency & Bankruptcy Code of 2016.