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An operational creditor and the right to file an application to initiate the insolvency resolution.

Author- Aprajita Bhardwaj, Founder at Lawschole.

Operational creditors are those whose liability from the entity comes from a transaction on operations[i]. In case of Uttam Galva Steel Limited[ii], the NCLT clarified that “business always runs keeping in mind the time value for money and transaction will be operational only if payment is to goods or services[iii]. An operational creditor has the right to file an application to initiate the insolvency resolution process against the corporate debtor, to file a claim in the insolvency resolution process and to participate, without voting rights, in a committee of creditors through their representatives.[iv] Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor. The expression default is wider than inability to pay. Therefore, it takes into its sweep the cases where default has occurred irrespective of anything else.[v] It is for the appellant to decide whether it comes within the meaning of Financial Creditor' or 'Operational Creditor'. If the appellant feels that if the company is an 'Operational Creditor' then before filing application under § 9, it will provide notice under § 8 to the Corporate Debtor' and follow all conditions of the Insolvency and Bankruptcy Code and Rules framed thereunder.[vi]

It would not be out of place to mention that according to the Sub-rule (1) of Rule 5 of the ‘Adjudicating Authority Rules’ mandates that the ‘Operational Creditor’ to deliver the demand notice to the ‘Corporate Debtor’ as mentioned in Form 3 or invoice attached with the notice in Form 4, as quoted below:

"Rule 5. (1) An operational creditor shall deliver to the corporate debtor the following documents, namely:-

a. a demand notice in Form 3; or

b. a copy of an invoice attached with a notice in Form 4."

The Appellate Tribunal while dealing with a case, decided that the Clause (a) and (b) of sub-rule (1) of Rule 5 as quoted above in respect to unpaid operational debt[vii], specifically decided that the procedural aspect of § 7 or § 9 and 10 of the Code are directory in nature and not mandatory[viii]. According to § 8 of the Code, this provision states that the operational creditor shall send demand notice or invoice to the operational debtor and wait for ten days, after which the debtor shall reply regarding the dispute in the matter and regarding acceptance or rejection of the payment amount. Once, the operational debtor fails to send a reply, the creditor after expiration of ten days can initiate a CIRP process against the operational debtor under § 9 of the Code. In Mobilox Innovations Private Limited v. Kirusa Software Private Limited, § 9(1) contains the conditions precedent for triggering the Code insofar as an operational creditor is concerned. The requisite elements necessary to trigger the Code are:

i. occurrence of a default;

ii. delivery of a demand notice of an unpaid operational debt or invoice demanding payment of the amount involved; and

iii. the fact that the operational creditor has not received payment from the corporate debtor within a period of 10 days of receipt of the demand notice or copy of invoice demanding payment, or received a reply from the corporate debtor which does not indicate the presence of a pre-existing dispute or repayment of the unpaid operational debt.[ix]

The scheme of § 7 stands in contrast with the scheme under § 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 § 8(1) of the Code. Under § 8(2), the corporate debtor can, within a period of ten days of receipt of the demand notice or copy of the invoice mentioned in Sub-§ (1), bring to the notice of the operational creditor regarding the existence of a dispute or the record of the pendency of a suit or arbitration proceedings, which is pre-existing-i.e. before such notice or invoice was received by the corporate debtor. The moment there is existence of such a dispute, the operational creditor gets out of the clutches of the Code.[x]



REFERENCES-

[i] Bankruptcy Law Reform Committee, Report of the Bankruptcy Law Reform Committee, Para 5.2.1 Vol. I (2015).

[ii] State Bank of India v. Uttam Galva Metallics Limited, (IB)-2054/(MB)/2018.

[iii] DF Deutsche Forfait AG and Ors v. Uttam Galva Steel Ltd., 45/I&BP/NCLT/MAH/2017.

[iv] Neelkanth Township and Construction Pvt. Ltd. vs. Urban Infrastructure Trustees Limited, MANU/NL/0063/2017.

[v] Capri Bathaid Private Limited vs. Angel Infrarealcon Private Limited, MANU/NC/0719/2017.

[vi] Paharpur Cooling Towers Ltd. vs. Dalmia Cement (Bharat) Ltd., MANU/NL/0233/2017.

[vii] Shriram EPC Limited and Ors. vs. Rio Glass Solar SA and Ors., MANU/NL/0157/2017.

[viii] Essar Steel India Limited and Ors. v. Reserve Bank of India and Ors, MANU/GJ/1563/2017

[ix]Mobilox Innovations Private Limited v. Kirusa Software Private Limited, MANU/SC/1196/2017

[x] Innoventive Industries Ltd. v. ICICI Bank and Anr., Civil Appeal Nos. 8337-8338 of 2017.





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