The Insolvency and Bankruptcy Code, 2016: A Blessing for Outstanding Trade Creditors

The Insolvency and Bankruptcy Code, 2016 (IBC) has helped the operational creditors i.e. outstanding trade creditors to recover their dues. The definition of Operational Creditors also includes employees within its ambit.

A rough estimate of the total cases filed in National Company Law Tribunal (NCLT) across the country shows that 70% or more of them have been filed by Operational Creditors to recover their dues.

If the corporate debtor does not make payment of the dues within a period of 10 days from the date of delivery of demand notice in Form 3 or a copy of an invoice attached with a notice in Form 4 demanding payment under sub-section (1) of section 8 of IBC or brings to the notice of operational creditor 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 operational creditor can file his application with NCLT within the jurisdiction of the registered office of the corporate debtor (“Adjudicating Authority”). The Adjudicating Authority, upon admission of such application of insolvency order for a moratorium for a period of 180 days with a onetime extension of 90 days.

Once the order for moratorium is passed, the Interim Resolution Professional (IRP) takes over the control of the corporate debtor and the management of affairs of the corporate debtor vests with the IRP. All the powers of the board of directors or the partners of the corporate debtor, as the case may be, stand suspended and are exercised by the IRP.

The IRP then collates all the claims received against the corporate debtor and after determining the financial position of the corporate debtor, constitute a Committee of Creditors (CoC) which includes both secured and trade creditors and is duty bound to work under the guidance and control of the CoC.

The next step here is the resolution of the corporate debtor under Regulation 37 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“IBBI Regulations”) and if the revival/resolution plan doesn’t work out for CoC, liquidation of the corporate debtor is the ultimate weapon in the hands of CoC.

In fact, IBC has gone ahead and stipulated in Regulation 38 of the IBBI Regulations that the resolution plan shall identify specific sources of funds that will be used to pay the liquidation value due to operational creditors and provide for such payment in priority to any financial creditor which shall, in any event, be made before the expiry of thirty days after the approval of a resolution plan by the Adjudicating Authority. Through this regulation, the IBC legislation has given preference for recovery of the outstanding dues of the corporate debtor payable to the business community at large or the employees, as the case may be, ahead of the financial creditors which hitherto were never thought of in our earlier legislations relating to recovery of money.

Further, Rule 5 (3) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, requires the Operational Creditor to file a copy of demand notice or invoice demanding payment served under this rule to be filed with an information utility, which at present is one, i.e. National E-Governance Services Limited (NESL) having its administrative office at Bengaluru and registered and corporate office at Mumbai. A copy of the demand notice or invoice demanding payment has to be submitted online with NESL at its website NESL does not acknowledge any hard copies of such demand notice or invoice demanding payment submitted with it.

A few public sector banks viz. State Bank of India, Oriental Bank of Commerce, Punjab National Bank and Union Bank of India have also signed information utility pacts with NESL.

The Information Utility serves the needs of the banking system by providing data to Insolvency Professionals/Adjudicating Authority/ Insolvency Bank Board of India about the borrowings/defaults committed by the corporate debtor.

Though, submission of a copy of demand notice or invoice demanding payment by an operational creditor to NESL is optional as per Rule 5 (3) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, it is advisable to submit this information to NESL due to the very objective behind constitution of NESL is to collect and collate data of defaults committed by the Corporate Debtor and provide it to the Financial Creditors as and when they require. The Financial Creditors may then use this data of defaults committed by the Corporate Debtor to gauge the creditworthiness of the Corporate Debtor.

Once this information is submitted with NESL, the corporate debtor may find it very difficult to smoothly run his business until and unless he settles his dues with the operational creditor or submits his reply of existence of dispute or pendency of suit or arbitration proceeding to the corporate debtor and conveys such settlement of dues or existence of dispute, as the case may be, in writing to the said Information Utility.

There have been instances wherein the debtors who were unwilling to pay even the principal amount of the outstanding trade creditors, upon receipt of the demand notice under IBC, has paid the principal amount along with the overdue interest.

The credible threat of loss of control of the corporate debtor and subsequent steps mentioned above, itself, act as a major deterrent to the promoters of the corporate debtor. The admission of insolvency application with the Adjudicating Authority may also result in the deterioration of credit ratings of the borrowings and depict an unsatisfactory picture about the financial soundness of the corporate debtor amongst the investors, its prospective customers and to the public at large.

Thus, this legal recourse made available to outstanding trade creditors has come as a real blessing to the operational creditors to recover their dues in a time bound and cost effective manner which otherwise was not possible for the operational creditor under any of the previous laws.


CS Nilesh Javker


CS Nilesh Javker is Assistant General Manager – Legal in the Legal Department of Welspun Group at its corporate office in Mumbai and working with Welspun Group since April 2010. He has interests in studying and research of various commercial laws such as Companies Act, 2013, Securities Laws, Insolvency and Bankruptcy Code, 2016, The Foreign Exchange Management Act, 1999, The Competition Act, 2002, The Arbitration and Conciliation Act, 1996. He has also worked extensively in company secretarial matters of both listed and unlisted companies, banking and finance documentation, contracts, tenders, agreements, civil litigations and corporate transactions such as mergers, demergers and acquisitions.

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