The Insolvency and Bankruptcy Code, 2016 (IBC) is a transformative piece of legislation in India, designed to streamline the resolution of insolvency and bankruptcy for corporate entities, partnership firms and individuals. It provides a structured, time-bound framework to address financial distress, maximize asset value and balance the interests of stakeholders. A key feature of the IBC is the mechanism it offers operational creditors, those who provide goods or services to initiate insolvency proceedings against corporate debtors who default on payments. This process begins with a demand notice, formally known as Form 3 under the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, which must include a critical document: the invoice for the unpaid debt, often referred to as Form 4 Insolvency and Bankruptcy Code.
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Overview of the Insolvency and Bankruptcy Code, 2016
The IBC was enacted on May 28, 2016 and it consolidates and amends laws related to insolvency resolution and bankruptcy in India. Prior to the IBC, the insolvency processes were fragmented across Companies Act, 2013 and the Sick Industrial Companies (Special Provisions) Act, 1985, which led to delays and inefficiencies. The IBC addresses these issues by providing a unified framework that promotes entrepreneurship, enhances credit availability and ensures timely resolution of distressed assets.
The IBC applies to corporate persons, partnership firms and individuals, with specific provisions for each. For corporate entities, the corporate insolvency resolution process (CIRP) is a key mechanism, which allows creditors to seek resolution or liquidation of a debtor’s assets. The Insolvency and Bankruptcy Board of India (IBBI) oversees the implementation of the IBC, regulating insolvency professionals, agencies and information utilities.
Who Are Operational Creditors?
Under the IBC, creditors are divided into two main categories: financial creditors and operational creditors. Financial creditors are those who have lent money or provided financial assistance and generally involving interest-bearing instruments like loans or bonds. Operational creditors, on the other hand, are those to whom an operational debt is owed. According to Section 5(20) of the IBC, operational debt includes claims arising from:
The provision of goods or services
Employment (e.g., unpaid wages)
Dues to statutory authorities (e.g., taxes or regulatory fees)
Examples of operational creditors include vendors, suppliers, service providers, employees and government bodies. These creditors play a vital role in the IBC framework, as their claims often arise from day-to-day business operations.
Read about Liquidation Procedure under Section 33 of IBC.
Section 8: Insolvency Resolution by Operational Creditors
Section 8 of Insolvency and Bankruptcy Code, 2016, outlines the process for operational creditors to initiate the CIRP against a corporate debtor upon default. A default occurs when a debtor fails to pay a debt that is due and payable. The process begins with the operational creditor delivering a demand notice to the corporate debtor, demanding payment of the unpaid operational debt.
The demand notice serves two primary purposes
It formally notifies the debtor of the default and demands payment within a specified period.
It provides the debtor an opportunity to settle the debt or raise a dispute before insolvency proceedings are initiated.
Section 8(1) specifies that the demand notice must be delivered in the prescribed form and manner, which is detailed in the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. The corporate debtor has 10 calendar days from the receipt of the notice to respond by either paying the debt or raising a pre-existing, bona fide dispute supported by evidence, such as pending litigation or arbitration proceedings.
Understanding Form 4 of IBC
Form 4, in the context of the Insolvency and Bankruptcy Code, 2016, refers to the invoice or bill that an operational creditor must attach to the demand notice (Form 3) to substantiate the claim of an unpaid operational debt. While the official rules designate Form 3 as the format for the demand notice itself, Form 4 Insolvency and Bankruptcy Code is often used to describe the accompanying invoice, which provides evidence of the debt.
The invoice (Form 4) typically includes
Date of Supply: When the goods or services were provided.
Amount Due: The total amount owed by the corporate debtor.
Payment Terms: Details of when the payment was due and any agreed-upon terms.
Description of Goods/Services: A clear outline of what was supplied to establish the legitimacy of the claim.
The inclusion of Form 4 Insolvency and Bankruptcy Code ensures that the demand notice is complete and legally valid since it provides tangible proof of the debt. Without a valid invoice (Form 4), the demand notice may be deemed insufficient and might hinder the creditor’s ability to proceed with insolvency proceedings.
Importance of Form 4
Form 4 serves as undeniable evidence of the debt by enabling the operational creditor to establish a default under the IBC. The invoice must be clear, accurate and complete to ensure the demand notice is legally sound. Without a valid Form 4, the NCLT may reject the creditor’s application, as the invoice is critical to proving the existence and amount of the debt.
Form 4 Insolvency and Bankruptcy Code also plays a role in maintaining transparency and fairness in the insolvency process. By requiring creditors to provide detailed invoices, the IBC makes sure that the debtors are fully informed of the claims against them and gives them a fair opportunity to respond before legal proceedings escalate.
Legal and Practical Considerations
The use of Form 4, as part of the demand notice is governed by strict legal requirements. The Supreme Court in Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd. (2017) clarified that the demand notice can be issued by an authorized agent or lawyer on behalf of the operational creditor, broadening access to the process. Additionally, the invoice (Form 4) must be accurate and verifiable, as discrepancies could lead to disputes or rejection by the NCLT.
Operationally, creditors must ensure that Form 4 Insolvency and Bankruptcy Code is properly formatted and includes all necessary details to avoid delays or challenges. The 10-day response period is strictly enforced and debtors must act promptly to avoid triggering insolvency proceedings.
Also read about the Role of NCLT under Section 60 of IBC.
The Demand Notice Process
The process of initiating insolvency proceedings under Section 8 of IBC, 2016 involves some steps. Given below is a breakdown of these steps
1. Preparation of the Demand Notice: The operational creditor prepares a demand notice in Form 3 according to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules of 2016. This notice must include details such as the creditor’s and debtor’s names and addresses, the amount of the debt and a statement of default. The invoice (Form 4) is attached to substantiate the claim.
2. Delivery of the Demand Notice: The demand notice, along with Form 4, must be delivered to the corporate debtor in one of the following ways
By hand, registered post, or speed post with acknowledgement due to the debtor’s registered office.
By electronic mail to the whole-time director, designated partner, or key managerial personnel of the corporate debtor. Additionally, a copy of the demand notice must be filed with an information utility, if available, as per Rule 5(3) of the rules.
3. Debtor’s Response: Upon receiving the demand notice with Form 4, the corporate debtor has 10 calendar days to respond. The debtor can
Pay the outstanding amount in full.
Raise a dispute, which must be pre-existing and supported by evidence (e.g., a pending lawsuit or arbitration). The Supreme Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2017) clarified that disputes must be genuine and not frivolous.
4. Next Steps: If the debtor fails to respond within 10 days or provides an inadequate response (e.g., no payment and no valid dispute), the operational creditor can file an application with the NCLT under Section 9 to initiate the CIRP. The application must include the demand notice (Form 3), the invoice (Form 4) and other supporting documents, such as bank statements confirming non-payment.
Step | Description | Form Involved | Timeline |
Prepare Demand Notice | Operational creditor drafts Form 3, attaching the invoice (Form 4). | Form 3, Form 4 | Before sending |
Deliver Notice | Notice sent via post or email to debtor’s registered office or key personnel. | Form 3, Form 4 | Upon default |
File with Information Utility | Copy of notice filed with an information utility, if available. | Form 3, Form 4 | Concurrent with delivery |
Debtor’s Response | Debtor must pay or raise a dispute within 10 days. | None | Within 10 days of receipt |
File Application with NCLT | If no response or inadequate response, creditor files under Section 9. | Form 5, includes Form 3 and Form 4 | After 10 days |
Summary
Form 4 Insolvency and Bankruptcy Code is understood as the invoice attached to the demand notice (Form 3), is a vital component of the insolvency resolution process for operational creditors under the Insolvency and Bankruptcy Code, 2016. It provides evidence of the debt and enables the creditors to demand payment and initiate the CIRP. By understanding the role and requirements of Form 4, operational creditors can navigate the IBC framework effectively along with ensuring timely resolution of unpaid debts. The clarity and transparency provided by Form 4 Insolvency and Bankruptcy Code contribute to the IBC’s goal of fostering a robust and efficient insolvency ecosystem in India.
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Form 4 Insolvency and Bankruptcy Code: FAQs
Q1. What is Section 4 of the IBC Code?
Section 4: IBC applies to cases where the minimum default amount is ₹1 crore for initiating insolvency proceedings against a corporate debtor. It sets the threshold for triggering the corporate insolvency resolution process (CIRP).
Q2. What is Form 3 and Form 4 of IBC?
Form 3 is a demand notice format used by operational creditors to demand payment of unpaid operational debt, while Form 4 is a notice accompanying an invoice for the same purpose. Both are used under Rule 5(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, to initiate insolvency proceedings.
Q3. What is Rule 4 of IBBI?
Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, outlines the procedure for financial creditors to file an application (in Form 1) to initiate the corporate insolvency resolution process (CIRP) under Section 7 of the IBC. It details the required documents and fees.ca2013.comblog.
Q4. What is the minimum amount for insolvency?
The minimum default amount for initiating insolvency proceedings under the IBC is ₹1 crore for corporate debtors as per Section 4. This threshold ensures only significant defaults trigger the insolvency process.
Q5. What happens when you claim insolvency?
When insolvency is claimed, a creditor files an application to initiate the corporate insolvency resolution process (CIRP). If accepted by the Adjudicating Authority, an insolvency professional manages the debtor’s assets and a resolution plan is developed or liquidation is pursued if no plan is viable.
