The Insolvency and Bankruptcy Code, 2016 (IBC) represents a landmark reform in India's financial and legal landscape. It provides a structured mechanism for addressing insolvency and default by companies, with the goal of maximizing asset value and ensuring time-bound resolution. Among its core provisions, Section 8 plays a critical role in enabling operational creditors to initiate the corporate insolvency resolution process (CIRP).
This article aims to provide a comprehensive explanation of Section 8, its procedural requirements, implications, and legal relevance within the broader framework of the IBC.
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Purpose of Section 8 of IBC
Section 8 outlines the preliminary step an operational creditor must take before initiating insolvency proceedings under Section 9. The goal is to provide the corporate debtor with an opportunity to either
Acknowledge and settle the outstanding operational debt, or
Bring to notice any pre-existing dispute regarding the claim.
This process ensures due process, prevents frivolous applications, and balances the rights of both the creditor and debtor.
Who is an Operational Creditor?
An operational creditor is defined under Section 5(20) of the IBC as any person to whom an operational debt is owed. This includes entities or individuals supplying goods or services to a company, or any dues arising from employment, government levies, or other operational transactions. Common examples include vendors, service providers, employees, or regulatory authorities.
Check out the article and find corporate law courses to gain specialisation in this field of law.
Section 8 of IBC: Key Provisions
This section breaks down the practical meaning of Section 8 of the IBC, 2016, helping readers understand the rights, steps, and timelines involved for operational creditors and corporate debtors.
1. Operational Creditor Can Start the Process: Sub-section (1)
If a company (called a "corporate debtor") fails to pay for goods or services received, the supplier or service provider (called an "operational creditor") has the legal right to begin the insolvency process.
But before doing so, they must formally inform the company about the default and demand payment.
2. Sending a Demand Notice: Sub-section (1)
The first step is to send a written demand notice to the company that owes money. This notice
Must clearly state the amount due.
Should include relevant documents like invoices.
Must follow the format prescribed by the insolvency rules.
This step serves as an official warning and gives the company a chance to pay before legal action is taken.
3. 10 Days to Respond: Sub-section (2)
Once the company receives the notice, it has 10 calendar days to reply. During this time, the company has two main options:
(a) Raise a Dispute
If the company believes there is a legitimate reason not to pay—such as poor service, defective goods, or an ongoing legal dispute—it must share documents or proof showing that the disagreement existed before the notice was sent.
This protects companies from being pushed into insolvency due to genuine disagreements.
(b) Prove the Debt is Paid
If the payment has already been made (even partially), the company can send bank records or other proof (like cheque clearance) to show that the debt has been settled.
This ensures that insolvency proceedings are not started based on outdated or incorrect information.
4. What If There’s No Response?
If the company does not reply within 10 days—or cannot prove that the debt is disputed or paid—the operational creditor is legally allowed to file an application before the National Company Law Tribunal (NCLT) under Section 9 to initiate the insolvency resolution process.
Significance of Pre-existing Disputes
A central safeguard in Section 8 is the clause concerning the existence of a dispute. The IBC, as interpreted by judicial forums such as the Supreme Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2017), mandates that the dispute must be genuine and must exist prior to the issuance of the demand notice.
This provision ensures that operational creditors do not misuse the insolvency process as a recovery mechanism in cases of bona fide disagreements.
Amendments and Legislative Clarifications
The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 made certain terminological changes to Section 8. For instance
The word "repayment" was replaced with "payment" to clarify the nature of obligation.
The conjunction in clause 2(a) was revised to “if any, and” to ensure both dispute and its legal record are mandatory where claimed.
These subtle yet impactful changes have strengthened the integrity of the insolvency initiation process.
Practical Implications and Legal Compliance
Section 8 serves both as a notice mechanism and a compliance requirement. From a legal standpoint
For Operational Creditors
It is mandatory to issue the demand notice before approaching the NCLT under Section 9.
The notice must be supported with accurate documentation, including invoices, agreements, and proof of service.
For Corporate Debtors
The 10-day timeline is strictly enforced.
Timely production of payment evidence or dispute documentation can effectively bar the initiation of CIRP.
Failure to respond or refute the claim within this period significantly weakens the corporate debtor’s position in the tribunal.
Illustrative Example
Take the example of ABC Ltd., a company that makes things, buying raw materials from XYZ Traders worth 10 lakhs. XYZ sends numerous reminders after supplying the goods but still doesn't receive payment. This is when XYZ sends a demand notice under Section 8. ABC Ltd. doesn't answer within 10 days, doesn't dispute anything, and doesn't show proof of payment. In order to start the insolvency resolution process, XYZ must file an application under Section 9.
Summary
Section 8 of the Insolvency and Bankruptcy Code, 2016, is one of the most important parts of making sure that the bankruptcy process is fair and protecting operational creditors. It offers a structured route for initiating insolvency proceedings, with an emphasis on genuine default and resolution over mere debt recovery. It is very important for both creditors and debtors to strictly follow this rule, as any failure to do so could have serious legal and financial consequences.
As the IBC continues to evolve through jurisprudence and amendments, Section 8 remains a vital gateway for operational creditors to access remedies in the event of corporate default.
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Section 8 of IBC: FAQs
Q1. Is it mandatory to send a demand notice before initiating insolvency?
Yes, issuance of a demand notice under Section 8 is a mandatory prerequisite before filing an application under Section 9 of the IBC.
Q2. How much time does the corporate debtor have to respond?
The corporate debtor must reply within 10 days of receiving the demand notice, either by raising a dispute or proving that payment has been made.
Q3. What qualifies as a valid dispute under Section 8(2)(a)?
A valid dispute must be pre-existing and supported by documentation, such as pending lawsuits or arbitration proceedings filed before the receipt of the demand notice.
Q4. Can an operational creditor initiate insolvency if the dispute is raised after the demand notice?
No. Only disputes that were raised or filed before the demand notice are considered valid. Post-notice disputes do not prevent insolvency proceedings.
