Claim, Debt and Default under IBC: Sections 3 and 4

Every insolvency process under the Code rests on three linked definitions. A claim is a right to payment; a debt is a liability in respect of a claim that has become due; and a default is the non-payment of a debt when due. Section 4 then sets the minimum amount of default that can trigger corporate insolvency. These definitions decide who can apply, what must be proved and which claims are dealt with in the process. This note examines each of them, the kinds of creditors, the threshold and the leading cases on proof and admission.

Figure 1: The chain of definitions

1. Claim, Section 3(6)

• Definition. A claim means (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; or (b) a right to remedy for breach of contract under any law, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured.
• Breadth. The definition covers contingent, disputed and unliquidated claims, including claims for damages; this matters because all claims are submitted to and dealt with by the resolution professional or liquidator.
• Consequence. Claims not included in an approved resolution plan stand extinguished, so a creditor with any claim, however uncertain, must file it in time (Ghanashyam Mishra and Sons v Edelweiss ARC, 2021; Topic 42)

2. Debt, Section 3(11)

• Definition. A liability or obligation in respect of a claim which is due from any person, and includes a financial debt and an operational debt.
• Due. The liability must be presently owed; a claim that may arise in future is a claim but not yet a debt in default.
• Two kinds. Financial debt, disbursed against the consideration for the time value of money (section 5(8); Topic 7), and operational debt, arising from goods, services, employment or statutory dues (section 5(21); Topic 9)

3. Creditors

Section 3(10) defines creditor as any person to whom a debt is owed, including a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder.

Figure 2: Kinds of creditors

• Security interest, section 3(31). A right, title or interest or a claim to property created in favour of, or provided for, a secured creditor by a transaction which secures payment or performance of an obligation, including mortgage, charge, hypothecation, assignment and encumbrance, but not a performance guarantee.
• 2026 Explanation. The IBC (Amendment) Act, 2026 added an Explanation clarifying that a security interest arises only from an agreement or arrangement between parties and not merely by operation of law, displacing the reasoning of State Tax Officer v Rainbow Papers (2022), which had treated a statutory charge for tax dues as making the State a secured creditor (Topic 43)

4. Default, Section 3(12)

• Definition. Non-payment of debt when the whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor.
• Part payment. Non-payment of even part of a debt, or a single instalment, is a default.
• Default to others. For a financial creditor's application, the default may be in respect of a financial debt owed to any financial creditor, not only the applicant (Explanation to section 7(1))
• Innoventive Industries v ICICI Bank, 2017. For a section 7 application, the NCLT must ascertain only whether a financial debt exists and is in default; unlike section 9, a dispute about the debt does not by itself defeat the application.

5. Proof of Default and Admission

• How proved. By the record of an information utility, by documents such as loan agreements, statements of account and acknowledgments, or by a decree or recovery certificate; an information utility record is prima facie evidence (Swiss Ribbons, 2019)
• E.S. Krishnamurthy v Bharath Hi-Tech Builders, 2021. The NCLT cannot refuse admission merely to encourage a settlement; once the statutory conditions are met, it must decide the application on the merits.
• Vidarbha Industries Power v Axis Bank, 2022. Read the word may in section 7(5) as giving the NCLT discretion to refuse admission despite a default, for example where the debtor's dues were held up by a pending regulatory award; on review, the Court confined this to the facts of that case.
• M. Suresh Kumar Reddy v Canara Bank, 2023. Clarified that once a debt and default are established and the application is complete, it must ordinarily be admitted.
• 2026 amendment. The 2026 Amendment provides that the NCLT shall admit the application once default, a complete application and the absence of disciplinary proceedings against the proposed professional are established, removing the discretion recognised in Vidarbha, and requires orders on admission within fixed timelines (Topic 11)

6. Minimum Default, Section 4

• Text. Part II applies where the minimum amount of default is one lakh rupees, and the Central Government may by notification specify a higher amount not exceeding one crore rupees.
• Raised in 2020. By a notification of 24 March 2020, issued as the COVID-19 lockdown began, the minimum default was raised to one crore rupees.
• Madhusudan Tantia v Amit Choraria, 2022. The increase is prospective; applications filed before 24 March 2020 continue to be governed by the old threshold of one lakh rupees.
• MSME pre-packs. For pre-packaged insolvency of MSMEs, the minimum default notified in 2021 is ten lakh rupees (Topic 21)
• Amount of default. The threshold refers to the amount in default, not the total debt; joint applications by several financial creditors are permitted under section 7(1)

Figure 3: Thresholds and suspensions over time

7. Decrees, Awards and Statutory Dues

• Decrees and recovery certificates. A decree-holder is a creditor (section 3(10)); in Kotak Mahindra Bank v A. Balakrishnan (2022), the Supreme Court held that a liability under a recovery certificate issued by a Debt Recovery Tribunal is a financial debt and its holder a financial creditor; a decree or certificate also gives a fresh period of limitation (Dena Bank v C. Shivakumar Reddy, 2021; Topic 18)
• Arbitral awards. In K. Kishan v Vijay Nirman Company (2018), the Court held that an operational creditor cannot use the Code to enforce an arbitral award that is under challenge under section 34 of the Arbitration Act, since the pending challenge shows a pre-existing dispute (Topic 13)
• Statutory dues. Dues payable to the Central Government, a State Government or a local authority under any law are operational debts (section 5(21)), and the government is an operational creditor.

8. Frequently Asked Questions

Is every claim a debt?

No. A claim is a right to payment, including one that is contingent or not yet due. It becomes a debt only when the liability is due, and only a debt that is due and unpaid can be in default.

Can a default of fifty lakh rupees support an application today?

Not for corporate insolvency under sections 7, 9 or 10, which need a default of at least one crore rupees. It may support a pre-packaged process for an MSME, where the threshold is ten lakh rupees.

Does a dispute about the amount defeat a financial creditor's application?

No. Under section 7 the NCLT asks whether a financial debt exists and is in default. A dispute about part of the amount does not matter if a default above the threshold is shown, as held in Innoventive (2017).

9. Related Topics

• Topic 7: Financial Debt and Financial Creditors. Section 5(8) in detail.
• Topic 9: Operational Debt and Operational Creditors. Section 5(21) in detail.
• Topic 11: Section 7. Application by a financial creditor.