Sections 8 and 9 IBC: Demand Notice and Pre-existing Dispute

An operational creditor cannot go straight to the NCLT. It must first serve a demand notice and give the corporate debtor ten days to pay or point to a dispute. Only if neither happens can it apply under section 9, and even then the application fails if a genuine dispute existed before the notice. This two-step design keeps the Code from being used as a debt collection tool for contested bills. This note explains the procedure, the meaning of dispute and the leading cases.

Figure 1: The operational creditor's route

1. The Demand Notice, Section 8

• Section 8(1). On the occurrence of a default, the operational creditor may deliver a demand notice of the unpaid operational debt, or a copy of an invoice demanding payment, to the corporate debtor in the prescribed form (Form 3 or Form 4 of the Application to Adjudicating Authority Rules, 2016)
• Section 8(2). Within ten days of receipt, the corporate debtor must bring to the creditor's notice (a) the existence of a dispute, if any, or a record of the pendency of a suit or arbitration proceeding filed before receipt of the notice, or (b) the payment of the unpaid debt, with proof such as an encashed cheque or electronic transfer.
• Who may issue. In Macquarie Bank v Shilpi Cable Technologies (2017), the Supreme Court held that a lawyer may issue the notice on behalf of the operational creditor.
• Documents. The notice need not be accompanied by invoices; any document evidencing the debt, such as the contract for supply, will do (Consolidated Construction Consortium v Hitro Energy Solutions, 2022)
• Mandatory. An application under section 9 is not maintainable without a valid demand notice delivered to the corporate debtor.

2. Meaning of Dispute

• Section 5(6). Dispute includes a suit or arbitration proceedings relating to (a) the existence of the amount of debt, (b) the quality of goods or service, or (c) the breach of a representation or warranty.
• Inclusive definition. Since the word is includes, a dispute need not be pending in a suit or arbitration; any real dispute about these matters that existed before the notice is enough.

Figure 2: Separating real disputes from spurious defences

3. Mobilox Innovations v Kirusa Software, 2017

• Facts. Kirusa supplied services to Mobilox, which withheld payment alleging that Kirusa had breached a non-disclosure agreement; the NCLAT had admitted Kirusa's application.
• Holding. Decided on 21 September 2017, the Supreme Court set aside the admission because a dispute existed before the demand notice.
• The test. The NCLT must reject the application if there is a plausible contention requiring further investigation and the dispute is not a patently feeble legal argument or an assertion of fact unsupported by evidence; it must separate the grain from the chaff, but need not be satisfied that the defence is likely to succeed.
• Rationale. Insolvency proceedings are not a substitute for a suit or arbitration where the existence of the debt is genuinely contested.

4. Other Leading Cases

• K. Kishan v Vijay Nirman Company, 2018. Where an arbitral award is under challenge under section 34 of the Arbitration Act, a pre-existing dispute exists, and the operational creditor cannot use section 9 to enforce the award.
• Kay Bouvet Engineering v Overseas Infrastructure Alliance, 2021. Correspondence between the parties before the demand notice showing disagreement over the amount payable established a pre-existing dispute, and the application was dismissed.
• Macquarie Bank v Shilpi Cable Technologies, 2017. Besides upholding a notice by a lawyer, the Court held that the certificate from a financial institution under section 9(3)(c) is not a mandatory condition, so a foreign supplier without an Indian bank account may apply; the 2018 amendment added the words if available to that clause.

5. The Application, Section 9

• Section 9(1). After ten days from delivery of the notice, if the operational creditor neither receives payment nor a notice of dispute, it may file an application in Form 5.
• Section 9(3). The application must be accompanied by a copy of the invoice or notice; an affidavit that there is no notice of dispute; a copy of the certificate from the financial institution maintaining the creditor's accounts confirming non-payment, if available; a copy of any record with an information utility confirming non-payment, if available; and other proof of non-payment.
• Section 9(4). The operational creditor may, but need not, propose an interim resolution professional; if none is proposed, the NCLT obtains a recommendation from the IBBI.

Figure 3: Admission and rejection under section 9(5)

• Section 9(5). Within fourteen days, the NCLT admits the application if it is complete, the debt is unpaid, the notice was delivered, no notice of dispute was received and no dispute is recorded with an information utility, and no disciplinary proceeding is pending against any proposed resolution professional; otherwise it rejects it, after allowing seven days to cure any defect.
• Threshold and limitation. The default must be at least one crore rupees (section 4), and the application must be filed within three years from the date of default under Article 137 of the Limitation Act (Topic 18)

6. Comparison with Section 7

A financial creditor needs no prior notice and a dispute does not defeat its application; an operational creditor must serve a demand notice and fails if a plausible dispute existed before it. Section 7 also allows reliance on a default to any financial creditor, while section 9 concerns only the applicant's own unpaid operational debt. These differences reflect the Code's view that operational debts are more often contested and smaller in amount (Topic 81).

7. Frequently Asked Questions

Can a dispute raised for the first time in reply to the demand notice defeat the application?

Only if it is real and existed before the notice. A dispute invented in reply, with no earlier trace in correspondence or proceedings, is ordinarily treated as spurious, while one supported by earlier records defeats the application.

Does the NCLT decide whether the dispute is well founded?

No. Under Mobilox (2017), it only checks whether a plausible dispute exists. The merits are for a civil court or arbitral tribunal.

Can an operational creditor enforce an arbitral award through section 9?

Not if the award is under challenge under section 34 of the Arbitration Act, since the challenge shows a pre-existing dispute (K. Kishan, 2018). An award that has become final may be the basis of an application like any undisputed debt.

8. Related Topics

• Topic 9: Operational Debt and Operational Creditors. Who is an operational creditor.
• Topic 11: Section 7. The financial creditor's route.
• Topic 81: Section 7 vs Section 9. A side-by-side comparison.