Proactive process to act as hedge against IBC notices – Eshwars
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Proactive process to act as hedge against IBC notices

Vendor payments and demand notice under Insolvency and Bankruptcy Code, 2016 (the “Code”)

More often than not, businesses are faced with issue of a vendor or supplier, providing or rendering low or deficient quality goods or services and as a natural consequence, payment of invoices in respect of such deficient supply of goods and rendering of services gets disputed with a vendor and thereby the invoices remain unpaid either in full or in part.

On most occasions, the reasons for the non-payment of the invoices are internally recorded by the procurement team and the finance team may book the invoice but not make payment against the same nor convey the reason for the non-payment to the vendor.

Under the Code, if a sum of money in excess of Rs. 1 lakh is not received by an operational creditor (vendor), then he is entitled to send to his customer a demand notice in Form 3 of the Code and allow a period of 10 days for the customer to either pay the outstanding amount or to show if there is any `pre-existing dispute’ (i.e) a dispute that was in existence even prior to sending the demand notice.

Pre-existing dispute

Companies on receiving the Form 3, write to the vendor and give reasons for not effecting payment and on most occasions, the response to the Form 3 is the first instance when the company puts on record the reasons for the payment denial.

NCLT does not consider such responses to be a `pre-existing dispute’ and looks at the extent of correspondence that has been done for denial of payment prior to the response to such demand notice.

Information Utility

Recently, the first Information Utility viz: The National e-Governance Services Ltd., under the IBC has commenced its operations, which will serve as the repository of legal evidence relating to debt due by companies. – the Information Utility will accept, store and make readily available authenticated financial information submitted by creditors, which will help in establishing defaults as well as verify claims under the Insolvency and Bankruptcy Code, 2016 expeditiously, so as to facilitate completion of the insolvency resolution transactions under the Code in a time-bound manner.

The Information Utility (“IU”) has established a process, whereby a vendor of the business uploads to the IU the details of its invoices due to it and these details are sent to the customer for confirmation within a time bound manner. The customer is required to either confirm the invoice or should raise a dispute.

Vendor and Customer

It is essential for a company to adopt different processes, from the perspective of the Code, for dealing with payment due to a vendor and for payment due from a customer – which if necessary would enable the company to proceed against the customer under the Code.

Protection from Vendor action

The reasons for denial of payment towards the vendor invoices could be many. In order to be able to show the existence of a `pre-existing dispute’, it is important that the company correspond with the vendor and write to them in detail (email or snail mail or in the manner specified in the supply agreement, if entered into), and document therein the reasons as to why they are unable to effect payment for the invoice(s). When a vendor invoice comes for confirmation from the Information Utility and the company were to dispute the invoice, then it would have to mark a dispute over it and thereafter write to them as stated above, if not already done.

When such reasons are recorded, then the only methodology for the vendor to claim the amount is through a civil suit or through arbitration if there is an arbitration agreement. The NCLT will then consider it as a `pre-existing dispute’ under the Code and would thereby not admit the application, as the Code is not an enactment for recovery of money, but only a mechanism for resolving insolvency of a company.

Proactive action for successful redressal under the Code in respect of Payments due from Customer

When goods or services are rendered and even if there is no dispute in connection with the quality of the goods or services supplied, some customers do not pay. The reason for the non-payment in such cases is, either the customer has cash flow issues or the customer defaults in making payment for no specific reason. It is the second category of customers (i.e) those who do not make payment for no specific reason despite there being no defects/issues in the supply itself, against whom, one would like to take action under the Code.

One of the documents that can be enclosed as a part of the demand notice under the Code, is a certificate from an IU confirming that there is no record of dispute in connection with the operational debt. The ability to make a claim on a customer under the Code, when relationship sours, increases if there is a record of the amount with the IU and there is no record of dispute in respect of the same.

It may be a good practice for companies to start filing with the IU, details of all its invoices due from the customer company (not available if the customer is not a company under the companies act) and send it to them for their acceptance through the IU, in addition to its usual practice.


While filing of operational debt under the Code with an IU is not mandatory, the process of submitting details of debt with an IU would assist businesses to initiate Insolvency proceedings under the Code on its customers when the relationship between the two turn sour.

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