Supply-side creditors under the IBC and the MSME route

Section 5(20) defines an operational creditor as a person to whom an operational debt is owed, including an assignee. Section 5(21) defines operational debt as a claim in respect of the provision of goods or services, including employment, or a debt for dues under any law payable to the Central Government, a State Government or a local authority. An employee's unpaid salary and a statutory authority's dues are therefore operational debts, and so is a supplier's invoice.

In Consolidated Construction Consortium Ltd. v. Hitro Energy Solutions Pvt. Ltd. the Supreme Court held that a purchaser who paid an advance for goods that were never supplied is an operational creditor, because the definition turns on the claim's nexus with the provision of goods or services, not on whether the creditor was the supplier or the receiver. Where a person is owed both kinds of debt, section 21(4) treats it as a financial creditor for the financial debt and an operational creditor for the rest. Under section 21(5) an operational debt assigned to a financial creditor remains an operational debt in the assignee's hands.

Section 8(1) requires the operational creditor to deliver a demand notice or a copy of the invoice demanding payment of the amount in default. Section 8(2) gives the company ten days from receipt to bring to the creditor's notice the existence of a dispute, if any, or the record of a suit or arbitration filed before the receipt of the notice or invoice, or to show payment by an attested record of electronic transfer or of an encashed cheque.

Only after those ten days pass without payment or a notice of dispute may the creditor file under section 9(1). Section 9(3) requires a copy of the notice or invoice, an affidavit that no notice of dispute was received, a bank certificate confirming non-payment if available, and an information utility record if available. Under section 9(5)(ii)(d) the Tribunal must reject the application if a notice of dispute has been received or there is a record of dispute in the information utility.

Section 76 makes it an offence for an operational creditor wilfully or knowingly to conceal in a section 9 application that the company notified a dispute or a full and final payment. The punishment is imprisonment of not less than one year, extending to five years, or a fine of not less than one lakh rupees extending to one crore rupees, or both.

Section 5(6) says that a dispute includes a suit or arbitration relating to the existence of the amount of debt, the quality of goods or service, or the breach of a representation or warranty, and the list is not exhaustive. In Mobilox the Supreme Court held that the Tribunal, when it examines the reply, only has to see whether there is a plausible contention requiring further investigation, and that the dispute is not spurious, hypothetical, illusory or a patently feeble legal argument. It does not decide whether the defence will succeed. A breach of a non-disclosure agreement, raised in correspondence before the notice, was enough on those facts.

In Transmission Corporation of Andhra Pradesh Ltd. v. Equipment Conductors and Cables Ltd. the Supreme Court set aside an Appellate Tribunal order that had threatened a corporate process over a debt that an arbitration had already rejected as time-barred and that the High Court had held unenforceable. The Code is not a substitute for a recovery forum, and a creditor whose claim is genuinely in dispute has to establish it elsewhere first.

Section 8(2)(a) gives separate weight to a suit or arbitration filed before the notice was received. Where the supplier has already sued on the invoices or started arbitration, the company can answer the notice with the record of that proceeding, and the section 9 application fails on that ground.

Section 15 of the MSMED Act requires a buyer to pay a supplier on or before the date agreed in writing, or before the appointed day where there is no agreement, and caps any agreed period at forty-five days from acceptance or deemed acceptance. Section 16 makes the buyer liable, notwithstanding any agreement or any other law, to pay compound interest with monthly rests at three times the bank rate notified by the Reserve Bank. Section 17 makes the amount and the interest recoverable.

Under section 18 either party may refer a dispute about an amount due under section 17 to the Micro and Small Enterprises Facilitation Council. The Council conciliates, and if conciliation fails it arbitrates itself or refers the dispute to an institution, and the reference is to be decided within ninety days. In Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. the Supreme Court held that Chapter V of the MSMED Act overrides an arbitration agreement between the parties, that the Council may act as arbitrator after conducting the conciliation, and that supplier status is tested on the date of the contract.

In Silpi Industries v. Kerala State Road Transport Corporation the Court held that the Limitation Act applies to arbitration under section 18(3), that a buyer may bring a counter claim in that arbitration, and that a supplier who registered only after completing the supplies cannot use Chapter V for them.

Once a process is admitted on anyone's application, the public announcement under section 13 calls for claims, and an operational creditor files its claim with the interim resolution professional. The committee of creditors under section 21 is made up of financial creditors. Under section 24(3)(c) operational creditors whose aggregate dues are not less than ten per cent. of the debt receive notice of the committee's meetings, and section 24(4) lets one representative attend without any right to vote. The proviso to section 21(8) provides for a differently constituted committee where the company has no financial creditors.

The operational creditor's protection is in the plan. Section 30(2)(b) requires every plan to pay operational creditors not less than the higher of their liquidation entitlement under section 53 and what they would receive if the plan amount were distributed in the section 53 order. An appeal against the plan lies under section 61(3)(iii) where the debts of operational creditors have not been provided for in the specified manner.

In the section 53 waterfall most trade suppliers fall under clause (f), any remaining debts and dues, after the resolution and liquidation costs, the workmen and relinquishing secured creditors, other employees for twelve months, unsecured financial creditors, and government dues for two years with the unpaid part of enforcing secured creditors. Workmen's dues for twenty-four months rank in clause (b), and employees' wages for twelve months in clause (c), even though both are operational debts.

A supplier who also holds a director's personal guarantee for the buyer's debts can proceed on it separately, because the company's moratorium under section 14(3)(b) does not protect a surety.

Reconcile the account and get the buyer's confirmation of the balance if possible, because the Tribunal's first question is whether there was a dispute before the notice. Gather the purchase orders, delivery proof, invoices, acceptance records and any correspondence about quality or quantity, and check whether a debt record with an information utility exists, since section 9(5) treats a record of dispute in the utility as fatal.

Fix the date of default and check limitation: in Consolidated Construction the Court applied Article 137 of the Limitation Act to a section 9 application and counted the three years from the date of default, which on those facts was the final refusal to pay. Where the supplier is a registered micro or small enterprise and the buyer is solvent but slow, a reference under section 18 of the MSMED Act carries the interest under section 16 and a ninety-day timetable, without putting the buyer through a corporate process.