The Insolvency and Bankruptcy Code 2016 (IBC) provides two primary routes for creditors to initiate the Corporate Insolvency Resolution Process (CIRP) against a defaulting corporate debtor. These are Section 7 (application by a financial creditor) and Section 9 (application by an operational creditor). Understanding the distinction between these two routes is essential for any creditor considering action under the IBC.
Minimum default threshold: As revised in 2020, the minimum amount of default required to trigger CIRP under both Section 7 and Section 9 is ₹1 crore. Prior to this revision, the threshold was ₹1 lakh.
Who is a Financial Creditor?
Under Section 5(7) of the IBC, a financial creditor is a person to whom a financial debt is owed. A financial debt under Section 5(8) means a debt along with interest disbursed against consideration for time value of money. This includes:
- Banks and financial institutions — term loans, working capital facilities
- Non-Banking Financial Companies (NBFCs)
- Debenture holders and bond holders
- Holders of mortgage or charge over assets
- Persons who have advanced money under financial lease or hire purchase agreements
Who is an Operational Creditor?
Under Section 5(20) of the IBC, an operational creditor is a person to whom an operational debt is owed. An operational debt under Section 5(21) means a claim in respect of the provision of goods or services, employment, or dues arising under any law payable to the Central or State Government. This includes:
- Suppliers of goods and raw materials
- Service providers — contractors, consultants, vendors
- Employees (for dues beyond the period covered by the Employees' Provident Fund)
- Statutory creditors — unpaid taxes, duties
Section 7: Application by Financial Creditor
A financial creditor may apply under Section 7 of the IBC to initiate CIRP upon the occurrence of a default. The application is filed before the National Company Law Tribunal (NCLT) having jurisdiction over the registered office of the corporate debtor.
Key Features of Section 7
- No prior notice or demand is required before filing — the creditor can approach the NCLT directly upon default
- The NCLT must either admit or reject the application within 14 days of receipt
- The financial creditor must establish only the existence of a debt and a default — intent or wilfulness is not relevant
- A financial creditor may also file a joint application along with other financial creditors
Section 9: Application by Operational Creditor
An operational creditor must follow a two-step process before filing an application under Section 9.
Step 1: Demand Notice under Section 8
The operational creditor must first deliver a demand notice or a copy of the invoice demanding payment to the corporate debtor. This notice must be in writing and must state the amount of the unpaid operational debt.
Step 2: Waiting Period
After serving the demand notice, the operational creditor must wait 10 days. During this period, the corporate debtor may either pay the debt or raise a notice of dispute.
Critical distinction: If the corporate debtor raises a pre-existing dispute in response to the Section 8 demand notice, the Section 9 application cannot be admitted. A "dispute" under the IBC has been interpreted broadly by courts to include any bona fide dispute raised before the date of the demand notice.
Filing the Section 9 Application
If the corporate debtor does not pay or raise a valid dispute within 10 days, the operational creditor may file an application under Section 9 before the NCLT. The application must be accompanied by the demand notice, proof of delivery, and evidence of the unpaid debt.
Key Differences Summarised
Prior Notice Requirement
Section 7 requires no prior notice to the corporate debtor. Section 9 mandates a demand notice under Section 8 and a 10-day waiting period before filing.
Dispute as a Defence
In a Section 7 application, the corporate debtor cannot defeat admission merely by raising a dispute — only the existence of debt and default is relevant. In a Section 9 application, a pre-existing dispute is a complete defence to admission.
Role in CIRP
Financial creditors form the Committee of Creditors (CoC) which oversees the CIRP and approves the resolution plan. Operational creditors do not have a seat on the CoC unless their aggregate debt exceeds 10% of total debt, and even then only as observers without voting rights.