Why Section 9 of IBC Isn’t Your Solution for Debt Recovery?

In India, the Insolvency and Bankruptcy Code (IBC) is designed to aid the resolution of insolvency, not debt recovery. Under Section 9 of IBC, an operational creditor can initiate the corporate insolvency resolution process (CIRP) if they meet specific criteria. 

However, recent legal interpretations have made it clear that applications under Section 9 of IBC cannot be filed solely for the recovery of dues. The focus is on insolvency resolution, not as a tool for creditors looking to recover money, which falls under a different judicial framework.

The IBC was enacted to provide a systematic approach to insolvency and bankruptcy in India, aiming to assist creditors by ensuring timely resolution of insolvency cases. Section 9 of IBC is primarily directed at the initiation of the Corporate Insolvency Resolution Process (CIRP) by operational creditors against a corporate debtor for non-payment of “operational debts” like those for goods or services. Its role is thus confined to insolvency resolution, not as a mechanism for simple debt recovery.

In several landmark cases, such as Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., the adjudicating authority clarified that Section 9 of IBC is not meant to serve as a “recovery forum” for unpaid dues. Instead, it is intended for situations where the corporate debtor is genuinely insolvent and incapable of paying its operational debts. 

The authority underscored that the objective of IBC is to safeguard the overall financial stability of corporations rather than allow creditors to employ it as a tool to extract payments, often described as “debt collection” attempts, which could disrupt corporate stability​.

On September 10, 2024, the National Company Law Appellate Tribunal (NCLAT) in M/s Agarwal Foundries Pvt. Ltd. v. POSCO E&C India Pvt. Ltd. reaffirmed that applications under Section 9 of IBC cannot be utilized for recovery actions. This case reiterates the intention of Section 9 of IBC to address insolvency, not as a method for operational creditors to recover dues.

In this case, the appellant, M/s Agarwal Foundries Pvt. Ltd., supplied TMT bars to a contractor on the instruction of POSCO E&C India Pvt. Ltd. However, the payment remained unpaid, and M/s Agarwal sought to recover these dues by filing an application under Section 9 of IBC against POSCO, arguing that POSCO acted as a guarantor for the contractor. 

The National Company Law Tribunal (NCLT) initially rejected the application, which led the appellant to file an appeal before the NCLAT.

The NCLAT examined the following issues:

1. Operational Creditor Status: The appellant claimed it was an operational creditor due to POSCO’s alleged guarantee. However, NCLAT found no direct privity of contract or acknowledgment of such a guarantee from POSCO’s side.
2. Nature of Debt: The tribunal reiterated that an operational debt must be connected directly to the provision of goods or services. The invoices supporting the appellant’s claim were raised by third parties, weakening the argument that it was an operational debt owed by POSCO.
3. Limitation Period: NCLAT clarified that the limitation period begins from the date of default, not from the demand notice date, rendering the appellant’s claim time-barred.
4. Abuse of IBC Provisions: NCLAT criticized the appellant for misusing Section 9 of IBC provisions, noting a pattern of withdrawn applications filed under the guise of recovery rather than insolvency resolution.

The case serves as a strong example of how Section 9 of IBC is intended solely for genuine insolvency issues, not as an alternative to debt recovery and clarifies the boundaries of operational debt under IBC provisions​.

The Section 9 of IBC framework remains a crucial tool for operational creditors genuinely seeking resolution to insolvency issues. However, recent rulings have firmly set boundaries to ensure it is not misused for mere debt recovery:

Courts and tribunals have consistently held that Section 9 of IBC is intended to facilitate insolvency resolution rather than to serve as a substitute for civil remedies or debt recovery actions. Applications with recovery as the sole objective misuse the IBC framework, as underscored in the recent M/s Agarwal Foundries Pvt. Ltd. v. POSCO E&C India Pvt. Ltd. ruling​.

For a creditor to qualify as an operational creditor under Section 9 of IBC, the debt must arise directly from transactions between the creditor and the debtor, such as the direct supply of goods or services, as reiterated in NCLAT’s observations. Attempts to leverage indirect transactions or unverifiable guarantees do not satisfy this requirement​.

The limitation period under the Limitation Act, counted from the default date, is strictly applied in IBC cases. Applications falling outside this period are generally dismissed, barring any exceptions sanctioned by the court​.

The judiciary’s strict interpretation helps prevent operational creditors from filing multiple applications solely to exert pressure on corporate debtors. This approach ensures that the IBC mechanism remains true to its primary goal: aiding in the resolution of genuine insolvency situations rather than facilitating recoveries.

By reinforcing these principles, the judiciary safeguards the purpose of the IBC and maintains the integrity of the insolvency framework. For creditors seeking recovery, the proper avenue lies in civil courts or other specified legal channels, rather than attempting to bend the scope of Section 9 of IBC.