Innoventive Industries Ltd. v. ICICI Bank (2017)

This is the first substantial ruling on the Code and it remains the standard statement of how a s. 7 application works. Where Swiss Ribbons explains why the Code exists, Innoventive explains what the Adjudicating Authority actually does when a financial creditor knocks on the door: it looks for a debt, it looks for a default, and it does not conduct a trial. The decision also supplies the contrast between the financial creditor's route under s. 7 and the operational creditor's route under s. 8, which is the single most examinable structural point in Unit 1.

The appellant corporate debtor resisted an application made by its financial creditor on the footing that a State enactment suspended its liabilities, so that nothing was presently payable. The dispute therefore turned on whether a debt that the debtor says is interdicted by another law can be a debt "due" for the purposes of the Code, and on how far the Adjudicating Authority may go into the debtor's objections at the admission stage.

• Object. One of the important objects of the Code is to bring insolvency law in India under a single unified umbrella, with the object of speeding up the insolvency process.
• Claim. A claim under s. 3(6) means a right to payment, even if it is disputed.
• Debt. A debt is disputed so long as the debt is due, that is, payable, unless interdicted by some law, or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the Adjudicating Authority that it may reject an application, and not otherwise.
• Default. Default is defined in s. 3(12) in very wide terms as non-payment of a debt once it becomes due and payable, which includes non-payment of even part of it or of an instalment amount.
• Operational creditor. An operational creditor means a person to whom an operational debt is owed, and an operational debt under s. 5(21) means a claim in respect of the provision of goods or services.
• The two routes. The scheme of s. 7 stands in contrast with the scheme under s. 8, where an operational creditor must, on the occurrence of a default, first deliver a demand notice of the unpaid debt to the operational debtor in the manner provided in s. 8(1).
• Pre-existing dispute. The moment there is pre-existence of a dispute, the operational creditor gets out of the clutches of the Code.

Read the definitions as a chain and the machinery follows. A claim is a right to payment and survives dispute; the dispute goes to whether the claim is good, not to whether it is a claim. A debt is the liability in respect of a claim. A default is simply non-payment once the debt is due and payable. Because default is defined so widely, the enquiry at admission is narrow: is there a debt, and has it not been paid? The debtor's answers are confined to the two propositions the Court identified — that the debt is not payable because some law interdicts it, or that it is payable only at a future date — and the burden of proving one of those to the Adjudicating Authority's satisfaction lies on the debtor.

The contrast with s. 8 is deliberate. The financial creditor deals in money and its default is recorded and provable at once, so it may apply directly. The operational creditor deals in goods and services, where genuine disagreements about quality, quantity and performance are routine, so the Code interposes a demand notice and lets the debtor surface a dispute. That is why a pre-existing dispute is fatal to the operational creditor's application and irrelevant to the financial creditor's.

1. Any problem on admission under s. 7 should begin with the Innoventive chain: claim, debt, default; then the two permitted defences; then the conclusion that the Authority may not embark on a wider inquiry.
2. Any question comparing financial and operational creditors should use the s. 7 / s. 8 contrast as its spine, and close with the pre-existing-dispute rule.
3. What it does not decide. It does not decide what counts as a genuine dispute — that is the work of Mobilox. It does not decide whether the Authority ever has a discretion to refuse admission despite a proved default; that question was reopened later and then closed by amendment.

Section 7(5) has since been substituted. The Adjudicating Authority is now to admit where it is satisfied that a default has occurred, the application is complete and no disciplinary proceeding is pending against the proposed resolution professional, and a clarificatory Explanation states that where those requirements are complied with, no other ground shall be considered to reject the application. A further Explanation makes a record of default held with an information utility, filed by a financial institution, sufficient to ascertain the existence of default. The substituted provision also requires a notice to rectify defects and reasons in writing where the fourteen-day period is exceeded. The Innoventive reading of debt and default is untouched; the statutory machinery around it has tightened.