IBC Section 40: Admission or rejection of claims

Section 40 of Insolvency and Bankruptcy Code, 2016: Admission or rejection of claims

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

(1) The liquidator may, after verification of claims under section 39, either admit or reject the claim, in whole or in part, as the case may be:

Provided that where the liquidator rejects a claim, he shall record in writing the reasons for such rejection.

(2) The liquidator shall communicate his decision of admission or rejection of claims to the creditor and corporate debtor within seven days of such admission or rejection of claims.

Legal Commentary & Landmark Judgments: Section 40

Section 40 governs the admission or rejection of claims by the liquidator, requiring written recording of reasons for rejection and mandatory seven-day communication to the creditor.

Admission or Rejection Standard: The liquidator may, after verification of claims, either admit or reject the claim, in whole or in part.
Mandatory Written Reasons for Rejection: Where the liquidator rejects a claim, he shall record in writing the reasons for such rejection.
Strict 7-Day Communication Window: The liquidator shall communicate his decision of admission or rejection of claims to the creditor and corporate debtor within seven days of such admission or rejection.
Trigger for Statutory Appeal: The communication under Section 40 triggers the creditor's statutory right of appeal to the NCLT under Section 42.

Key Landmark Precedents:

Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17: The Supreme Court held that the requirement to record written reasons for rejection under Section 40 is a vital procedural safeguard against arbitrary liquidator determinations.
Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. (2023) 10 SCC 60: Affirmed that orders rejecting statutory or commercial claims under Section 40 are directly appealable before the Adjudicating Authority under Section 42.

Courtroom Practice & Strategic Litigation Guidance:

Never reject a claim without a reasoned speaking order. In the rejection letter, explicitly state the ground (e.g., limitation, lack of privity of contract, failure to produce original invoices) and notify the creditor of their 14-day appeal right under Section 42.