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Introduction
Section 8 of the Insolvency and Bankruptcy Code, 2016 deals with the concept of delivering of demand notice by the operational creditor to the corporate debtor with regard to payment of the amount due to him. Further Section 9 of the Code deals with the application for the initiation of insolvency process against the corporate debtor being filed by the operational creditor as prescribed under the Act. Section 238 further deals with the concept of overriding effect of the Code over other laws. The court in this case interpreted various provisions constituted under the Act. Interpretation of the rules constituted for the clarification of provisions incorporated under the Code has also being interpreted by the Hon’ble Court in the present case along with the Section 30 of the Advocates Act. This case dealt with the matter raised under section 8, 9 and 238 of the Insolvency and Bankruptcy Code, 2016.
Facts
In the present case, the appellant i.e., Macquarie Bank Ltd. (hereby to be referred as appellant) has come in a contract with the respondent i.e., Shilpi Cable Technologies Ltd. (hereby to be referred as respondent). With effect of the contract the appellant became the original supplier with having rights, title, and interest in the supply agreement with the respondent. The respondent thus entered into the supply agreement against a certain amount of money, as per the agreement, the supplier will issue the invoices on the decided date the payment of which were to be made within 150 days from the issuance of the bill of lading. The bill of lading in this case were issued in the year 2015. The payment of the same has been due from the side of respondent, the appellant sends various reminder mails to the respondent for the payment of the amount due. The appellant further alleged that the respondent stated that he will sort out the pending matters. The appellant then issued notice under Section 433 and Section 434 of the Companies Act, 1956 of which the respondent replied that he does not owe any outstanding amount to appellant.
Section 433 of the Companies Act 1956 states that[1]:
Circumstances in which company may be wound up by Court. A company may be wound up by the Court, –
(a) if the company has, by special resolution, resolved that the company be wound up by the Court;
(b) if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting;
(c) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year;
(d) if the number of members is reduced, in the case of a public company, below seven, and in the case of a private company, below two;
(e) if the company is unable to pay its debts;
(f) if the Court is of opinion that it is just and equitable that the company should be wound up.
Further, Section 434 of the Companies Act, 1956 states that[2] :
Company when deemed unable to pay its debts.
(1) A company shall be deemed to be unable to pay its debts-
(a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor;
(b) if execution or other process issued on a decree or order of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part; or
(c) if it is proved to the satisfaction of the Court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the company.
(2) The demand referred to in clause (a) of sub- section (1) shall be deemed to have been duly given under the hand of the creditor if it is signed by any agent or legal adviser duly authorised on his behalf, or in the case of a firm, if it is signed by any such agent or legal adviser or by any member of the firm. Transfer of Proceedings.
After the enactment of the Insolvency and Bankruptcy Code, 2016 the appellant issued the demand notice at the registered office of the respondent, as per the provisions laid down under Section 8 of the Code for which the respondent replied that nothing is owed by him with respect to the contention filed by the appellant. The appellant filed the application for initiation of insolvency proceedings against the respondent under Section 9 of the Code. The NCLT rejected the application stating that as per Section 9(3) (c) of the Code, the application lacks the complying procedure of documents under the Act.
Section 9(3)(c) states that[3]:
“a copy of certificate from financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available”
The NCLT further stated that the dispute has not arisen under Section 9 of the Code but the same is filed upon the notice that was issued under section 433 and 434 of Companies Act 1956. Hence the application was dismissed.
The appellant filed the appeal in NCLAT against the order passed by NCLT. The NCLAT upheld the decision of NCLT on the ground that mandatory provision under the Act has not been complied by the appellant. It further stated that in such cases a lawyer is not authorised to issue demand notice under section 8 of the Code on behalf of the operational creditor. Hence the order passed by NCLT was upheld.
The appellant then further filed appeal in Supreme Court of India.
Issues in the case
The appeal filed before the Supreme Court raised the following two issues:
- Whether in relation to an operational debt, the provision contained under Section 9(3)(c) of the Insolvency and Bankruptcy Code, 2016 is mandatory?
- Whether the lawyer is eligible to issue demand notice of an unpaid operational debt on behalf of operational creditor?
Arguments from both the sides
The arguments raised by the appellant counsel and the respondent counsel are summarized below:
Argument by appellant counsel
- The first argument raised by the appellant counsel was that the co joint reading of section 9(3)(c) with Rule 6 and Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, it can be construed that section 9(3)(c) of the Code is not mandatory but directory in nature.
- The counsel further stated that the section is procedural in nature and hence there is no condition to be fulfilled before filing of the application under section 9(1). Further, section 9(5) makes it clear that if the certificate is not obtained by the financial institution of the corporate debtor regarding the unpaid amount of operational debt then in such case, this ground does not make the application to be rejected.
- It was further contended by the counsel that Section 30 of The Advocates Act and judgements with effect therefrom, the word “practice” when read in context to Advocates include practice in tribunals also. In other words, Section 30 of Advocates Act empowers the Advocates enrolled to practice in NCLT as well as NCLAT.
- The counsel further contended that section 5 of the Code laid down the definition of the term “person” which includes the person resident outside India, if read in relation to the operational debtor the same gives the impression that the operational creditor who is resident outside India is also eligible to file application against the corporate debtor for the initiation of the insolvency proceedings under the provision of Code.
Argument by respondent counsel
- The first counter arguments raised by the respondent counsel against the contentions of appellant counsel was, that the object of the code does not give rise to one to use it as one of the means of recovering of the debt, they further stated that the provision laid down under Section 9(3)(c) it is mandatory for the person who is filing an application for the initiation of corporate insolvency process against the corporate debtor to comply with the provision strictly. The documents as prescribed under the section should be attached in order to make a valid application.
- They further contended that in order to reject the application filed by operational debtor the only thing needed is the pre-existing dispute between the operational creditor and corporate debtor. Hence the provision under section 9 is considered as a judicial precedent and the expression “initial” and “shall” makes the section mandatory.
- They further stated that the consequences of not furnishing the application as per the requirement under section 9(3)(c)[4], section 9(5)(ii)(a) stated that the application which is incomplete in nature should be rejected.
Section 9(5)(ii) states that[5]:
“reject the application and communicate such decision to the operational creditor and the corporate debtor if:
- The application made under sub section (2) is incomplete.
- There has been payment of the unpaid operational debt.
- The creditor has not delivered the invoice or notice for payment of the corporate debtor.
- Notice of the dispute has not been received by the operational creditor or there is a record of dispute in the information utility, or
- Any disciplinary proceeding is pending against any proposed resolution professional.”
- They further contended that the lawyer is not eligible under section 8 to issue demand notice. The demand notice as per the provision of the Code can be issued by either the operational creditor or by the agent appointed thereto by him as authorized under the Code.
Judgement in the case
After hearing both the sides the decision laid down by the court in the present case was that the section 9(3) is not mandatory in nature and will not be construed as condition precedent and that the operational creditor can appoint a lawyer as an authorized agent under Section 8 of the Code in order to deliver the demand notice.
Thus, the order passed by the NCLAT was set aside by the Supreme Court of India.
Analysis of the case
- Decision on Issue no. 1 i.e., whether in relation to the operational debt, the provision contained under section 9(3)(c) is mandatory or not?
The court with regard to this issue held that in order to read section 9 of the Code the judge should see what is beneficial for the matter, he must not be strict to the laws laid down in the provision. The court further stated that the term person includes the operational creditor who is resident outside India. However, the same will not be eligible to apply for the financial institution in India. This section will be read as directory in nature. Hence it was held by the court that, the section 9(3) is not mandatory in nature and will not be construed as condition precedent. The court interpreted section 9 of the code. It stated that:
“It is true that the expression “initiation” contained in the marginal note to Section 9 does indicate the drift of the provision, but from such drift, to build an argument that the expression “initiation” would lead to the conclusion that Section 9(3) contains mandatory conditions precedent before which the Code can be triggered is a long shot. Equally, the expression “shall” in Section 9(3) does not take us much further when it is clear that Section 9(3)(c) becomes impossible of compliance in cases like the present. It would amount to a situation wherein serious general inconvenience would be caused to innocent persons, such as the appellant, without very much furthering the object of the Act.”[6]
- Decision on Issue no. 2 i.e., whether the lawyer is eligible to issue demand notice of unpaid operational debt on behalf of the operational creditor?
The court held in reference to this issue that the section 8 of the code states the term, “delivering of the demand notice” it does not state the issuance of the demand notice by the operational creditor. In other words, the section 8 of the Code states that the demand notice should be delivered by the operational creditor it does not state that the demand notice should be issued by the operational creditor. Hence, nowhere in the code it is written that the lawyers are prohibited to issue notice under the Code on behalf of the operational creditor.
Further, it was held by the court that prohibiting the Advocates from practicing in the Tribunal will affect Article 19 of the constitution which give freeness to practice the profession.
Conclusion to the case
The Court in the present case, rightfully protected the rights of the operational creditors as in this case. Those operational creditors who are resident of outside India if get cheated or affected by the act of the corporate debtor to whom the provisions of IBC 2016 would apply then in such case, the judges have to apply the modern approach towards the strict provisions of the code in such manner that the innocent person will not get affected and get justice.
As in the present case, the court protected the rights of the operational debtor by using literal approach towards the provision of section 9 of the Code. Also, to not to deprive the Advocates from practice of their profession, the Court held that depriving them for such practice will attract the violation of Article 19 of the Constitution of India.
From the present case, it can be concluded that the operational creditor can appoint a lawyer in order to issue the demand notice to the corporate debtor before initiating the insolvency proceedings against him.
References:
[1] www.indiankanoon.org/doc/1676812/
[2] www.indiankanoon.org/doc/1883142/
[3] Section 9(3) of IBC 2016
[4] Refer to page no. 3
[5] Section 9(5) of IBC 2016
