Facts of the Case

One Company named Uttam Galva Metallics (Corporate Debtor) (Respondent in the current case) did not make the payment to one bank named Macquarie Bank (Operational Creditor) (Appellant in the current case). The amount which was demanded by the bank amounted to 6,321,337 US dollars which is equal to Rs 4,11,15,190. The bank sent emails repeatedly to the respondent demanding the payment of the amount. The Respondent did not make payment even after receiving multiple emails. The bank then sent a statutory notice to the respondent under Section 433 and 434 of the Companies Act, these Sections stipulate for circumstances in which company may be wound up by Court and conditions for when a company is deemed to be unable to pay its debt, respectively. The Appellant made use of Insolvency and Bankruptcy Code (IBC) and gave a ‘Demand Notice’ to the Respondent under Section 8 of the IBC. The respondent in its reply denied the existence of debt and also questioned the Purchase Agreement. Hence, the appellants approached National Company Law Tribunal (NCLT) and started the Corporate Insolvency Resolution Process.

NCLT Ruling

The NCLT rejected the application of Corporate Insolvency Resolution Process on the ground that the application was devoid of the compulsory requirements under Section 9(3)(c) of the IBC. This Section required that a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor be attached with Insolvency Resolution Process Moreover, the bank being foreign it was held that it is not a ‘Financial Institution’ as per Section 3(14) of the IBC and thus it was held that it is not a certificate from a Financial Institution.

The second reason for rejecting the application was that there was already an existence of dispute before the Demand Notice was sent u/S 8(2)(a) of the IBC which was also raised at the time when a reply was made to the Statutory Notice which was furnished under  Section  433 and 434 of the Companies Act.

National Company Law Appellate Tribunal (NCLAT) Ruling

NCLAT upheld the NCLT’s order reason being that an application has to complete the statutory requirements u/S 9(3)(c) of the IBC and that the bank not being a Financial Institution u/S 3(14) of the IBC cannot issue a valid certificate signifying the payment/non-payment of a debt. The certificate being a compulsory requirement and it not being made by a financial institution the application remains incomplete.

Moreover, the tribunal paid heed to the Demand Notice and held that it should be made in compliance with Form 3 under Rule 5 of IBC Rules, 2016. Such Demand Notice was to be sent by the Operational Creditor himself or by a person authorized by him and a lawyer sending such Demand Notice would not suffice the Notice to be a Demand Notice u/S8 of the IBC. The appeal was rejected on these grounds.

Issues Before the Hon’ble Supreme Court

Issue 1: Whether a demand notice of an unpaid operational debt can be issued by a lawyer on behalf of the operational creditor?

Issue 2: Whether, in relation to an operational debt, the provision contained in Section 9(3)(c) of the IBC stipulating for the requirement of a Financial Institution’s certificate with respect to payment of the Debt is mandatory?

Contentions raised

Appellant’s Side:

Learned senior advocate appearing on behalf of the appellant, referred to various provisions of the Code. According to learned senior counsel, on a conjoint reading of Section 9(3)(c), Rule 6 and Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“Adjudicating Authority Rules”), it is clear that Section 9(3)(c) is not mandatory, but only directory and that, in the said section, “shall” should be read as “may”.

Further, according to learned senior counsel, Section 9(3)(c) is a procedural section, which is not a condition precedent to the allowing of an application filed under Section 9(1)

It was also stressed the fact that at the end of Form 5, what has to be attached to the application, by way of Annexure III, is a copy of the relevant accounts from banks/financial institutions maintaining accounts of the operational creditor confirming that there is no payment of the operational debt only “if available”. Also, according to learned counsel, this is only an additional document, which along with other documents that are mentioned in Item 8 of Part V, would go to prove the existence of the operational debt.

A further argument was made that the definition in Section 3(14), though exhaustive, is subject to context to the contrary and that, therefore, it is clear that a financial institution would include a bank outside the categories mentioned in Section 3(14) when it comes to an operational creditor who is a resident outside India.

Respondent’s Side:

According to learned senior counsel from the side of the Respondent, the object of the Code is not that persons may use the Code as a means of recovering debts. The Code is an extremely draconian piece of legislation and must, therefore, be construed strictly. If this is kept in mind, it is clear that Section 9(3)(c) is mandatory and requires to be complied with strictly or else the application should be dismissed at the threshold.

He stated that in the context of it being recognized by our judgments that a financial creditor and operational creditor are completely, differently and separately dealt with in the Code, and that so far as an operational creditor is concerned, it is important to bear in mind that a very low threshold is required in order that an operational creditor’s application be rejected, namely, there being a pre-existing dispute between the parties.

He contended that Section 9(3)(c) is a jurisdictional condition precedent, which is clear from the expression “initiation” and the expression “shall”, both showing that the Section is a mandatory condition precedent which has to be satisfied before the adjudicating authority can proceed further. According to learned senior counsel, a copy of the certificate from a financial institution is a very important document which makes it clear, almost conclusively, that there is an unpaid operational debt.

It was contended by the it is clear from the definition of “financial institution” contained in Section 3(14) that certain foreign banks are included within the expression “scheduled banks” under Section 3(14)(a) and that, under Section 3(14)(d), the Central Government may, by notification, specify other foreign banks as financial institutions.

It was argued that the consequence of not furnishing a copy of the certificate under Section 9(3)(c) is that, under Section 9(5)(ii)(a) the application that is made would be incomplete and, subject to the proviso, would have to be dismissed on that score.

According to the learned senior counsel, a lawyer’s notice cannot be given under Section 8, read with the Adjudicating Authority Rules and Form 5 therein. Either the operational creditor himself must send the requisite notice, or a duly authorized agent on his behalf should do so, and such authorized agent can only be an “insider”, namely, a person who is authorized by the operational creditor, being an employee, director or other person from within who alone can send the notice under Section 8 and sign the application under Section 9. It was also stated that it is clear, from Forms 3 and 5, that only a person authorized to act on behalf of the operational creditor can send the notice and/or sign the application. He stressed the word “position” with or in relation to the operational creditor and stated that this would also indicate that it is only an insider who can be so authorized by the operational creditor and not a lawyer.

Hon’ble Supreme Court’s Judgement

The Supreme Court held that Section 9(3)(c) of the IBC should be interpreted creatively and not in a restrictive way. As interpreting it in a restrictive sense would cause grave inconvenience to the appellants and other foreign banks which might land in a similar situation as that of present case.

It was observed that the certificate under Section 9(3)(c) of the IBC is a supportive document which proves the existence or non-existence of debt, which could be proved by other documents as well. Serious inconvenience will be caused if documents which are impossible to furnish are demanded from the appellants. If such documents are demanded by the way of strictly interpreting the provisions, it would impair the aims and objectives that the Code aspires to achieve.

While dealing with a second issue of whether a lawyer a can send a Demand Notice u/S 8 of the IBC. It relied on the case of Byram Pestonji Gariwala v. Union Bank of India[1], in this case a signature made by a lawyer on behalf of his client on a compromise document was held to effective in law.

Conclusion

The Hon’ble Supreme Court made great observations and saved the IBC to be wrecked as a piece of law riddled with procedural technicalities. The language was paid heed to and interpreted along with the aims and object that the IBC aims to achieve. Furthermore, by liberally interpreting the procedural aspects the creditors would be at ease putting in motion the proceedings under IBC against a debtor. It would also avoid the debtors from escaping their liability by pulling out the procedural loopholes in law while causing an inconvenience and injustice to an innocent creditor.

[1]  1992 (1) SCC 31

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ABOUT THE AUTHOR

Jai Bajpai

Jai Bajpai is a student in the third year of the five-year B.B.A. L.L.B (hons.) Course at University of Petroleum and Energy Studies, Dehradun.