Case Study: Insolvency & Bankruptcy Code, 2016

QUESTION

A Corporate Debtor defaulted in the payment to the Operational Creditor, Safe Bank, a foreign bank, amounting to INR 1,000 crore. A certificate was also furnished by the Safe Bank with regards to the non-payment of the outstanding amount by the Corporate Debtor and repeated reminders as to the payment of the debt were made, but such communications could not influence the Debtor to make the payment, pursuant to which a Statutory Notice was sent by the Operational Creditor under Section 433 and 434 of the Companies Act, 1956. The reply to such notice denied the existence of any such outstanding debt on the part of the Debtor.

After, the Insolvency and Bankruptcy Code (the Code) was enacted in 2016, the Operational Creditor furnished a Demand Notice through his lawyer to the Corporate Debtor under Section 8 of the Insolvency and Bankruptcy Code, 2016. The Corporate Debtor replied to the notice saying that there existed no outstanding default on its part and simultaneously, also questioned the validity of the Purchase Agreement. The Debtor also challenged the validity of sending the Demand Notice through his lawyer.

Aggrieved by the action of the Corporate Debtor, the Operational Creditor approached the National Company Law Tribunal (NCLT) and applied for the initiation of the Corporate Insolvency Resolution Process. NCLT rejected the application for initiation of Corporate Insolvency Resolution Process. Operational Creditor aggrieved by the decision of NCLT, preferred an appeal to the National Company Law Tribunal (NCLAT), which also upheld the decision of NCLT.

Subsequently, the Operational Creditor approached the Supreme Court for the redressal of its grievance.

In this backdrop, answer the following questions:

1. Give reasons for the rejection of the application for the initiation of the Corporate Insolvency Resolution Process by NCLT and NCLAT citing relevant provisions of the Code.
2. Discuss whether challenging the validity of the Demand Notice by Corporate Debtor is justified? Discuss with relevant provisions of the Code.
3. The Supreme Court overruled the orders of NCLT and NCLAT and allowed initiation of Corporate Insolvency Resolution Process. Discuss reasons for the same with the help of a decided case law.

ANSWER

(i) The NCLT rejected the application for initiation of the Corporate Insolvency Resolution Process since it was incomplete as it did not comply with the mandatory requirements of Section 9(3)(c) of the Insolvency and Bankruptcy Code, 2016 which require a certificate from a financial institution with regards to thenon-payment of the outstanding amount by the Corporate Debtor. The certificate from the Safe Bank itself was not held to be a certificate from a financial institution as it was a foreign bank which did not fulfill any of the requirements to qualify as a 'financial institution' as per Section 3(14) of the Code. Section 3(14) defines financial institution as under:

"financial institution" means-

(a) a scheduled bank;

(b) financial institution as defined in section 45-I of the Reserve Bank of India Act, 1934;

(c) public financial institution as defined in clause (72) of section 2 of the Companies Act,2013 and

(d) such other institution as the Central Government may by notification specify as a financial institution;

NCLAT upheld the NCLT order since the application has to be complete before the initiation of the Corporate Insolvency Resolution Process and that the appellant failed to comply with the mandatory requirement of furnishing a certificate by a financial institution in which the Corporate Debtor has its account with regards that it has failed to pay the outstanding debt.

Moreover, it reiterated that the Appellant Bank was not a 'financial institution' as per Section 3(14) of the Code. Also, as it is a mandatory document which acts as an evidence to the existence of default, it has to be necessarily furnished and without it the application is incomplete.

(ii)There was an existence of dispute before the Demand Notice was furnished upon the Corporate Debtor as per Section 8(2)(a) of the Code which was also raised at the time when a reply to the Statutory Notice was furnished under Section 433 and 434 of the Companies Act, 1956 by the Respondent.

Section 8(1) of the Code contains a provision relating to Demand Notice, it reads as under

"An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed."

NCLAT noted that "in the present case, as the notice has been given by an advocate/lawyer and there is nothing on the record to suggest that the lawyer was authorized by the appellant, and as there is nothing on the record to suggest that the said lawyer/ advocate hold any position with or in relation to the appellant company, we hold that the notice issued by the advocate/ lawyer on behalf of the appellant cannot be treated as notice under Section 8 of the

Code. And for the said reason also the petition under Section 9 at the instance of the appellant

against the respondent was not maintainable.

NCLT took cognizance of the Demand Notice which was furnished by the lawyer of the Appellant and noted that such Demand Notice has to be in compliance with Form 3 under Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. It was also observed that such Demand Notice was invalid as it has to be furnished as per Form 3 by the Creditor himself or by any authorized person on his behalf and lawyer cannot come under such purview as there was absence of any authority by the Operational Creditor.

(iii) Hon'ble Supreme Court in the matter of Macquarie Bank Limited v. Shilpi Cable Technologies Ltd. dated December 15, 2017 while deciding upon the aforesaid issues, made the following observations:

(a) Section 9(3)(c) of the Code is directory and not mandatory in nature The Supreme Court observed that a creative interpretation of Section 9(3)(c) is necessary in the present case as the literal interpretation would be unreasonable and would create hardships for Appellants and other foreign banks in the future. Also, the requirement of certificate as adocument is not necessary for substantiating the existence of default as it can be proved by other documents as well. Also, in such cases where such certificates are impossible to furnish, serious inconvenience will be caused to the innocent persons like Appellant when such requirements are not even necessary to further the object of the Code.

Section 9(3)(c) has been since amended to read as under

"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 bythe corporate debtor, if available;"

(b) A Lawyer can issue a demand notice of an unpaid operational debt on behalf of the operational creditor  in this context, the Supreme Court observed that Section 8 of the Code speaks of an operational creditor delivering a demand notice and if the legislature had wished to restrictsuch demand notice being sent by the operational creditor himself, the expression used wouldperhaps have been 'issued' and not 'delivered'. Delivery, therefore, would postulate that such notice could be made by an authorized agent.

The expression 'practise' under Section 30 of the Advocates Act, 1961 providing for the 'Right of advocates to practice' is an expression of extremely wide import, and would include all preparatory steps leading to the filing of an application before a Tribunal.

PLEASE NOTE THAT: The Court also noted that the non-obstante clause contained in Section 238 of the Code (provisions of the Code overriding other laws) will not override the Advocates Act, 1961 as there is no inconsistency between Section 9, read with the Adjudicating Authority Rules and Forms referred to hereinabove, and the Advocates Act.

SC also considered the judgment in Byram Pestonji Gariwala v. Union Bank of India, (1992) 1 SCC 31. In this judgment, what fell for consideration was Order XXIII Rule 3 of the Code of Civil Procedure, 1908 after its amendment in 1976. It was argued in that case that a compromise in a suit had, under Order XXIII Rule 3, to be in writing and "signed by the parties".

It was, therefore, argued that a compromise effected by counsel on behalf of his client would not be effective in law, unless the party himself signed the compromise. This was turned down stating that Courts in India have consistently recognized the traditional role of lawyers and the extent and nature of the implied authority to act on behalf of their clients, which included compromising matters on behalf of their clients. The Court held there is no reason to assume

that the legislature intended to curtail such implied authority of counsel.

The Supreme Court of India has : also noted that to insist upon the party himself personally signing the agreement or compromise would often cause undue delay, loss and inconvenience, especially in the case of non-resident persons. It has always been universally understood that a party can always act by his duly authorized representative. If a power-of-attorney holder can enter into an agreement or compromise on behalf of his principal, so can counsel, possessed of the requisite authorisation by vakalatnama, act on behalf of his client. Not to recognise such capacity is not only to cause much inconvenience and loss to the parties personally, but also to delay the progress of proceedings in court. If the legislature had intended to make such a fundamental change, even at the risk of delay, inconvenience and needless expenditure, it would have expressly so stated.

THE DECISION OF COURT

Therefore, a conjoint reading of Section 30 of the Advocates Act, 1961 and Sections 8 and 9 of the Code together with the Adjudicatory Authority Rules and Forms thereunder would yield the result that a notice sent on behalf of an operational creditor by a lawyer is in order.

 It means that the Notice issued by an advocate of the Operational Debtor according to the provisions of Section 8 of IBC,2016 is a valid notice.

DISCLAIMER: The case study presented here is only for sharing knowledge with the readers. The views are personal , shall not be taken a professional advice. In case of necessity do consult with professionals for more understanding and clarity on the subject matter.