Insolvency Code: Lawyer can Issue Demand Notice on Behalf of Operational Creditor

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December 18, 2017

Macquarie Bank Limited v. Shilpi Cable Technologies Ltd.

Date of Judgment: December 15, 2017

In this recent case, the Supreme Court settles the legal proposition under the Insolvency and Bankruptcy Code, 2016 to hold that:

  • Section 9(3)(c) of the Code is directory and not mandatory in nature
  • Demand notice under the Code can be issued by the Lawyer on behalf of the operational creditor

The two issues that were raised in this case pertained to Insolvency and Bankruptcy Code, 2016 (Code).  Firstly, whether, in relation to an operational debt, the provision contained in Section 9(3) (c) of the Code is mandatory and secondly, whether a demand notice of an unpaid operational debt can be issued by a lawyer on behalf of the operational creditor.

With reference to the aforesaid issues, two-Judge Bench of the Supreme Court made the following observations.

Section 9(3) (c) of the Code is directory and not mandatory in nature

Here it is relevant to mention that Section 9(3) (c) of the Code provides for the documents to be furnished alongwith application for initiation of corporate insolvency resolution process by operational creditor under Section 9 of the Code.

In this context the Court made reference to the requisite elements necessary to trigger the Code under Section 9(1):

  1. occurrence of a default;
  2. delivery of a demand notice of an unpaid operational debt or invoice demanding payment of the amount involved; and
  • the fact that the operational creditor has not received payment from the corporate debtor within a period of 10 days of receipt of the demand notice or copy of invoice demanding payment, or received a reply from the corporate debtor which does not indicate the existence of a pre-existing dispute or repayment of the unpaid operational debt.

The Court held that only when these conditions are met an application may be filed under Section 9(2) of the Code in the prescribed manner, accompanied with prescribed fee. Under Section 9(3), along with the application, certain other information is also to be furnished.

That under Section 9(3)(c) of the Code a copy of the certificate from the financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor is certainly not a condition precedent to triggering the insolvency process under the Code. The expression “confirming” makes it clear that this is only a piece of evidence, albeit a very important piece of evidence, which only “confirms” that there is no payment of an unpaid operational debt.

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 in the instant case. 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 and therefore, Section 9(3)(c) would have to be construed as being directory in nature.

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 wished to restrict such demand notice being sent by the operational creditor himself, the expression used would perhaps have been “issued” and not “delivered”. Delivery, therefore, would postulate that such notice could be made by an authorized agent.

That both the expressions “authorized to act” and “position in relation to the operational creditor” go to show that an authorized agent or a lawyer acting on behalf of his client is included within the aforesaid expression.

That the expression “practise” under Section 30 of the Advocates Act 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.

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 as there is no inconsistency between Section 9, read with the Adjudicating Authority Rules and Forms referred to hereinabove, and the Advocates Act.

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