Analysing Supreme Court’s Ruling in Macquarie Bank v. Shilpi Cable

[Vishakha Srivastava and Ashutosh Kashyap]

The authors are fourth-year students at Chanakya National Law University, Patna.

In the case of Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd., the Supreme Court was confronted with two pertinent questions in relation to the Insolvency and Bankruptcy Code, 2016 (“Code“): firstly, whether, in relation to an operational debt, the provision contained in Section 9(3)(c)[1] of the Code is mandatory; secondly, whether a demand notice of an unpaid operational debt can be issued by a lawyer on behalf of the operational creditor.

Facts of the Case

Hamera International Private Limited executed an agreement with the Appellant, Macquarie Bank Limited, Singapore, by which the Appellant purchased the original supplier’s right, title and interest in a supply agreement in favour of the Respondent. The Respondent entered into an agreement for supply of goods in accordance with the terms and conditions contained in the said sales contract.

Since amounts under the bills of lading were due for payment, the Appellant issued a statutory notice under sections 433[2] and 434[3] of the Companies Act, 1956. After the enactment of the Code, the Appellant issued a demand notice under section 8 of the Code[4] to the contesting Respondent, calling upon it to pay the outstanding amount. The contesting Respondent stated that nothing was owed by them to the Appellant. They further went on to question the validity of the purchase agreement dated in favour of the Appellant.

The Appellant initiated the insolvency proceedings by filing a petition under section 9 of the Code.[5] The National Company Law Tribunal (“NCLT”) rejected the petition holding that section 9(3)(c) of the Code was not complied with, inasmuch as no certificate, as required by the said provision, accompanied the application filed under Section 9.

Decisions of the Adjudicating Authorities

The NCLT held that section 9(3)(c) of the Code is a mandatory provision, and therefore, non-compliance of the provision would lead to rejection of the application seeking to initiate insolvency proceedings. Thus, it was held that the application would have to be dismissed at the threshold.

On appeal, the National Company Law Appellate Tribunal (“NCLAT”) agreed with the NCLT holding that the application would have to be dismissed for non-compliance of the mandatory provision contained in section 9(3)(c) of the Code. It further held that an advocate/lawyer cannot issue a notice under section 8 on behalf of the operational creditor. The NCLAT observed that as there was nothing on the record to suggest that the lawyer/ advocate held any position with or in relation to the Appellant, the notice issued by the advocate/ lawyer on behalf of the Appellant could not be treated as notice under section 8 of the Code.

Appeal to the Supreme Court

The Court observed that the first thing to be noticed on a conjoint reading of sections 8 and 9 of the Code, as explained in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, is that Section 9(1) contains the conditions precedent for triggering the Code insofar as an operational creditor is concerned.

The requisite elements necessary to trigger the Code are:

  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
  3. 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.

It is only when these conditions are met that an application may then be filed under section 9(2) of the Code in the prescribed manner, accompanied with such fee as has been prescribed.

Under section 9(3), what is clear is that, along with the application, certain other information is also to be furnished. Under section 9(3)(a), a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor is to be furnished. Under rules 5 and 6 of the Adjudicating Authority Rules 2016, read with Forms 3 and 5, it is clear that, as Annexure I thereto, the application in any case must have a copy of the invoice/demand notice attached to the application. That this is a mandatory condition precedent to the filing of an application is clear from a conjoint reading of sections 8 and 9(1) of the Code.

On a reading of sub-clause (c) of section 9(3), it is equally clear that 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. The true construction of section 9(3)(c) is that it is a procedural provision, which is directory in nature, as the Adjudicatory Authority Rules read with the Code clearly demonstrate.

The Court further observed that section 8 of the Code speaks of an operational creditor “delivering” a demand notice. It is clear that had 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. In fact, in Forms 3 and 5, it is clear that this is the understanding of the draftsman of the Adjudicatory Authority Rules, because the signature of the person “authorized to act” on behalf of the operational creditor must be appended to both the demand notice as well as the application under section 9 of the Code.

The position further becomes clear that both forms require such authorized agent to state his position with or in relation to the operational creditor. A position with the operational creditor would perhaps be a position in the company or firm of the operational creditor, but the expression “in relation to” is significant. It is a very wide expression. It is clear, therefore, that both the expression “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.

The Court, therefore, held that a conjoint reading of section 30 of the Advocates Act, 1961 (right of advocates to practice) 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 would be in order. The expression “an operational creditor may on the occurrence of a default deliver a demand notice…..” under section 8 of the Code must be read as including an operational creditor’s authorized agent and lawyer, as has been fleshed out in Forms 3 and 5 appended to the Adjudicatory Authority Rules.

Accordingly, the Court allowed the appeals and held that the NCLAT judgment has to be set aside on both counts. It was held that inasmuch as the two threshold bars to the applications filed under section 9 have now been removed by the Court, the NCLAT will proceed further with these matters under the Code on a remand of these matters to it.

Conclusion

With the present ruling, the Supreme Court has streamlined the process for operational creditors to initiate proceedings under the Code. The NCLAT in its judgment in Smart Timing Steel v National Steel and Agro Industries had adopted a conservative approach while interpreting provisions under the Code. The direct result of this was that a multitude of insolvency proceedings were dismissed on grounds of procedural non-compliance. This was a hurdle for foreign creditors proceeding against Indian parties who did not maintain accounts with a recognized financial institution. The judgment in Smart Timing which ruled that section 9(3)(c) was mandatory was specifically rejected by the Supreme Court in the present case.

The law has now been settled to say that, even though the certificate of a financial institution under section 9(3)(c) is an important piece of evidence, it is not mandatory. The Court also broadened the scope of section 8 by holding that a lawyer or an authorized agent is competent to issue a demand notice as required therein. The judgment of the court is a welcome development for foreign-based operational creditors who will now no longer be obstructed by the technical hurdles opening the gates for such petitions before the NCLT.

References

[1] Under Section 9(3)(c) of the Code, 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, is to be furnished along with the application for initiating the insolvency resolution process.

[2] Section 433 provides for six circumstances in which a company may be wound up by the court.

[3] Section 434 enumerates the circumstances when a company shall be deemed to be unable to pay its debts.

[4] Section 8 deals with insolvency resolution by operational creditor.

[5] Section 9 deals with application for initiation of corporate insolvency resolution process by operational creditor.

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