Authorized Person to Issue Demand Notice under the Insolvency and Bankruptcy Code, 2016

Authorized Person to Issue Demand Notice under the Insolvency and Bankruptcy Code, 2016.

[Jai Bajpai]

The author is a third-year student of School of Law, University of Petroleum and Energy Studies.

The Insolvency and Bankruptcy Code, 2016 (“Code”) arrived at a critical stage where the banking industry was facing credit financing problems and had been looking for an efficient time-bound solution to the same. Having ushered in a new regime, the Code, enacted with the primary objective of compiling laws relating to insolvency, re-organization, liquidation and bankruptcy as regards companies and individuals, is witnessing an evolving jurisprudence in relation to its provisions.

Recently, the National Company Law Appellate Tribunal (“NCLAT”) pondered upon the question of the elements that constitute a “demand notice” on behalf of an operational creditor under section 8(1) of Code, which provision deals with the initiation of the insolvency resolution process by an operational creditor.

The NCLAT has paid heed to the fact that the provisions of the Code are being casually used and applied by lawyers and chartered accountants. The pertinent question before the NCLAT was whether a demand notice, drafted and sent by a lawyer, could be regarded as a demand notice under section 8(1) of the Code. This question was answered in the case ofMacquarie Bank Limited v. Uttam Galva Metallics[1], wherein it was held that if any person who issues a demand notice on behalf of the operational creditor is not authorized in this behalf by the operational creditor and does not stand in or with relation to the said creditor, the concerned notice would not be termed as a demand notice under section 8(1).

Again, in Centech Engineers Private Limited & Anr v. Omicron Sensing Private Limited,[2] the NCLAT made similar observations with regard to a demand notice. In this case, it was brought to the notice of the tribunal that the demand notice was not issued by the operational creditor, but by the Advocates Associates. It was observed that a demand notice not issued in consonance with the requirements enumerated in the Macquarie Bank Limitedcase would deem the notice to be a lawyer’s or a pleader’s notice under section 80 of the Civil Procedure Code, 1908. A demand notice is necessary if an operational creditor wishes to initiate the corporate insolvency resolution process against a corporate debtor. Along with the said notice, the operational creditor is required to deliver an invoice pertaining to the defaulted amount. Moreover, under rule 5(1) of the Insolvency and Bankruptcy Rules, 2016 (“Rules”), it has been provided that the demand notice can only be sent by an operational creditor or a person authorized by him. Therefore, the language of section 8 of the Code could not interpreted in a manner that goes against rule 5(1). Accordingly, in this case, the NCLAT held that the order passed by the Adjudicating Authority appointing an insolvency resolution professional and declaring moratorium was illegal and liable to be set aside.

The purpose of the demand notice under section 8 of the Code is to convey to the corporate debtor the consequences that would follow upon non-payment of the operational debt. On the other hand, a legal notice under section 80 of the Civil Procedure Code, 1908 is to notify the other party about the initiation of the legal proceedings against it. The corporate insolvency process is distinct from a normal legal process, as a case filed for claiming debt under section 9 of the Code cannot be disputed by a corporate debtor until there is existence of a prior dispute before the sending of notice under section 8. Thus, a demand notice under section 8 stands different from a legal notice as stipulated under section 80.

There have been many instances where the Code has catered to the needs of the creditors but has suffered from ambiguity while doing so. The above-mentioned cases were two such instances where the tribunal interpreted the law so as to give effect to the aim of the legislation.

[1] Macquarie Bank Limited v. Uttam Galva Metallics Limited, III (2017) BC 10.

[2] Centech Engineers Private Limited and Ors. v. Omicron Sensing Private Limited, Company Appeal (AT) (Insolvency) No. 132 of 2017.

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