The Supreme Court recently in Macquarie Bank Limited v. Shilpi Cable Technologies had the opportunity to settle the law on two important questions arising under the Insolvency and Bankruptcy Code, 2016 ('IBC'), which have impaired operational creditors from enforcing their rights under the IBC.
The first question was whether §9(3)(c) of the IBC, which requires an operational creditor to produce a certificate of a recognized financial institution to initiate insolvency proceedings is mandatory in nature. Foreign operational creditors who did not maintain accounts with such recognized financial institutions, were unable to produce the certificate and resultantly prevented from initiating proceedings under the IBC. The Supreme Court has now clarified that §9(3)(c) is not mandatory in nature.
The second question was whether a demand notice of an unpaid operational debt under §8 can be issued by a lawyer or an authorized representative on behalf of the operational creditor. The Apex Court has liberally interpreted the provision and held that a demand notice issued by a lawyer would be in accordance with law.
Facts
Macquarie Bank Limited, Singapore ('the Bank') issued a demand notice under §8 of the IBC, through its lawyers calling upon Shilpi Cable Technologies ('Shilpi') to pay an outstanding debt. Shilpi failed to pay the said amount and the Bank initiated insolvency proceedings before the National Company Law Tribunal ('NCLT'). The Bank's petition was dismissed by the NCLT on grounds that the Bank had not complied with §9(3)(c) of the IBC. On appeal, the National Company Law Appellate Tribunal ('NCLAT') upheld the order of the NCLT. It further held that the demand notice under §8 cannot be issued by a lawyer on behalf of the operational creditor.
The Bank accordingly approached the Supreme Court of India by way of a Special Leave Petition.
Judgment
The Supreme Court in its judgment held that §9(3)(c) does not constitute a threshold bar for filing an Application under the IBC. The requirement to produce the certificate of a recognized financial institution is not a condition precedent for triggering the insolvency process. The Court stated that the expression 'confirming' used in the statute made it clear that the certificate was only an important piece of evidence to show that there was non-payment of an unpaid operational debt, even though other documents to establish the debt could also be produced. The Court relied on §9(3)(d) for support which requires an operational creditor to produce such other information as may be specified to establish debt.
The Court also relied on the Insolvency and Bankruptcy (Application to Adjudicatory Authority) Rules, 2016 and the forms therein to conclude that §9(3)(c) was not mandatory. Specifically reliance was placed on Form 5 and Form 6 and the annexures to the forms. The Court noted that the forms required copies of relevant accounts kept by banks/financial institutions confirming an unpaid operational debt to be produced, 'if available'. This clearly established that such a certificate was not mandatory in nature.
The Court noted that the certificate under §9(3)(c) can only be issued by a 'financial institution' recognized under §3(14) of the IBC. In a case where insolvency proceedings are initiated by a non-resident creditor, who did not maintain accounts with a financial institution as defined under §3(14) of the IBC, then this alone wold not act as a bar against the non-resident creditor for initiating the insolvency process. It was observed that, the IBC cannot be construed in a discriminatory fashion so as to include only those operational creditors who are residents of India and happen to bank with financial institutions included under §3(14) of the IBC. This was violative of Article 14 of the Constitution of India which applies to foreign residents as well.
The Judgment of the NCLAT in Smart Timing Steel v National Steel and Agro Industries decided on 19 May 2017, which ruled that §9(3)(c) was mandatory was specifically rejected by the Supreme Court. Shilpi's contention that since an SLP against the Smart Timing judgment had been dismissed by the Supreme Court, the said judgment was binding was also rejected. The Court noted that the SLP against the Smart Timing judgment was dismissed at the very threshold by the Supreme Court and therefore was not law under Article 141 of the Constitution.
The Court then proceeded to analyse whether a demand notice under §8 of the IBC can be sent by a lawyer or authorized agent of the operational creditor.
The Court held that from the language of the provision itself, it was clear that such a notice could be issued by lawyers. The provision referred to 'delivery' of notice by an operational creditor and not 'issuance'. If the legislature wished to restrict such demand notice being sent by the operational creditor himself, the expression used would shave been 'issued'.
The Court also relied on §30 of the Advocates Act, 1961, where the use of the word 'practise' was held to include all preparatory steps leading to the filing of an application before a Tribunal, including issuance of a notice. It was accordingly held that a conjoint reading of §30 of the Advocates Act and §8 and §9 of the IBC together with the Adjudicatory Authority Rules would lead to the conclusion that a notice sent on behalf of an operational creditor by a lawyer would be in order.
Conclusion
With the present ruling, the Supreme Court has streamlined the process for operational creditors to initiate proceedings under the IBC. The NCLAT in its judgment in Smart Timing had adopted a conservative approach while interpreting provisions under the IBC. 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 law has now been settled to say that, even though the certificate of a financial institution under §9(3)(c) of the IBC, is an important piece of evidence, it is not mandatory. The Court also broadened the scope of §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.
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