Demand notice filing procedure clarified for lawyers

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The Supreme Court had the opportunity to settle the law on important questions arising under the Insolvency and Bankruptcy Code, 2016 (IBC), which have impaired operational creditors from enforcing their rights under the IBC.

In Macquarie Bank Limited v Shilpi Cable Technologies, Macquarie Bank, Singapore, issued a demand notice under section 8 of the IBC through its lawyers calling upon Shilpi Cable Technologies to pay an outstanding debt. Shilpi failed to pay the amount and the bank initiated insolvency proceedings before the National Company Law Tribunal (NCLT). The bank’s petition was dismissed on the grounds that it had not complied with section 9(3)(c) of the IBC. On appeal, the National Company Law Appellate Tribunal (NCLAT) upheld the NCLT’s order holding that the demand notice under section 8 cannot be issued by a lawyer on behalf of the operational creditor. The bank accordingly approached the Supreme Court by way of a special leave petition.

The first question before the Supreme Court was whether section 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. Foreign operational creditors which did not maintain accounts with such recognized financial institutions were unable to produce the certificate and resultantly prevented from initiating proceedings. The second question was whether a demand notice of an unpaid operational debt under section 8 can be issued by a lawyer or an authorized representative on behalf of the operational creditor.

The Supreme Court set aside the order passed by NCLAT and held that section 9(3)(c) of the IBC is a procedural section, which is not a condition precedent to the allowing of an application filed under section 9(1). This is clarified by section 9(5), which states if there is no such certificate, the application does not need to be rejected. Relying upon the Insolvency and Bankruptcy (Application to Adjudicatory Authority) Rules, 2016, and the forms therein especially Form 5 and Form 6 and the annexures to the forms, the court concluded that the forms required copies of relevant accounts kept by banks/financial institutions confirming an unpaid operational debt to be produced, if available. This established that such a certificate was not mandatory in nature.

The court observed that under section 8 an operational creditor is, on the occurrence of a default, to first deliver a demand notice of the unpaid debt to the operational debtor in the manner provided in section 8(1) of the IBC. The expression, “an operational creditor may on the occurrence of a default deliver a demand notice…” under section 8 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. The court also relied on section 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.

The said judgment is significant for foreign-based operational creditors, which will no longer be obstructed by the technical hurdles opening the gate for such petitions before the NCLT.

The dispute digest is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.