India: Landmark Order Under Insolvency And Bankruptcy Code 2016
Last Updated: 23 May 2017

The law with respect to the issue whether it is mandatory to serve a demand notice under Section 8(1) of Insolvency and Bankruptcy Code 2016 (I&B Code 2016) read with Rule 5 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016 in prescribed Form 3 before filing an Application under Section 9 of the I&B 2016 by an Operational Creditor (i.e. prior to initiating the Insolvency Resolution Process) was not clear as the Insolvency and Bankruptcy Code 2016 is a recent enactment came into force in the year 2016. 

There was a doubt that the demand notice served even under Section 271 of Companies Act, 2013 will be sufficient to meet the requirement of serving a demand notice for filing an application under Section 9 of the I&B Code 2016.

Recently, the Hon'ble Adjudicating Authority (NCLT, Principal Bench, Delhi) vide order dated 12.04.2017 has triggered the Insolvency Resolution Process on an Application made by Operational Creditor against Era Infra Engineering Limited (Corporate Debtor). The Application under Section 9 of the I&B Code 2016 was filed by the Operational Creditor without serving the notice under Section 8(1) of the I&B Code 2016 and have filed the said Application under Section 9 on the basis of the Demand Notice duly served under Section 271 of the Companies Act, 2013.

Under the guidance of Singh & Associates, the Corporate Debtor have against the said impugned order dated 12.04.2017 filed an appeal before the Hon'ble National Company Law Appellant Tribunal (NCLAT) under Section 61 of I&B Code 2016.  

Singh & Associates, have successfully acted for and on behalf of the Corporate Debtor before the Hon'ble NCLAT and argued that the Application filed by the Operational Creditor under Section 9 before the Hon'ble Adjudicating Authority was not maintainable as notice under Section 8(1) of the I&B Code 2016 has not been served on the Corporate Debtor and same was a pre requisite or the cause of action to file an application under Section 9 starts only when the notice is served as per the Section 8(1) of I&B Code. Further, both Companies Act, 2013 and I&B Code 2016 are different enactment and one cannot treat the notice served under the previous enactment as served under the present one. It would also be worth mentioning that after the amendment on 15.12.2016, Section 271 of Companies Act, 2013 a winding up petition cannot be filed on the ground of 'unable to pay debt', which prior to the amendment was present under Section 271 of Companies Act, 2013 and Section 433 of the Companies Act, 1956.

The Hon'ble NCLAT on Wednesday, 03rd May 2017 allowed the appeal filed by the Appellant and had dismissed the order passed by Hon'ble Adjudicating Authority including the order of appointment of Interim Resolution Professional, moratorium period declared under Section 14 of I&B Code 2016. Consequently, the law as of now has been settled and there is a clarity that it is a mandatory prerequisite that the notice be served under Section 8(1) read with Rule 5  in prescribed Form 3 before filing an application under Section 9 by an Operational Creditor failing which the Application under Section 9 will be treated as an incomplete application.

The Hon'ble NCLAT also held that the Demand Notice served under Section 271 of Companies Act, 2013 cannot be treated as the compliance w.r.t notice to be served under Section 8(1) of I&B Code 2016.

The Hon'ble NCLAT while allowing the appeal also brought the attention to Section 238 of I&B Code 2016 and held that the intention of the legislature was clear that the I&B Code has overriding effect over other laws unless categorically provided that certain sections of relevant act will apply in case of I&B Code 2016. The Hon'ble NCLAT further discussed that under Section 238 no exception has been carved out w.r.t serving of the notice under Section 271 of Companies Act, 2013 be treated as serving of notice under Section 8(1) of I&B Code 2016.

The matter was argued by Mr. Manoj K Singh, Founding Partner of Singh & Associates and was assisted by the other Advocates of the Firm.

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