India: Interpreting The Nature Of The Notice Under Section 8 Of The Insolvency And Bankruptcy Code, 2016

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the "Code") provides for a time-bound resolution process for insolvency and bankruptcy. Part II of the Code, provides for the procedure for the insolvency resolution wherein financial creditors, operational creditors and/or corporate debtors themselves can approach the Adjudicating Authority for initiation of corporate insolvency resolution process under the provisions of Sections 7, 8, and 10 respectively.

Section 9 of the Code deals with the application for the initiation of the corporate insolvency resolution process by the operational creditor, where sub-section

(1) provides that the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process after sub section (1) and (2) of Section 8 have been complied with. For the purposes of this article I will be referring only to the provision under sub-section (1) of Section 8 which provides that after the occurrence of a default, the operational creditor has to deliver a demand notice of the unpaid default to the debtor; subsequent to which, the corporate debtor has to reply within a period of ten days under the provision of sub- section(2)- eitherdisputingtheclaimoftheoperational creditor or repaying the operational debt.

Inthecaseof Era Infra Engineeringvs. Prideco Commercial Projects Pvt. Ltd, the appellate authority (NCLAT) was called upon to adjudicate the issue - whether the NCLT was correct in admitting the petition to initiate the corporate resolution process and subsequent appointment of Insolvency Resolution Professional and declaration of moratorium period, on the basis of an application filed by Operational Creditor under Section 9 of I&B Code 2016, even when there was no proper notice served under Section 8(2) and Rule 5 in Form 3 of the Code.

THE MANDATORY NATURE OF THE NOTICE SERVED UNDER THE SECTION 8(1) OF THE CODE

In the case, Era Infra Engineering Ltd. was taken to the National Company Law Tribunal (NCLT) by one of its operational creditors, Prideco Commercial Projects Pvt. Ltd, for non-payment of dues. The case was admitted for bankruptcy by the Delhi bench of NCLT on 12 April 2017, and an interim insolvency professional was appointed. The present challenge before the NCLAT arose on the issue that Prideco did not serve notice as mandated by the provisions of Section 8(2) read with Rule 5 in Form 3 of the Code; to which Prideco's stand was that the notice served to Era during the winding up petition filed under the provision of Section 271 of the Companies Act, 2013 was sufficient to meet the criteria of serving of notice under Section 8 of the Code.

The NCLAT, did not agree with the argument of the operational creditor holding that,"Admittedly, no notice issued by Operational Creditor stipulated under Rule 5 in Form 3 has been served. Therefore, in absence of any expiry period of tenure of 10 days there was no question of preferring an application under Section 9 of I&B Code 2016". The Hon'ble NCLAT further held that "the Adjudicating Authority has failed to notice the aforesaid facts and the mandatory provisions of law as discussed above. As the application was not complete and there was no other way to cure the defect, the impugned order cannot be upheld".

The Hon'ble Tribunal opined that the application of the corporate insolvency resolution process, can be filed only after expiry of period of 10 days from the date of delivery of the notice or invoice demanding payment, as provided under sub section (1) of section 9, because it is only subsequent to this that the Adjudicating Authority, in terms of sub-section (5) of Section 9 can choose to either accept the application, if it is complete, or reject the application provided 7-days time was granted for the curing of any procedural defect in the application. Since this mandatory position of law was not followed, the NCLT was not correct in allowing the petition and thereby the NCLAT set aside the order passed by the Hon'ble Adjudicating Authority and quashed all orders and interim arrangements including declaration of moratorium and appointment of Insolvency Resolution Professional. It further held that all actions taken by Interim Resolution Professional after passing of the order as illegal. The Appellant Tribunal observed that serving of notice under Section 271 of Companies Act, 2013 cannot be considered as sufficient notice as required to be served under Section 8(1) of I&B Code 2016 in the prescribed format.

CONCLUSION

This case is important since it interprets the mandatory nature of the notice that needs to be served under Section 8 of the Code. The attempt to couch the serving of notice under the Code by clubbing it with the serving of notice under some other legislation (in this case, Section 271 of the Companies Act, 2013) cannot be allowed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.