India: Macquarie Bank Limited vs. Shilpi Cable Technologies Ltd

Last Updated: 23 January 2018
Article by S.S. Rana & Co. Advocates

FACTS

Hamera International Private Limited executed an agreement with, Macquarie Bank Limited, Singapore (hereinafter called 'appellant'), where the appellant purchased the original supplier's right, title and interest in a supply agreement in favour of Shilpi Cable Technologies (hereinafter referred to as the "respondent").

Appellant had issued two invoices against the respondent for payment of the amount due, wherein term of payment was stated as 150 days from the date of bill of ladings. Upon the amounts becoming due for payment the appellant sent an email demanding payment of such amounts. On receiving a denial from any such default in payment the Appellant issued a statutory notice under Section 433 and Section 434of the Companies Act 1956 (as applicable that time) to the respondent to retrieve the outstanding amount.

Further the appellant also issued a demand notice under the Insolvency and Bankruptcy Code 2016 (hereinafter called 'the Code') under Section 8 of the Code at the registered office of the Respondent, calling upon it to pay the outstanding amount. Through reply, the contesting Respondent stated that nothing was owed by them to the Appellant and further went on to question the validity of the purchase agreement in favour of the appellant. Thus the Appellant initiated insolvency proceedings by filing a petition Under Section 9 of the Code.

Judgement appealed

The National Company Law Tribunal (hereinafter called 'NCLT') rejected the petition holding that Section 9(3) (c) of the Code was not complied with as the certificate required to accompany application under Section 9 was omitted. It therefore dismissed the application for noncompliance of mandatory provision as laid under Section 9 (3) (c) of the Code. The NCLT also acknowledged the dispute raised by the reply to the statutory notice sent under Sections 433 and 434 of the Companies Act, 1956 and therefore, under Section 9(5) (ii) (d), the application would have to be dismissed. The National Company Law Appellate Tribunal (hereinafter referred as 'NCLAT') reaffirmed and upheld the grounds of dismissal as held by NCLT. NCLAT further held that an advocate/lawyer cannot issue a notice under Section 8 on behalf of the operational creditor

Ratio Decidendi

(i) Section 9 (3) (c) mandatory or directory

Supreme Court has relied on the recent judgement of Mobilox Innovations Private Limited v. Kirusa Software Private Limited1 Civil Appeal No. 9405 of 2017, to answer the first question raised in this case that whether Section 9(1) contains the conditions precedent for initiating the Code insofar as an operational creditor is concerned. The components required to invoke the Code are:

i. Existence of default in payment;

ii. Delivery of a demand notice for an unpaid operational debt or invoice demanding payment of the amount of payment; and

iii. The fact that the operational creditor has not received payment from the corporate debtor within a period of 10 days of receipt of the demand notice or copy of invoice demanding payment, or received a reply from the corporate debtor which does not indicate the existence of a pre-existing dispute or repayment of the unpaid operational debt.

A copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor has to be mandatory furnished by joint reading of Sections 8 and 9(1) of the Code.

Further the court held that sub-clause (c) of Section 9(3), reads that the requirement for a copy of operational creditors financial account is certainly not a condition precedent for bringing the insolvency machinery in motion under this Code. Further the honorable court held that Section 9(3) (c) would have to be construed as being directory in nature as otherwise it would amount to a situation wherein serious general inconvenience would be caused to innocent persons, such as caused to the Appellant herein, without very much furthering the object of the Act, as has been held in the case State of Haryana v. Raghubir Dayal 1995 SCC (1) 133, 1994 SCALE (4)1084.

(ii) Authorized Agent

As the second point is concerned, Section 8 of the Code speaks of an operational creditor delivering a demand notice. In Forms 3 and 5 the signature of the person "authorized to act" on behalf of the operational creditor must be added to both the demand notice as well as the application under Section 9 of the Code. Further both forms require authorized agent to state his position with or in relation to the operational creditor. A position with the operational creditor would perhaps be a position in the company or firm of the operational creditor, but the expression "in relation to" is significant. It is a very wide expression, as has been held in Renusagar Power Co. Ltd. v. General Electric Co., and State of Karnataka v. Azad Coach Builders (P) Ltd, (1984) 4 SCC 679 at 704 which specifically includes a position which is outside or indirectly related to the operational creditor. It is clear, therefore, that both the expression "authorized to act" and "position in relation to the operational creditor" go to show that an authorized agent or a lawyer acting on behalf of his client is included within the aforesaid expression.

(iii) Harmonious construction between Advocates Act,1961 and the code

The overriding clause contained in Section 238 of the Code will not override the Advocates Act, 1961 (hereinafter referred to as 'the Advocates Act') as there is no inconsistency between Section 9, read with the Adjudicating Authority Rules and Forms. The court relied on Balchand Jain v. State of M.P. (1976) 4 SCC 572 to answer upon the overriding effect of the non obstante clause.

The court held that, "there should be a clear inconsistency between the two enactments before giving an overriding effect to the non-obstante Clause but when the scope of the provisions of an earlier enactment is clear the same cannot be cut down by recourse to non-obstante clause. Harmonious interpretation, it is clear that both the statutes must be read together. Section 30 of the Advocates Act deals with the right of advocates to practice which is in consonance with Article 19(1) (g) of the Constitution. Therefore, a conjoint reading of Section 30 of the Advocates Act and Sections 8 and 9 of the Code together with the Adjudicatory Authority Rules and Forms thereunder would yield the result that a notice sent on behalf of an operational creditor by a lawyer would not be out of order".

Conclusion: Since the Code is in its natal stage, this particular judgment has become a landmark event as it has provided clarity as to the directory nature rather than mandatory nature of Section (9) (c) as well as to what is inclusive under the head of authorized person for serving a demand notice.

Footnote

1 http://ssrana.in/Admin/UploadDocument/IP%20Updates/India-NCLAT-Interprets-disputed-debts-underthe-Insolvency-Bankruptcy-Code-2016.htm  

For further information please contact at S.S Rana & Co. email: info@ssrana.in or call at (+91- 11 4012 3000). Our website can be accessed at www.ssrana.in

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.

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