India: Demand Notice Under Section 8 Of The Insolvency And Bankruptcy Code, 2016 Can Be Filed By Lawyer On Behalf Of The Operational Creditor & Provision Under Section 9(3)(C) Of The Code Is Not Mandatory

Under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as, the "Code"), for operational creditors to initiate a corporate insolvency resolution process (hereinafter referred to as "CIRP"), two steps are required to be followed. The first step is that the creditor has to deliver a demand notice under Section 8 of the Code to the Corporate Debtor regarding the non-payment of dues and then subsequently if there is no dispute raised by the Corporate Debtor or there is the absence of payment, the CIRP can be initiated under the provisions of Section 9 of the Code. In a recent judgment, the Hon'ble Supreme Court had the opportunity to settle the law on two issues that were impeding the right of the Operational Creditors in initiating the CIRP against the Corporate Debtors.

The Hon'ble Supreme Court, on 15.12.2017 delivered a landmark judgment in the case of Macquarie Bank v. Shilpi Cables1, wherein the Hon'ble Supreme Court settled the law on two important issues under the Code. The first issue was whether the provision under Section 9 (3)(c) of the Code which mandates that in order to trigger CIRP against the Corporate Debtor, ""a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor." is mandatory or not?. This issue is specifically relevant to the foreign operational creditors who could not maintain accounts with the recognized financial institutions and thus were prevented from initiating the CIRP since such institutions were unable to produce the requisite certificate. The second issue for consideration before the Hon'ble apex court was that 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 present case hadcome before the Hon'ble Supreme Court by the way of a Special Leave Petition wherein the NCLAT order dated 1 August 2017 was being challenged which had upheld the NCLT decision wherein the application to initiate CIRP had been dismissed on the ground that provision under Section 9 (3) of the Code had not been complied with. It was also held that the demand notice under Section 8 cannot be issued by a lawyer.

The Hon'ble Supreme Court began with the detailed review of the Code and the provisions of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016. The Hon'ble Supreme Court took a very pragmatic approach and differed with the narrow view taken by the NCLT/NCLAT and came to the conclusion that the requirement under section 9(3)(c) is not a "condition precedent to triggering the insolvency process under the Code". The certificate is only a piece of evidence to confirm the existence of the debt rather than being a precondition. The Hon'ble Court held that the provision in question is merely directory in nature, and not mandatory. The Court also noted that since the provisions of the Code are open to the triggered by a foreign creditor, there is no need to impose procedural hurdles in the way of such creditors. Hon'ble Supreme Court also left open the possibility that foreign creditors may offer evidence of the debt through means other than a certificate by a "financial institution".

On the second issue, the Hon'ble Supreme Court looked at the language of Section 8, with particular emphasis on the word "delivering" of the demand notice. It observed that usage of such a word hinted towards the intention of the legislature that it was not mandatory for the Operational Creditor to send the notice itself through its own employees or officers. The Hon'ble Supreme Court also observed that the Adjudicating Authority Rules provide that for demand notice under Section 8 & 9 of the Code, provide for the signature of the person"authorized to act" and thereby it has to be construed widely that the person that can sign and deliver the demand notice on the behalf of the Creditor has to include a lawyer acting on behalf of the client. The Hon'ble Supreme Court had also looked at the Advocates Act and held that the expression "practice" is of an "extremely wide import, and would include all preparatory steps leading to the filing of an application before a Tribunal" and thereby the notice can be sent by its lawyer. Based on the aforementioned reasoning, the Hon'ble Supreme Court allowed the appeal and set aside the orders passed by the NCLAT.

Footnotes

1 Civil Appeal 15135/2017

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