On 15 December 2017, the Hon’ble Supreme Court of India (Supreme Court) delivered a landmark judgment in Macquarie Bank v. Shilpi Cables, Civil Appeal 15135/2017 on whether Section 9(3)(c) of the Insolvency and Bankruptcy Code 2016 (Code) is mandatory and whether a demand notice of an unpaid operational debt can be issued by a lawyer on behalf of the operational creditor. The Supreme Court allowed the appeals of Macquarie Bank against the judgment of the National Company Law Appellate Tribunal (Appellate Tribunal) in Shilpi Cable Technologies v. Macquarie Bank dated 1 August 2017 and in Macquarie Bank v. Uttam Galva Mettalics Limited (Macquarie v. Uttam Galva) dated 17 July 2017.

Background

Proceedings before the National Company Law Tribunal and the Appellate Tribunal

In Civil Appeal 15481/2017, Macquarie Bank Limited, Singapore filed a petition under Section 9 of the Code as an operational creditor before the National Company Law Tribunal (‘Adjudicating Authority’) against Uttam Galva Metallics Limited. However, the Adjudicating Authority dismissed the petition on the ground that the operational creditor did not furnish a certificate from the financial institutions maintaining accounts of the operational creditor, confirming the non-payment of operational debt, as is mandatory under Section 9(3)(c) of the Code. Macquarie Bank appealed against the decision before the Appellate Tribunal.

The Appellate Tribunal in Macquarie v. Uttam Galva affirmed the decision of the Adjudicating Authority and held that it is mandatory to furnish a certificate from a financial institution under Section 9(3)(c) of the Code, failing which the petition under Section 9 must be dismissed. It was further held that an advocate cannot issue a demand notice on behalf of the operational creditor under Section 8 of the Code in the absence of any authority by the operational creditor and if such person does not hold any position with or in relation to the operational creditor.

However, the petition under Section 9 of the Code filed by Macquarie Bank against Shilpi Cables was admitted by the Adjudicating Authority. On appeal, the Appellate Tribunal relied on the decision in Macquarie v. Uttam Galva, to dismiss the appeal for non-compliance of Section 9(3)(c) of the Code.

 

Judgment

The Supreme Court allowed the appeals by Macquarie Bank and set aside the judgment of the Appellate Tribunal on both issues and remanded the matters to the Appellate Tribunal. The Supreme Court decided on the following issues:

The condition under Section 9(3)(c) is directory

  • The furnishing of a copy of the certificate from a financial institution maintaining accounts of the operational creditor confirming non-payment of operational debt required under Section 9(3)(c) of the Code is not a condition precedent to triggering the insolvency process under the Code.
  • The expression “confirming” makes it clear that this is only a piece of evidence, which only “confirms” that there is no payment of an unpaid operational debt. There is a requirement of furnishing other information and documentary evidence involving particulars of operational debt as well along with the application. This can be gathered from a reading of Section 9(3)(d) of the Code along with the entries mentioned in Part V of Form 5 under Rule 6.
  • The important condition precedent is an occurrence of a default which can be proved, by means of other documentary evidence such as a letter written by the corporate debtor to the operational creditor confirming that a particular operational debt is due and payable. Despite having sufficient evidence, dismissal of a petition simply because a copy of the financial certificate is not available leads to an absurd result.
  • Section 9(3)(c) is only a procedural provision which is directory in nature as the Adjudicatory Authority Rules read with the Code demonstrate.

Section 9(3)(c) cannot be interpreted in a discriminatory manner

  • There may be situations where the operational creditor does not have a certificate from a financial institution as defined in Section 3(14) of the Code. For instance, a foreign operational creditor may have a foreign banker or an operational creditor may have a non-scheduled Bank as its banker, which is not within the definition of a ‘financial institution’ under Section 3(14) of the Code.
  • The Code cannot be construed in a discriminatory fashion so as to include only those operational creditors who are residents outside India who happen to bank with financial institutions which may be included under Section 3(14) of the Code.
  • The argument that such persons may be excluded from triggering the Code against their corporate debtor, despite being operational creditors as defined, may lead to violation of Article 14 of the Constitution of India, 1950, which applies to all persons including foreigners.  The operational creditors cannot be divided into two sub-classes of those who deal with a financial institution that is recognized under Section 3(14) and those who do not.
  • Interpreting the expression ‘shall’ as making the provision mandatory would amount to a situation wherein serious general inconvenience would be caused to innocent persons without furthering the object of the Act.

Foreign suppliers are included within the definition of operational creditors

  • A reading of the provisions establishes that a foreign supplier is an operational creditor for the purposes of the Code. The definition of “person” contained in Section 3(23), as including persons resident outside India, together with the definition of “operational creditor” contained in Section 5(20), which in turn is defined as “a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred” clearly establish that a foreign supplier is an operational creditor.

Notice under Section 8 can be sent by an advocate or a lawyer on behalf of the operational creditor

  • The expression used in Section 8 of the Code is that an operational creditor is to ‘deliver a demand notice’ to a corporate debtor. Had the legislature wished to restrict such demand notice being sent by the operational creditor himself, the expression used would perhaps have been “issued” and not “delivered”. Therefore, it can be inferred that such notice could be made by an authorized agent, including advocates or lawyers.
  • As per Forms 3 and 5 of the Insolvency and Bankruptcy (Application to Adjudicatory Authority) Rules, 2016 (Adjudicatory Authority Rules), the signature of the person “authorized to act” on behalf of the operational creditor must be appended to both the demand notice as well as the application under Section 9 of the Code.
  • Further, both the forms require such 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 a very wide expression which specifically includes a position which is outside or indirectly related to the operational creditor. This was in line with the decisions of the Supreme Court in Renusagar Power Co. Ltd. v. General Electric Co., (1984) 4 SCC 679 at 704 and State of Karnataka v. Azad Coach Builders (P) Ltd. (2010) 9 SCC 524 at 535.
  • Therefore, it is clear that both the expressions, “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 may send a demand notice.

Harmonious construction of the Advocates Act, 1961 and the Code

  • A conjoint reading of Section 30 of the Advocates Act, 1961 (Advocates Act) and Sections 8 and 9 of the Code together with the Adjudicatory Authority Rules and Forms thereunder lead to the conclusion that advocates are permitted to send the demand notice under Section 8 of the Code.
  • Section 30 of the Advocates Act provides for the right of advocates to practise. The expression “practise” is of wide import, and would include all preparatory steps leading to the filing of an application before a Tribunal. Further, Section 8 of Code and the Forms in the Adjudicatory Authority Rules, as interpreted above also lead to the same conclusion.
  • The non-obstante clause contained in Section 238 of the Code will not override the Advocates Act as there is no inconsistency between Section 9, read with the Adjudicating Authority Rules and Forms and the Advocates Act. Since there is no clear disharmony between the two Parliamentary statutes, it is clear that both statutes must be read together.

Comment

The Supreme Court has clarified yet another aspect of the Code in this landmark judgment by not accepting the strict and literal interpretation of the word ‘shall’ under Section 9(3)(c) of the Code and adopting a fair construction of the provision in light of the object sought to be achieved by the Code. If the provision had been interpreted strictly, it would rightly lead to an absurd result as creditors, despite being operational creditors under Section 5(20) of the Code, would not be able to initiate the insolvency resolution process. Therefore, although the provisions of the Code may lead to drastic consequences, it need not be interpreted strictly. Further, the fact that lawyers and advocates may send demand notices on behalf of a creditor is a welcome step towards the right direction.