Supreme Court overturns NCLAT’s ruling on two distinct points of the Insolvency Code

The Supreme Court has recently set two precedents in one judgment in its attempt to further strengthen the jurisprudence surrounding the Insolvency and Bankruptcy Code, 2016.

Three civil appeals from NCLAT judgments were clubbed and two important questions, which arose before a Bench of Justices R.F. Nariman and Navin Sinha, were:

1) Whether a certificate under Section 9(3)(c) of the Code is mandatory or directory in nature; and

2) Whether a demand notice of an unpaid operational debt can be issued by a lawyer on behalf of the operational creditor.

The (primary) case relates to an agreement executed between Hamera International Private Ltd. in favour of Macquarie Bank Ltd, Singapore (MBL), the appellant, assigning its rights, title and interest in a supply agreement with Shilpi Cable Technologies Ltd, the respondent. On an outstanding payment, MBL sent reminders to the respondent and upon non-payment despite repeated reminders, resorted to legal recourse under Sections 433 and 434 of the Companies Act, 1956, which deals with winding up.

After enactment of the Code, statutory demand notice was issued under section 8 as is required to be served by an operational creditor. The application was rejected by the NCLT for lack of a certificate required under Section 9(3)(c) of the Code, which requires the operational creditor to submit,

“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”

The NCLAT while upholding the order of the NCLT further added an additional ground for rejection i.e. the demand notice not having being filed by an “authorised representative” of the board, as has been held several times by the NCLAT.

Clasis Law Partner Mustafa Motiwala along with Associate Partner Shwetabh Sinha represented Macquarie Bank.

Arguments

Section 9(3)(c) – mandatory or directory?

Appearing for the appellant, MBL, Senior Advocate, Mukul Rohatgi’s overall argument was that this certificate is simply another document that could be relied on for proving the existence of debt and it can be submitted only “if available” as is mentioned in Form 5 Annexure III of the Adjudicating Authority Rules.

He further argued that a conjoint reading of Section 9(3)(c) along with Rule 6 and Form 5 of  theAdjudicating Authority Rules, it is clear that Section 9(3)(c) is not mandatory but directory and the word ‘shall’ should be read as ‘may’, since it would otherwise cause serious inconvenience without really furthering the object of the Code.

Rohatgi also argued that the provision is merely procedural and is not a condition precedent to the allowing application under Section 9(1).

Also appearing for the appellants, Senior Advocate, Arvind Datar argued that since the definition of term “financial institution” in the Code doesn’t cover non-resident banks or financial institutions, it cannot operate to non suit the appellant as it would be impossible to get certificate from a Financial Institution as defined.

Appearing for the respondents, Senior Advocate Abhishek Manu Singhvi argued that object of Code is not that persons may use it as means of recovering debts and it must be construed strictly since it’s a draconian legislation. He said that it is important to bear in mind that very low threshold is required to reject an operational creditor’s application i.e. a pre-existing dispute. According to him, this requirement of a certificate is a jurisdictional condition precedent as it is an important document which makes it clear, almost conclusively, that there is an unpaid operational debt.

Singhvi also relied on the Vishwanathan Report of November 2015 wherein it was written that the creditor can trigger the IRP on clear evidence of default.

To counter Datar’s argument, he argued that certain foreign banks are included and it can be easily expanded by means of notification, suggesting that the foreign bank should approach the central government for inclusion in the aforesaid list of banks.

Can lawyers send demand notice under Section 8?

For the appellants, Rohtagi argued that under Form 5 of the Adjudicating Authority Rules, “a person authorised to act on behalf of the operational creditor”,  is a person who can sign Form 5 on behalf of the operational creditor, and is wide enough to cover a lawyer who is authorised by the operational creditor. A reference was made to Section 30 of the Advocates Act, 1961 in this regard where expression “practise” is applied to lawyers vis-a-vis tribunals such as NCLT and NCLAT.

Singhvi countered by saying that  Forms 3 as well as 5 make it clear that only a person expressly authorised to act on behalf of operational creditor can send notice which means only an insider who can be authorised by operational creditor and not a lawyer.

The Ruling

Section 9(3)(c) is directory

While observing the essential elements of an application made by the Supreme Court in Mobilox vs. Kirusa, and drifting away from the strict interpretation rule, the Bench held that a certificate under 9(3)(c) is certainly not a “condition precedent” and the expression “confirming” makes it clear that it is only a piece of evidence, which “confirms” that there is no payment of an unpaid operational debt. It is here that the Bench  referred to Justice R.F Nariman’s conclusion that the modern trend of case law is that creative interpretation is within the Lakshman Rekha of the Judiciary. While limiting the scope for liberal interpretation also ruled that,

“Any arbitrary interpretation, as opposed to fair interpretation, of a statute, keeping the object of the legislature in mind, would be outside the judicial ken.”

The Bench while accepting Rohatgi’s argument, ruled that in Annexure III of Form 5 which speaks of copies of relevant accounts kept by Banks/ financial institutions, the words “if available” shows that it’s not a pre-condition.

The Bench also realised that a person to whom the debt has been assigned may have dealings with a bank/financial institution that is not covered in the definition, and Singhvi’s argument would render the provisions of the Code discriminatory  and  infringe Article 14 of the Constitution. The Bench observed,

“The true construction of Section 9(3)(c) is that it is a procedural provision, which is directory in nature, as the Adjudicatory Authority Rules read with the Code clearly demonstrate.”

Lawyers can serve demand notice

On this point, the Bench observed that section 8 of the Code speaks on an operational creditor “delivering” the demand notice and not “issuing” it. It is therefore obvious, said the Bench, that such notice could be made by an authorised agent only.

Both the forms require the person serving demand notice to “state position with or in relation to the operational creditor” and the Supreme Cound found that in“relation to” is a very wide expression (Renusagar Power Co. Ltd. v. General Electric Co.) which specifically includes a position which is outside or indirectly related to the operational creditor, including a lawyer.

Also, the Bench observed the word “practise” in Section 30 of the Advocates Act as an expression of extremely wide import that would include all preparatory steps leading to the filing of an application before a Tribunal. To remove and doubts, the bench ruled that the non-obstante provision in Section 238 of the Code will not override the Advocates Act since there is no inconsistency between the Adjudicating Authority Rules and and Advocates Act. The Bench therefore observed,

“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 be in order.”

(Read the judgment)