SCI (15.12.2017) in Macquarie Bank Limited Vs Shilpi Cable Technologies Ltd. [Civil Appeal No. 15135 of 2017] held that;
“therefore, the Code requires that the creditor can only trigger the IRP on clear evidence of default.” Nowhere does the report state that such “clear evidence” can only be in the shape of the certificate, referred to in Section 9(3)(c), as a condition precedent to triggering the Code.
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.
Excerpts of the order;
# 1. The present appeals raise two important questions which arise under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “Code”).
The first question is whether, in relation to an operational debt, the provision contained in Section 9(3)(c) of the Code is mandatory; and
secondly, whether a demand notice of an unpaid operational debt can be issued by a lawyer on behalf of the operational creditor.
# 3. After the enactment of the Code, the appellant issued a demand notice under Section 8 of the Code on 14.2.2017 at the registered office of the contesting respondent, calling upon it to pay the outstanding amount of US$6,321,337.11. By a reply dated 22.2.2017, the contesting respondent stated that nothing was owed by them to the appellant. They further went on to question the validity of the purchase agreement dated 27. 7.2015 in favour of the appellant. On 7.3.2017, the appellant initiated the insolvency proceedings by filing a petition under Section 9 of the Code. On 1.6.2017, the NCLT rejected the petition holding that Section 9(3)(c) of the Code was not complied with, inasmuch as no certificate, as required by the said provision, accompanied the application filed under Section 9 It, therefore, held that there being non-compliance of the mandatory provision of Section 9(3)(c) of the Code, the application would have to be dismissed at the threshold. However, the NCLT also went into the question as to whether a dispute has been raised in relation to the operational debt and found that such dispute was in fact raised by the reply to the statutory notice sent under Sections 433 and 434 of the Companies Act, 1956 and that, therefore, under Section 9(5)(ii) (d), the application would have to be dismissed.
# 4. By the impugned judgment dated 17.7.2017, the NCLAT agreed with the NCLT holding that the application would have to be dismissed for non compliance of the mandatory provision contained in Section 9(3)(c) of the Code. It further went on to hold that an advocate/lawyer cannot issue a notice under Section 8 on behalf of the operational creditor in the following terms:
“In the present case, as the notice has been given by an advocate/lawyer and there is nothing on the record to suggest that the lawyer was authorized by the appellant, and as there is nothing on the record to suggest that the said lawyer/ advocate hold any position with or in relation to the appellant company, we hold that the notice issued by the advocate/ lawyer on behalf of the appellant cannot be treated as notice under Section 8 of the ‘I & B Code’. And for the said reason also the petition under Section 9 at the instance of the appellant against the respondent was not maintainable.”
# 8. According to the learned senior counsel, the consequence of not furnishing a copy of the certificate under Section 9(3)(c) is that, under Section 9(5)(ii)(a), the application that is made would be incomplete and, subject to the proviso, would have to be dismissed on that score. Also, according to the learned senior counsel, the NCLAT was right in following the judgment contained in Smart Timing Steel Ltd. v. National Steel and Agro Industries Ltd decided on 19.5.2017, which, according to the learned senior counsel, has merged in an order of this Court dismissing an appeal from the said judgment.
# 11. The first thing to be noticed on a conjoint reading of Sections 8 and 9 of the Code, as explained in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, Civil Appeal No. 9405 of 2017 decided on 21.9.2017, at paragraphs 33 to 36, is that Section 9(1) contains the conditions precedent for triggering the Code insofar as an operational creditor is concerned. The requisite elements necessary to trigger the Code are:
i. occurrence of a default;
ii. delivery of a demand notice of an unpaid operational debt or invoice demanding payment of the amount involved; 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.
# 12. It is only when these conditions are met that an application may then be filed under Section 9(2) of the Code in the prescribed manner, accompanied with such fee as has been prescribed. Under Section 9(3), what is clear is that, along with the application, certain other information is also to be furnished. Obviously, under Section 9(3)(a), a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor is to be furnished. We may only indicate that under Rules 5 and 6 of the Adjudicating Authority Rules, read with Forms 3 and 5, it is clear that, as Annexure I thereto, the application in any case must have a copy of the invoice/demand notice attached to the application. That this is a mandatory condition precedent to the filing of an application is clear from a conjoint reading of sections 8 and 9(1) of the Code.
# 13. When we come to Section 9(3)(b), it is obvious that an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt can only be in a situation where the corporate debtor has not, within the period of 10 days, sent the requisite notice by way of reply to the operational creditor. In a case where such notice has, in fact, been sent in reply by the corporate debtor, obviously an affidavit to that effect cannot be given.
# 14. When we come to sub-clause (c) of Section 9(3), it is equally clear that a copy of the certificate from the financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor is certainly 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, albeit a very important piece of evidence, which only “confirms” that there is no payment of an unpaid operational debt. This becomes clearer when we go to sub-clause (d) of Section 9(3) which requires such other information as may be specified has also to be furnished along with the application.
# 29. Dr. Singhvi then relied upon the Viswanathan Report dated November 2015, in particular Box 5.2, which reads as follows:
Box 5.2 – Trigger for IRP
1. The IRP can be triggered by either the debtor or the creditors by submitting documentation specified in the Code to the adjudicating authority.
2. For the debtor to trigger the IRP, she must be able to submit all the documentation that is defined in the Code, and may be specified by the Regulator above this.
3. The Code differentiates two categories of creditors: financial creditors where the liability to the debtor arises from a solely financial transaction, and operational creditors where the liability to the debtor arises in the form of future payments in exchange for goods or services already delivered. In cases where a creditor has both a solely financial transaction as well as an operational transaction with the entity, the creditor will be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt is more than half the full liability it has with the debtor.
4. The Code will require different documentation for a debtor, a financial creditor, and an operational creditor to trigger the IRP. These are listed Box 5.3 under what the Adjudicator will accept as requirements to trigger the IRP.
# 30. Item 2 in Box 5.2 does show that for the corporate debtor to trigger the IRP, it must be able to submit all the documentation that is defined in the Code and that different documentation is required insofar as financial creditors and operational creditors are concerned, as is evident from Item 4 in Box 5.2. The sentence which is after Box 5.2 is significant. It reads, “therefore, the Code requires that the creditor can only trigger the IRP on clear evidence of default.” Nowhere does the report state that such “clear evidence” can only be in the shape of the certificate, referred to in Section 9(3)(c), as a condition precedent to triggering the Code. In fact, in Item 2(c) in Box 5. 3, the Committee, by way of drafting instructions for how the IRP can be triggered, states:
“If an operational creditor has applied, the application contains:
i. Record of an undisputed bill against the entity, and where applicable, information of such undisputed as filed at a registered information utility.”
# 31. When it comes to the Joint Committee report dated April 2016, the draft Section contained therein, namely the definition of financial institution contained in Section 3(14) of the Code, has added into it a sub-clause (c) which is a public financial institution as defined in Section 2(72) of the Companies Act, 2013. Apart from this, the draft statute that was placed before the Joint Committee contains Section 9(3)(c) exactly as it is in the present Code. This report again does not throw much light on the point at issue before us.
# 33. Insofar as the second point is concerned, the first thing that is to be noticed is that Section 8 of the Code speaks of an operational creditor delivering a demand notice. It is clear that 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”. Delivery, therefore, would postulate that such notice could be made by an authorized agent. In fact, in Forms 3 and 5 extracted hereinabove, it is clear that this is the understanding of the draftsman of the Adjudicatory Authority Rules, because 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. The position further becomes clear that both 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 significant. It is a very wide expression, as has been held 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, 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.
# 36. ………. Since there is no clear disharmony between the two Parliamentary statutes in the present case which cannot be resolved by harmonious interpretation, it is clear that both statutes must be read together. Also, we must not forget that Section 30 of the Advocates Act deals with the fundamental right under Article 19(1)(g) of the Constitution to practice one’s profession. 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.
# 38. Just as has been held in Gariwala (supra), the expression “an operational creditor may on the occurrence of a default deliver a demand notice…..” under Section 8 of the Code must be read as including an operational creditor’s authorized agent and lawyer, as has been fleshed out in Forms 3 and 5 appended to the Adjudicatory Authority Rules.
# 39. For all these reasons, we are of the view that the NCLAT judgment has to be set aside on both counts. Inasmuch as the two threshold bars to the applications filed under Section 9 have now been removed by us, the NCLAT will proceed further with these matters under the Code on a remand of these matters to it. The appeals are allowed in the aforesaid terms.
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