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IBC:- Landmark Judicial Pronouncements under IBC

& Learning from them

IP & CA Manoj Kumar Anand

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Judgement dated 5th February, 2019 of the Hon’ble Supreme Court of

India

Judgements Folder\Summary-SC-K Sashidhar Vs IOB 2_2019-02-08

19_46_47.docx

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IDBI Bank Ltd. v. Jaypee Infratech Ltd (CA No. 26/2018) Application under Section 66, 43, 45

& 60(5)(a)

In this case the resolution professional examined various transactions and consequently filed an application before the NCLT that the Impugned transactions were fraudulent, preferential and undervalued and sought consequent relief. The NCLT, Allahabad after satisfying that these transactions fell within the look back period of two years prior to the ICD and are also preferential, undervalued and fraudulent transactions reversed these transactions. This is probably the first judgment to assess the scope of preferential, undervalued and fraudulent transactions under IBC and has also laid down certain principles to guide further on avoidance proceedings under IBC

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The issue for determination before the NCLT (Allahabad Bench) in the matter of Pramod Kumar Sharma vs. IDBI Bank Limited (orders Dt. 31.01.2019) was, ‘whether the amount which is in the suspense account of the bank can be made use of by the bank for payment towards lead bank charges dues’.

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In this case, IDBI Bank Limited has debited ₹ 32, 40,000/- from Trust and Retention Account (TRA) of CD before the commencement of CIRP and transferred the same to the suspense account. After commencement of CIRP, IDBI bank Limited adjusted the amount towards lead bank charges due to it for the period prior to commencement of CIRP.

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The NCLAT, New Delhi has in an earlier appeal matter upheld the NCLT orders passed in the matter Of Debashish Nanda vs. SBI (order dt. 02.08.2018), wherein the NCLT has held, “once the moratorium has been declared is not open to any person including ‘financial creditors’ and the appellant bank to recover any amount from the account of the CD, nor it can appropriate any amount towards it own dues.”

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Distinguishing the facts of the present case, the NCLT held that, “here. N the case on hand, no amount was withdrawn from the TRA account of the CD after the commencement of CIRP”. Thus, holding that the bank has a right to adjust the amount from the suspense account towards the lead bank charges due to it for the period prior to commencement of CIRP, the NCLT dismissed the application filed by the RP.

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NCLT, Chennai (Division bench) in the matter of Upshot Utility Services Pvt. Ltd. Vide its order dated 03.01.2019 after taking not of the submission made by the IRP’s Counsel that the company was struck off by the ROC on 05.07.2017, held that since there is a recorded material showing that the company is already struck off, the company’s petition shall no more survive. The application seeking co-operation of promoters under section 19 of the code was accordingly dismissed as being infructuous. The NCLT also observed that the OC filed the case without even finding out as to whether the CD is in existence as on the date of filing, and the bench has passed an order of admission, resulting into IRP discharging his functions by taking out his time and money.

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It directed the OC who filed the application

without even verifying the existence of the company to pay Rs. 1,00,000/- towards IRP fee of Rs. 16000/- towards costs that the IRP incurred in discharging his functions as IRP and in attending the court and Rs. 25,000/- towards advocate’s fee for the advocate engaged by the IRP.

The NCLT held that since no proceedings could be initiated against a company that is not in existence ion the rolls o ROC, accordingly, the petition was dismissed as misconceived relieving IRP from his duties.

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In the matter of Joel Cardoso v. Priority Marketing private Limited. Before the Division Bench, the NCLAT vide its orders dated 30.01.19, passed in company Appeal (AT) (Insolvency) NO.616 of 2018, held that section 5(8) defines the term “Financial Debt” as “ a debt along with interest, if, any which is disbursed against the consideration for the time value of money and includes…any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing.”

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In the matter of Joel Cardoso v. Priority Marketing private Limited. Before the Division Bench, the NCLAT vide its orders dated 30.01.19, passed in company Appeal (AT) (Insolvency) NO.616 of 2018, held that section 5(8) defines the term “Financial Debt” as “ a debt along with interest, if, any which is disbursed against the consideration for the time value of money and includes…any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing.”

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Emphasing on the use of expression “interest, if any,” the appellate tribunal concluded that “Use of expression ‘if any’ as a suffix to ‘interest’ leaves no room for doubt that the component of interest is not a sine qua non for bringing the debt within the fold of ‘financial debt’. “The NCLAT also observed that the language of the clause [section5(8)(f)] clearly manifests the fact that the money advanced by promoter , Director or a shareholder of the corporate debtor as stake holder to improve financial health of the company would have the commercial effect of borrowings on the corporate debtor, notwithstanding the fact that no provision is made for interest. This simply means that a loan advanced even without interest is a ‘Financial Debt’ and fund raised in such a situation may be treated as Long Term Borrowings and shall be considered as financial debt with obligation on the part of company to discharge the same.

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Moratorium order has been passed under Section14 of the IBC on 15.10.2018. After that Municipal Corporation had no authority to seal the property of the Corporate Debtor.

We at this moment provide two days to the Ex-Directors to comply with The directions given by us and hand over the entire possession of the property, papers and all documents relating to the Corporate Debtor company to the RP.

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In the matter of Alloysmin Industries vs. Raman Casting Pvt. Ltd. MANU/NL/0017/2019, NCLAT vide its orders dated 21.01.2109 passed in company appeal (AT) (insolvency) NO. 684 of 2018 held that the adjudicating authority (NCLAT, New Delhi bench III) erred in rejecting the application under section 9 on a wrong presumption that demand notice is to be served on the registered office of the Corporate Debtor and not Corporate Office .

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If the demand notice under section 8(1) is served on the Corporate Debtor either on its Registered Office or its Corporate Office, it should be treated to be a valid service of notice under section 8 and application under section 9 is maintainable.

Therefore, in view of the aforesaid, NCLAT directed that a fresh notice may be issued to the Corporate Debtor to give an opportunity , to both of the their aforesaid addresses to enable the Respondent to settle the claim with the Operational Creditor and enable the Operational Creditor to withdraw its petition. Otherwise, the application under Section 9 is to be admitted.

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The Resolution Professional, appointed in the case of “SBI Vs Dunar food limited & Ors.”, filed an application before the adjudicative Authority , seeking directions to be given to the Chartered Accountant(appointed as s Statutory Auditor in the AGM) either to give its consent to conduct the audit of the CD on the terms proposed by him, or to else issue a NOC in order to enable him to appoint another Chartered Accountant to conduct the statutory audit of the CD, since no reply was received from the Chartered Accountant in this respect.

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The Hon’ble Court, speaking through the Member, M.K. Shrawat, held that non issuance of NOC by the Chartered Accountant without assigning any cogent reason, is unprofessional and unethical. The Hon’ble Court after observing the urgency of the audit requirement and the fact that COC and the RP have waited for quite some time for the issuance of NOC of the outgoing Chartered Accountant, directed for substitution with new Chartered Accountant without further delay.

The Tribunal also directed the Registry for intimating the said decision to the Chairman, Institute of Chartered Accountants, New Delhi.

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Section 11(D) of the code prohibits a CD in respect of whom a liquidation order has been made to initiate the proceedings under IBC.

Section 77 of the code specifies punishment for providing false information in application made by CD. It reads as follows:-

“Where a CD provides information in the application under section 10 which is false and immaterial particulars, knowing it to be false and omits any material facts, knowing it to be material”.

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NCLT, Mumbai Bench in the matter Of Amar Remedies Limited wide order dated 29 Jan 2019 observed that it is cleared that after liquidation order passed in winding up petition against the CD then it is barred from filing a petition under section 10 of the court. Here the CD has not only suppressed the material fact that the winding up petition has not only been filed and admitted, but liquidation order has also been passed against the corporate applicant/CD and liquidator has been directed liquidation proceedings expeditiously.

The corporate applicant suppressed this material fact, knowing it to be material, and filed the petition under section 10 and in contravention of rule 10 Insolvency and Bankruptcy Rules 2016. The alleged at of the corporate applicant is punishable under section 77 of the IBC 2016.

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Since the petition has been filed under Section 10 of the IBC 2016 after the suppression of the material facts, which were known to be material, therefore the petition was rejected with cost 10 Lakhs which shall be paid by the Corporate Applicant.

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Section 11 of the code specifies which person is not eligible to initiate proceedings under it. In particular, section11 (d) reads as follows.

“11. Persons not entitled to make applications- The following shall not be entitled to make an application to initiate corporate insolvency resolution process under this Chapter, namely:-

(d) a corporate debtor in respect of whom a liquidation order has been made.

Explanation-For the purpose of this section, corporate debtor includes a corporate applicant in respect of such corporate debtor.”

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The Hon’ble court in the case of Forech India ltd. Vs Edelweiss Assets Reconstruction Company ltd. Vide order dated 22nd Jan 2019 held that “Section 11 is of limited application and only bars a corporate debtor from initiating a petition under section of the code in respect of whom a liquidation order has been made. From reading of this section, it follows that until a liquidation order has been made against the corporate debtor, an insolvency petition may be filed under section 7 or section 9 as the case may be, as it has been held by the Appellate Tribunal”.

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There is no provision under the I&B code which stipulate that if a winding up or liquidation or proceeding has been initiated against the corporate debtor’ the petition under section 7 or section 9 against the said corporate debtor is not maintainable.

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The Hon’ble Supreme Court vide its judgement in the case of B.K.

Educational Service Private Limited Vs. Parag Gupta and Associates

laid down that Limitation Act, 1963 is applicable under the

proceedings of Insolvency and Bankruptcy Code. The judgment stated

that any default which has occurred over 3 years prior to the date of

filing of the application would be barred under Article 137 of the

Limitation Act except if delay is condoned under section 5 of the

Limitation Act.

However, in the matter of Unimetal Castings Limited Vs. TJSB Sehkari Bank Limited

NCLT Mumbai Bench admitted the petition filed under Section 7 of the code by the Applicant Bank where CD raised an objection claiming petition to be barred by Limitation Act as the date of default was June 30, 2015 while application was filed in August, 2018. The Adjudicating Authority while deciding the application held that loan was appearing in the Balance Sheet of the CD which is acknowledgment of liability and CD has no disputed the fact of loan being shown as liability in his Balance Sheet. Thus the Adjudicating Authority carving an exception and agreeing with the Applicant Bank stated that the liability shown in the balance sheet is a clear acknowledgement of debt by the CD and is not barred by Limitation.

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In each of these cases, the appellants will be given copies of all resolution plans submitted to the CoC within a period of two weeks from the date of this judgment. The resolution applicant in each of these cases will then convene a meeting of the CoC within two weeks thereafter, which will include the appellants as participants. The CoC will then deliberate on the resolution plans afresh and either reject them or approve of them with the requisite majority

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NCLAT Case: Dr. Vishnu Kumar Agarwal vs. M/s. Piramal Enterprises Ltd." (Company

Appeal (AT) (Insolvency) No. 346 of 2018)Order 08.01.2019

Judgements Folder\Guranter.docx

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Judgements Folder\Supreme Court - Record of Proceedings in the matter of Brilliant Alloys.pdf

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In exercise of the power vested in this Court under Article 142 of the Constitution, we direct that the initial period of 180 days for the Conclusion of the CIRP in respect of JIL shall commence from the date of this order. If it becomes necessary to apply for a further extension of 90 days, we permit the NCLT to pass appropriate orders in accordance with the provisions of the IBC; 16/03/2019 34

We direct that a CoC shall be constituted afresh in accordance with the provisions of the Insolvency and Bankruptcy (Amendment) Ordinance, 2018, more particularly the amended definition of the expression “financial creditors”;

We permit the IRP to invite fresh expressions of interest for the submission of resolution plans by applicants, in addition to the three short-listed bidders whose bids or, as the case may be, revised bids may also be considered;

JIL/JAL and their promoters shall be ineligible to participate in the CIRP by virtue of the provisions of Section 29A;

RBI is allowed, in terms of its application to this Court to direct the banks to initiate corporate insolvency resolution proceedings against JAL under the IBC;

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The amount of Rs 750 Crores which has been deposited in this Court by JAL/JIL shall together with the interest accrued thereon be transferred to the NCLT and continue to remain invested and shall abide by such directions as may be issued by the NCLT.

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Judgements Folder\IBBI Rulings.docx

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IN THE SUPREME COURT OF INDIA

Decided On: 31.08.2017

INNOVENTIVE INDUSTRIES LTD. VS. ICICI BANK AND ORS.

FACTS

1.Application made by the financial creditor stating that Appellant (Innoventive industries ltd.) is a defaulter within the meaning of the Code,

2.Corporate debtor had defaulted in making payments, as evidence placed by the financial creditors,

3.NCLT ordered that the code would prevail over the Maharashtra Relief Undertaking (Special Provisions) Act [“MRU”] in view of the non- obstante Clause in Section 238 of the Code.

4. Appeal was carried to NCLAT, which met with same fate.

5.Appeal against the order of the NCLT and NCLAT filed to Hon’ble Supreme Court.

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Contentions 1. Initially the only contention raised by Innoventive was that since MRU is

applicable to the entity, no debt can be recovered till its operation. Later Innoventive took an additional plea that owing to non-release of funds under the Master Restructuring Agreement, Innoventive was unable to pay back the debts.

2. Section 238 of IBC applies only if there is a conflict of another law with IBC, not when the two laws have been held to be not repugnant to each other. NCLAT held that MRU is not repugnant to IBC, but then went to say that MRU will not apply in this case.

3. Because of MRU, the debt was kept in temporary abeyance, after which IBC would apply.

4. Whereas, Financial Creditor (FC) pointed out MRU and IBC works in same field. MRU provides for partial moratorium but IBC provides for full moratorium.

5. Corporate Debtor (CD) also raised an issue that erstwhile directors of Corporate Debtor do not represent the company but are filing the appeal as persons aggrieved by the order as their management right has been taken away and they are also affected as shareholders.

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1. Code would prevail against the Maharashtra Act in view of the non-obstante Clause in Section 238 of the Code.

2. Parliamentary statute would prevail over the State statute as both are repugnant to each other.

3. Moratorium under MRU clashes with moratorium under IBC. Unless MRU is out of the way, the parliament enactment will be hindered and obstructed to bring no CIRP as outlined in IBC.

4. Non obstante clause in MRU cannot apply to Central enactment.

3. Once an insolvency professional is appointed to manage the company, the erstwhile directors who are no longer in management, obviously cannot maintain an appeal on behalf of the company

4. Present Central enactment forms a code complete in itself and is exhaustive of the matters dealt with therein.

5. Entrenched managements are no longer allowed to continue in management if they cannot pay their debts.

(NCLAT also held that notice to CD is must before admitting an application under Sec 7 also. Additionally)

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Prior History:

Arising out of S.L.P. (C) No. 3172 OF 2018.

•Permission to file Special Leave Petition is granted. Heard

learned Counsel appearing for the appellants. Leave granted.

•A Petition under Section 9 of the Insolvency and Bankruptcy

Code, 2016 has been admitted by the National Company Law

Tribunal, New Delhi on 27.09.2017.

•Since that date, by way of a Memorandum of Understanding

dated 16.12.2017, the matter has been settled between the

parties.

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Decided On: 24.07.2017

Lokhandwala Kataria Construction Private Limited Vs. Nisus Finance and Investment Managers LLP read with Uttara Foods

and Feeds Private Limited Vs. Mona Pharmachem

FACTS

1. CD issued a cheque in favour of the creditor for redemption of the part of the debenture, but the cheque has been dishonoured. Application admitted.

2. Financial Creditor submitted that the parties have settled the dispute and part amount has already been paid. However, such settlement cannot be ground to interfere with the impugned order in absence of any other infirmity.

3. According to Rule 8 of I&B (Application to adjudicating Authority)Rules, 2016. The Adjudicating Authority may permit withdrawal of the application made under Rules 4, 6 or 7, as the case may be, on a request made by the applicant before its admission.“

4. NCLAT held that Rule 11 of NCLT Rules is not applicable to IBC. However, as the said Rule 11 has not been adopted for the purpose of IBC and only Rules 20 to 26 have been adopted in absence of any specific inherent power and where there is no merit, the question of exercising inherent power does not arise.

5. Eventually, Supreme Court set aside the proceedings under Article 142 of Constitution.

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Amicable settlement between parties under I & B Code, 2016 is

permissible through the inherent powers of Supreme Court as under

Article 142 of the Constitution. The court acknowledged the bar by

Rule 8 of the code to avoid a compromise from taking effect as

stated in Rule 11. An order was further made to amend the relevant

rule and allow application of inherent powers so as to avoid

unnecessary appeals.

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Juggilal Kamlapat Jute Mills Company Ltd. and Ors.

FACTS

1. Appellant filed the application under Section 9(2) of IBC before the NCLT.

2. Registry of the NCLT pointed out some procedural defects on the basis of the check list prepared for scrutiny of the petition. NCLT passed interim order and granted more time.

3. Interim order passed by NCLT, Allahabad Bench was challenged before the NCLAT.

4. The NCLAT while directing NCLT to reject and close the application filed by the Appellant also held that 7 days period within which the defects are to be removed is mandatory and not directory.

5. NCLAT also held that 14 days period for passing order under IBC is directory and not mandatory as the same is procedural, which would be counted from the date on which the application is listed for admission/order and not from the date of filing of the application.

6. 180 days and 270 days are mandatory and not directory

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Stage I- Filing of Application

• After filing of application, Registry to scrutinize the same to see if complete or

defects. If complete, then list , else applicant would be notified about those defects so that these are removed.

• For this purpose, 7 days time is given. Once the defects are removed then the application would be posted before the adjudicating authority.

Stage -II- Admission or Rejection of Application

When the application is listed before the adjudicating authority, it has to take a decision

to either admit or reject the application. For this purpose, 14 days time is granted to the

adjudicating authority. If the application is rejected, the matter is given a quietus at

that level itself. However, if it is admitted, we enter the third stage

Stage-III Commencement of CIRP

After admission of the application, insolvency resolution process commences. This resolution process is to be completed within 180 days, which is extendable, in certain cases, up to 90 days. Insofar as the first stage is concerned. Mandatory adherence to stage III timelines is must.

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Question :Whether the time limit prescribed in IBC, 2016 for the removal of defects in the application for initiation of CIRP is mandatory?

No, it is not mandatory & such time limit of seven days is directory in nature. The

appeals were allowed and that part of the impugned judgment of NCLAT which holds

proviso to Section 7(5) or proviso to Section 9(5) or proviso to Section 10(4) to remove the

defects within seven days as mandatory and on failure applications to be rejected was set

aside. If 14 days of adjudication is held to be directory, no reason to make 7 days to remove

defect as mandatory which is at pre-adjudication stage. Required to file a condonation

application explaining the reason of delay.

Question: Whether the time limit prescribed in Insolvency & Bankruptcy Code, 2016 (hereinafter referred to as Code 2016) for admitting or rejecting a petition or initiation of insolvency resolution process is mandatory?

In P.T. Rajan v. T.P.M. Sahir and Ors. the Hon'ble Supreme Court observed that where Adjudicating Authority has to perform a statutory function like admitting or rejecting an

application within a time period prescribed, the time period would have to held to be

directory and not mandatory.

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IN THE SUPREME COURT OF INDIA

Decided On: 21.09.2017

Mobilox Innovations Private Limited Vs. Kirusa Software Private

Ltd.

1. An application filed before NCLT under sections 8 and 9 of the Code stating that operational debt was owned to the Respondent.

2. The Tribunal dismissed the application.

3. Whether there was existence of dispute between parties or record of pendency of suit filed before receipt of demand notice of unpaid operational debt in relation to such dispute.

4. Appeal made to NCLAT which was allowed. NCLAT allows the appeal and remit the case to NCLT for consideration for admission of the application.

5. Default payment being disputed by the Corporate Debtor, for the Petitioner has admitted that the notice of dispute has been received by the operational creditor, the claim made by the Petitioner is hit by Section (9)(5)(ii)(d) of the Code, hence this Petition is hereby rejected.

Issues

Original definition of dispute has now become an inclusive definition, the word

“bona fide” before “suit or arbitration proceedings” being deleted cannot be imported into the present avatar of section 5(6).

Pre existing dispute i.e. it must exist before the receipt of the demand notice or invoice, as the case may be.

Adjudicating Authority has to check:

1. Whether there is an operational debt due?

2. Whether the documentary evidence furnished shows that the debt is

due and payable and has not yet been paid?

3.Whether any existence of dispute or pendency of suit or

arbitration? Sec 8(2)(a) – “and” should be read as “or”

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1. Once the operational creditor has filed an application, which was otherwise complete, the Adjudicating Authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there was a record of dispute in the information utility.

3. Confirmation from a financial institution that there was no payment of an unpaid operational debt by the corporate debtor was an important piece of information that needs to be placed before the Adjudicating Authority, under Section 9 of the Code, but given the fact that the Adjudicating Authority had not dismissed the application on this ground and that the Appellant had raised this ground only at the Appellate stage, the application could not be dismissed at the threshold for want of this certificate alone.

Adjudicating Authority has to see that dispute was not a patently feeble legal argument or an assertion of fact unsupported by evidence. Important to separate the grain from the chaff and to reject a spurious defence which was mere bluster. However, court need not be satisfied that the defence was likely to succeed and thus, no need for court to examine the merits of the dispute.

If dispute is not spurious, hypothetical or illusory, the application must be rejected

IN THE SUPREME COURT OF INDIA

dated 23.10.2017 in Civil Appeal No. 16929 of 2017

Alchemist Asset Reconstruction Company Ltd. v. Hotel Gaudavan Pvt. Ltd. & Ors.;

• No other proceedings can be invoked when moratorium period is imposed through

Section 14 of the Insolvency and Bankruptcy Code, 2016. In the current case, after a

petition was admitted by NCLAT, a moratorium was imposed, after which, even the

SLP filed was rejected. Further, when again, arbitration proceedings were sought to be

invoked in between the respondents, the Principal Bench, held that when moratorium

period is imposed, no arbitration proceedings can go on.

• The same was affirmed by the Supreme Court when a petition for Arbitration before a District Judge was accepted. The court order read:

5) The mandate of the new Insolvency Code is that the moment an insolvency petition is admitted, the moratorium that comes into effect under Section 14(1)(a) expressly interdicts institution or continuation of pending suits or proceedings against Corporate Debtors

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MACQUARIE BANK LIMITED …APPELLANT

VERSUS SHILPI CABLE TECHNOLOGIES LTD. ...RESPONDENT

CIVIL APPEAL NO.15135,15481&15447 OF 2017

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 the Adjudicating 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 16/03/2019 53

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. 16/03/2019 54

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 16/03/2019 55

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 Court 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

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“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 there under would

yield the result that a notice sent on behalf of an operational creditor by a lawyer would be

in order.”

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All India Insolvency Professional

Association

President

IP & CA Manoj Kumar Anand