The firm is grateful to its partner, Advocate & Solicitor Chirag Sancheti for his inputs in this Research Update.
INTRODUCTION
In its recent landmark judgment given by the Honorable Supreme Court of India (on 15th December, 2017), in the case of Macquarie Bank Vs. Uttam Galva Metallics Limited, the Court has set aside the judgment of the National Company Law Appellate Tribunal (“NCLAT”) and held that-
for initiating insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (“Code”), it is not mandatory for the operational creditor to obtain 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; and
a demand notice of an unpaid operational debt can be issued by a lawyer on behalf of the operational creditor and it was not necessary that a demand notice under the Code could be sent only by a person employed in the organisation of the Operational Creditor.
In so far as foreign operational creditors are concerned, the Code cannot be construed in a discriminatory fashion to include only those operational creditors who happen to bank with financial institutions which may be included Under Section 3(14) of the Code. In other words, even if the financial institutions (with whom the foreign creditors bank) are not recognised under the Code, the foreign creditors could obtain the requisite certificate from such banks / financial institutions.
The said judgement of the Supreme Court is a major relief which had been long desired by the operational creditors as their insolvency applications were being dismissed by the National Company Law Tribunal (‘NCLT”) because they could not procure a certificate from the bank / financial institutions which would confirm that there was no payment of an unpaid operational debt by the corporate debtor. NCLT used to reject the insolvency application, despite the operational creditors producing various other documents which evidently proved that the debt was unpaid. Moreover, majority of the banks flatly refused to provide such a certificate despite there being clear requirements prescribed under the Code to procure such a certificate from the bank.
Very importantly, this judgment is also a major relief for the foreign operational creditors for whom it was impossible to obtain such a certificate. This was because, most of the times, the banks/financial institutions, with whom these creditors maintained accounts were non-resident banks which are not specifically covered under the definition of “financial institution”. Therefore, when such banks/financial institutions were not recognised under the Code in the first instance as valid / scheduled financial institutions, the question of obtaining the certificate from them did not arise; and NCLT had to dismiss their application.
This update contains an elucidation on the aforesaid case and the Court’s judgement.
BACKGROUND
In case of operational creditor initiated insolvency, as per provisions of section 9(3)(c) of the Code, the operational creditor shall, along with the insolvency application, furnish a copy of the certificate from the financial institutions (which maintain the accounts of the operational creditor) confirming that there is no payment of an unpaid operational debt by the corporate debtor.
Due to the aforesaid requirement which seem to be mandatory because of the usage of the word “shall”, under section 9(3)(c) of the Code, the NCLT as well as the NCLAT in their various judgements held that, – in the absence of such a certificate, the NCLT cannot admit an insolvency application of the operational creditor.
These judgments of the NCLT and the NCLAT caused unfair hardship to operational creditors because most banks flatly refused to provide the aforesaid certificate despite there being a clear mandate under the Code to the operational creditor to procure such a certificate from the banks / financial institutions.
Further, the NCLT as well as the NCLAT under various judgments had held that a demand notice of an unpaid operational debt could not be issued by a lawyer on behalf of the operational creditor and it could be sent only by a person who was either holding a position either with or in relation to the operational creditor. Such a judgment was given placing reliance on the language used in Form-3 and Form-4 and with the consequent rationale that it is only when the Operational Creditor serves the notice in Form 3 or Form 4 to the Corporate Debtor, it will understand the serious consequences of non-payment of operational debt.
FACTS OF THE CASE (IN BRIEF)
Hamera International Private Limited, the original supplier executed an agreement with the Appellant, Macquarie Bank Limited, Singapore, by which the Appellant purchased the original supplier’s right, title and interest in a supply agreement in favour of the Respondent (Uttam Galva Metallics Limited).
As the Respondent failed to make payment, the Appellant issued a demand notice under Section 8 of the Code calling upon the Respondent to pay the outstanding amount. The Appellant thereafter initiated the insolvency proceedings by filing a petition under Section 9 of the Code with the NCLT. The NCLT dismissed the petition, inter alia on the ground that the Appellant did not procure the certificate as required under Section 9(3)(c) of the Code.
The NCLAT also concurred 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 and further held that an advocate/lawyer could not issue a notice under Section 8 on behalf of the operational creditor.
The Appellant filed an appeal before the Honourable Supreme Court of India against the said judgement of the NCLAT.
ISSUES
Issue no. 1
Whether, in relation to an operational debt, the provision contained in Section 9(3)(c) of the Code is mandatory, i.e. whether it was mandatory for the operational creditor to obtain 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?
Issue no. 2
Whether a demand notice of an unpaid operational debt can be issued by a lawyer on behalf of the operational creditor?
RELEVANT MAIN LEGAL PROVISIONS
For Issue no. 1
Section 9(3)(c) of the Code – Requirement of submission of certificate obtained from the financial institution (Quoted)
“(1) After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under Sub-section (1) of Section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under Sub-section (2) of Section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.
(2) …….
(3) The operational creditor shall, along with the application furnish–
(a) ………..;
(b) ………..;
(c) 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; and
(d) such other information as may be specified.”
For Issue no. 2
As per Form 3 (which is the prescribed form of Demand Notice which is sent by the operational creditor), pursuant to Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, and the Form 5 (that is the prescribed form of the insolvency application) pursuant to Rule 6 of the said Rules; both these documents have to be signed by a person authorised to act on behalf of the operational creditor and who holds position with or in relation to the operational creditor.
HONORABLE SUPREME COURT’S JUDGMENT (MAIN POINTS OF THE JUDGMENT EXPLAINED)
On Issue no. 1
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, which only “confirms” that there is no payment of an unpaid operational debt.
Annexure III in the Form also speaks of copies of relevant accounts kept by banks/financial institutions maintaining accounts of the operational creditor, confirming that there is no payment of the unpaid operational debt, only “if available”. This would show that such accounts are not a pre-condition to trigger the Code, and that if such accounts are not available, a certificate based on such accounts cannot be given,
The Code cannot be construed in a discriminatory fashion 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. There may be situations where an operational creditor may have as his banker a non-scheduled bank, in which case, it would be impossible for him to fulfil the condition of obtaining a bank certificate from such bank. A so-called condition precedent impossible of compliance cannot be put as a threshold bar to the processing of an application Under Section 9 of the Code and therefore Section 9(3)(c) would have to be construed as being directory in nature.
The important condition precedent is an occurrence of a default, which can be proved by means of other documentary evidence. For example, the case of an earlier letter written by the corporate debtor to the operational creditor confirming that a particular operational debt is due and payable. This piece of evidence would be sufficient to demonstrate that such debt is due and that default has taken place, as may have been admitted by the corporate debtor.
If the bank certificate under section 9(3)(c) is construed as a mandatory requirement for initiating insolvency, then, despite the availability of such documentary evidence contained in the Section 9 application, the application would yet have to be rejected because of absence of requisite certificate under Section 9(3)(c). This would amount to a situation wherein serious general inconvenience would be caused to innocent persons, without very much furthering the object of the Act. Such an absurd result militates against such a provision being construed as mandatory.
Placing reliance on several case laws on the subject matter of interpretation of statutes, the Court held that the modern trend of case law is that creative interpretation is within the “Lakshman Rekha” of the Judiciary. Creative interpretation is when the Court looks at both the literal language as well as the purpose or object of the statute, in order to better determine what the words used by the draftsman of the legislation mean. 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.
Taking on record the Viswanathan Report, which mentioned that the creditor can only trigger the IRP on “clear evidence” of default; the Court observed that nowhere does the said 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.
it is well settled that procedure is the handmaid of justice and a procedural provision cannot be stretched and considered as mandatory, when it causes serious general inconvenience.
On Issue no. 2
If 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. Both the expression “authorized to act” and “position in relation to the operational creditor” as mentioned under Form 5 and Form 5 go to show that an authorized agent or a lawyer acting on behalf of his client is included within the aforesaid expression.
To insist upon the party himself personally signing the agreement or compromise would often cause undue delay, loss and inconvenience, especially in the case of non-resident persons. It has always been universally understood that a party can always act by his duly authorised representative. If a power-of-attorney holder can enter into an agreement or compromise on behalf of his principal, so can counsel, possessed of the requisite authorisation by vakalatnama, act on behalf of his client. Not to recognise such capacity is not only to cause much inconvenience and loss to the parties personally, but also to delay the progress of proceedings in court. If the legislature had intended to make such a fundamental change, even at the risk of delay, inconvenience and needless expenditure, it would have expressly so stated.
CONCLUDING COMMENTS
The said judgement of the Supreme Court is a major relief which had been long desired by the operational creditors for the reasons mentioned under paragraphs 1.2 and 1.3 above (and which are not repeated here for brevity) and where your kind attention is drawn.
Additionally, the judgement becomes a strong authority for the following 2 reasons:
in the event the legal procedural requirements result in unjustified hardship and serious prejudice, the courts would grant relaxation from compliance of such provisions.
The word “shall” (used under an enactment), in certain cases, can be construed to be only directory in nature and not mandatory.
Though not specifically dealing with this point, the Honorable Court nevertheless remarked that,- Annexure III in the Form which requires the operational creditors to submit copies of relevant accounts kept by banks/financial institutions maintaining accounts of the operational creditor, confirming that there is no payment of the unpaid operational debt, is only subject to its availability; and that submission of accounts are not a pre-condition to trigger the Code. From this particular observation of the Court, it can be inferred that, along with the bank certificate, even submission of accounts statements is not mandatory. This too is very helpful for the operational creditors because for debts which remain outstanding for a substantial period, say 2 to 3 years, the creditors were required to submit the entire statement of accounts for such period, not only in hard copies (which usually run into more than 300 pages for a midsized corporate) but also the soft copy version (that too scanned in a CD / DVD). Such requirement, was not only laborious in nature, but also involved frequent liaison with the banks to obtain account statements for such a long period. But after this judgment, the NCLT may grant exemption from requirement of submission of aforesaid accounts.