Supreme Court Clarifies Demand notice Filing Procedure Under IBC

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Supreme Court Clarifies Demand notice Filing Procedure Under IBC
Supreme Court Clarifies Demand notice Filing Procedure Under IBC

The Supreme Court recently clarified in Macquarie Bank Limited v Shilpi Cable Technologies two important questions that had come up under the Insolvency and Bankruptcy Code, 2016 (IBC), and were impairing operational creditors from enforcing their rights under the IBC.

Case Details

Macquarie Bank, Singapore sent a demand notice under section 8 of the IBC via its lawyers asking Shilpi Cable Technologies to pay its outstanding debt. After Shilpi failed to pay up, the bank started insolvency proceedings in the National Company Law Tribunal (NCLT).

The NCLT however dismissed the bank’s petition on the grounds that it had failed to comply with section 9(3)(c) of IBC.

On appeal, the National Company Law Appellate Tribunal (NCLAT) upheld the earlier order that a lawyer cannot send a demand notice on behalf of the operational creditor. The bank next approached the Supreme Court via a special leave petition.

The questions before the Supreme Court were:

  1. Whether section 9(3)(c) of IBC, which mandates that an operational creditor must provide a certificate of a recognized financial institution to start insolvency proceedings, is mandatory

Foreign operational creditors have been unable to produce such a certificate as they often don’t maintain accounts with the various recognized financial institutions.

  1. Whether a demand notice regarding an unpaid operational debt under section 8 can be sent by a lawyer or an authorized representative on behalf of the operational creditor.

Supreme Court Clarifies IBC Provisions  

In its judgement setting aside the order passed by NCLAT, the Supreme Court held that section 9(3)(c) of IBC is to be considered a procedural section, so not a condition precedent for an application to be filed under section 9(1).

This clarification is further helped by section 9(5) which states even without such a certificate, the application need not to be rejected.

The court used the Insolvency and Bankruptcy (Application to Adjudicatory Authority) Rules, 2016, as well as the forms under it, in particular Form 5 and Form 6 along with other annexures to the forms, to conclude that the forms needed copies of necessary accounts held by banks/financial institutions confirming an unpaid operational debt, which established that a certificate was not mandatory.

The court also noted that section 8 requires an operational creditor to first deliver a demand notice of the unpaid debt as per section 8(1) of IBC.

It found that the phrase “an operational creditor may on the occurrence of a default deliver a demand notice…” mentioned in section 8 of IBC should be read to include an operational creditor’s authorized agent and lawyer, as mentioned in Forms 3 and 5 which are appended to the Adjudicatory Authority Rules.

The court also used section 30 of the Advocates Act, 1961, wherein the word ‘practise’ has been used to include all preparatory steps for the filing of an application before a tribunal, including issuance of a notice.

The Supreme Court judgment is seen to be significant for all foreign-based operational creditors as they will no longer be hampered by the technical hurdles for filing petitions before the NCLT.

 

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