SC: A Lawyer can issue Statutory Demand notice under IBC, on behalf of an operational creditor.

The Supreme Court of India, in its judgment dated 15th December 2017, has overruled a decision of the National Company Law Appellate Tribunal (NCLAT) in Macquarie Bank Limited Appellant Vs. Uttam Galva Metallics Limited, which laid down that statutory demand notice sent by a lawyer on behalf of the Operational Creditor is not a valid notice within the meaning of the Insolvency & Bankruptcy Code, 2016.

The two broader issues before the court were:

  1. Whether, in relation to an operational debt, the provision contained in Section 9(3) (c) of the I&B Code is mandatory?, and
  2. Whether, a demand notice of an unpaid operational debt can be issued by a lawyer on behalf of the operational creditor?

Facts :

Appellant sent demand notice for payment of the outstanding amounts through email followed by several reminders. Ultimately, the appellant issued a statutory notice under Sections 433 and 434 of the Companies Act, 1956. Respondent vide a reply to the statutory notice denied any outstanding amount.

After the enactment of the Code, the Appellant again issued a demand notice under Section 8 of the I&B Code at the registered office of the respondent, calling upon to pay the outstanding amount. By another reply, the respondent stated that nothing was owed by them to the appellant. The Appellant initiated insolvency proceedings by filing a petition under Section 9 of the Code. 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.

The NCLAT agreed with the ruling of 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.

Ratio:

While analysing the first issue, the court summarised following points:

  1. 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.
  2. 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. There may be situations of operational creditors who may have dealings with a financial institution as defined in Section 3(14) of the Code. There may also be situations where an operational creditor may have as his banker a non-scheduled bank, for example, in which case, it would be impossible for him to fulfill the aforesaid condition. A foreign supplier or assignee of such supplier may have a foreign banker who is not within Section 3(14) of the Code. Therefore, as the facts of these cases show, 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 I&B Code.
  3. Even otherwise, the important condition precedent is an occurrence of a default, which can be proved, as has been stated hereinabove, by means of other documentary evidence.

Further analysing the second issue, the court summarised following points:

  1. 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.
  2. In Forms 3 and 5 of the Code, the understanding of the draftsman of the Adjudicatory Authority Rules is clear, 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 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.
  3. The non-obstante clause contained in Section 238 of the Code will not override the Advocates Act as there is no inconsistency between Section 9, read with the Adjudicating Authority Rules, Forms and the Advocates Act.
  4. 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 I&B 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 sufficient.

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