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SUPREME COURT: LAWYERS CAN ISSUE BANKRUPTCY LAW NOTICES AND BANKER’S CERTIFICATE IS NOT MANDATORY

Judgment: Macquarie Bank Limited (“MBL”) v. Shilpi Cable Technologies Ltd. (“SCTL”).

Forum: The Supreme Court of India (“SC”).

Judgment delivered on: December 15, 2017

Act/Law: The Insolvency and Bankruptcy Code, 2016 (“Code”).

Ratio: Firstly, lawyers can issue notice(s) under Section 8 of the Code, on behalf of the operational creditor they represent.

Secondly, it is only directory, and not mandatory, for the operational creditors to submit certificate from a financial institution while initiating insolvency proceedings against a company upon its default in payment of an undisputed operational debt (of more than INR 100,000).

Cause, Effect and Relevance:

Simply put, as per the Code, before any insolvency proceeding can be initiated against a company (called “Corporate Debtor”), the operational creditor (i.e. the creditor facing default in payment in connection with supply of good or services to the Corporate Debtor) needs to first deliver a demand notice of the unpaid debt to the Corporate Debtor. The Corporate Debtor can then, within a period of 10 days of receipt of such notice from the operational creditor, bring to the notice of the operational creditor the existence of a dispute or the record of the pendency of a suit or arbitration proceedings, which is pre-existing – i.e. before such notice or invoice was received by the Corporate Debtor, or pay the defaulted amount. The moment there is existence of such a dispute, or the Corporate Debtor pays, it gets out of the clutches of the Code.

However, in cases where there is no pre-existing dispute, and the Corporate Debtor fails to pay to the operational creditor the amount in default within the aforesaid 10 days’ notice period, the operational creditor can file an application before the jurisdictional NCLT praying for initiation of corporate insolvency resolution process against the Corporate Debtor. The Code and the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 prescribe for certain documents to be filed along with the insolvency application before the NCLT. One of these documents is a certificate from a financial institution, with whom the operational creditor maintains a bank account, confirming that the amount of default has not been received by the operational creditor (“banker’s certificate”). Now, the Code defines “financial institutions” in such a way that foreign banks are not financial institutions.

In the present case of MBL v. SCTL, the insolvency application presented by MBL against SCTL was rejected by the NCLT. In appeal by MBL against such rejection, the NCLAT upheld the decision of the NCLT, and further elaborated the grounds for rejection of MBL’s application. The relevant grounds for rejection, in brief, were:

  1. The 10 days’ notice to be issued by the operational creditor (MBL) was issued by MBL’s lawyer and not by MBL itself. As the interpretation of the Code given by NCLT/NCLAT, the 10 days’ notice could only be issued by the operational creditor itself, and not by its lawyer(s).

Effect:   The above observation led to rejection of applications by many operational creditors in other cases as well. India follows a practice where lawyers usually and regularly issue notices and litigation papers on behalf of their clients, and the submissions of the lawyers are akin to submissions by the litigants themselves. Many worthy operational creditors and their lawyers were therefore caught on the wrong foot, absolutely unaware of any possibility of such an interpretation of the Code flowing from the NCLT/NCLAT.

  1. MBL did not have a bank account in India, and therefore it did not attach a banker’s certificate to its application to the NCLT, stating that MBL did not receive payment of the defaulted amount after notice. Again, as per the interpretation of the NCLAT, submission of banker’s certificate was mandatory. Therefore, the applications, which were not accompanied by banker’s certificate, would merit rejection.

Effect: The above observation in one shot made the Code an India centric piece of legislation so far as operational creditors were concerned, effectively cutting out from its benefits, all operational creditors who did not have a presence in India or have a bank account in India.

The Hon’ble Supreme Court was also perhaps looking for an opportune moment to settle the law (and unsettle the above narrow interpretations coming from NCLTs/NCLAT), which moment presented itself by way of MBL v. SCTL. The Supreme Court by its detailed order, followed by much detailed arguments from both sides, overruled the interpretations of the NCLT/NCLAT. As a result:

  1. Lawyers can issue insolvency notices on behalf of their Clients (specifically notice under Section 8 of the Code from an operational creditor to a Corporate Debtor); and
  2. Submission of banker’s certificate is only directory, and not mandatory. Accordingly, the benefits of the Code are now open to foreign operational creditors, who may not have a bank account with an Indian financial institution.

Conclusion:

The benefit of the present decision and interpretation of the Supreme Court would also be available to a series of pending cases, and cases which could not be initiated/filed owing to the narrow interpretation of the Code by NCLAT/NCLT prevailing till now. In its detailed judgment, the Supreme Court considered a wide range of arguments and legal provisions, including that the interpretations of NCLAT/NCLT (set aside) would run afoul of the Constitution of India – namely:

  • Article 14, which guarantees equality before law, is available even to foreigners. Article 14 therefore would not permit an artificial classification between Indian and foreign operational creditors; and
  • Article 19(1)(g) which protects the fundamental right of all Indians to practice one’s profession. As per the Supreme Court, Section 30 of the (Indian) Advocates Act, 1961 deals with this fundamental right. As such, advocates (lawyers) could not be restricted from issuing insolvency notices under the Code on behalf of their clients.

On an overall reading, the judgment of MBL v. SCTL reflects the cautious effort of the Supreme Court (even by way of reference to previous judgments of the Supreme Court, where it reversed the interpretations of the NCLAT/NCLTs on certain other issues) to prompt the tribunals to take a more inclusive approach, considering the object and purpose for any legislation, rather than falling for strict and literal interpretations which may defeat the object of the legislation itself.