By Prabhan Patel- Symbiosis Law School, Hyderabad
The Appellant in the case DF Deutsche Forfait AG is a company which has been incorporated by the laws of Germany and is situated in Cologne, Germany. The Respondent along with Misr Bank Europe GmBH(Respondent no.2) are operational creditors. They were subject to payment from the appellant on behalf of an agreement about the supply of 20,000 tons of prime steel billet which was to be supplied by German manufacturer AIC Handels GmbH as per the agreement. Due to the non-payment of the principal amount plus interest of USD 1.65 Crore, the Respondents filed for winding up against the Respondents under Section 433 of the Companies Act,1956 before the Hon’ble High Court of Punjab and Haryana. The Respondents had entered into a forfeiting agreement which was not acknowledged by the appellant. After the case was transferred to the NCLT, Chandigarh Bench under Rule 5 of “The Companies (Transfer of Pending Proceeding) rules,2016, the Respondents had requested the treatment of the application as under Section 9 of the Insolvency and Bankruptcy IBC, 2016. This petition was admitted and registered by the NCLT Mumbai Bench. Soon after passing of the order, the appellant filed for an appeal to the NCLAT appealing that the petition was not maintainable under Section 9 of the act and that the notice served was not issued by the Respondents but by their lawyers which was against the guidelines of Section 8(1) of the Act. The Appellant also contended that there existed a pre-existing dispute between the parties and hence, Section 9 of the Act was not maintainable.
ISSUES OF THE CASE
- Whether the joint petition is maintainable under Section 9 of the Act?
- Whether as prescribed under Section 9 of the Insolvency and Bankruptcy IBC,2016, a certified certificate of bank account from a financial institution has been filed?
- Whether the notice was issued in adherence to the directions issued under Section 8(1) of the act?
- Whether there exists a pre-existing dispute between the parties?
Justice S.J. Mukhopadhaya was of the opinion that even though certain facts and judgments stand decided by the tribunal, the questions in this appeal as regards to maintainability of a joint application under Section 9 and whether notice can be given through a lawyer under Section 8 of the act, have not been shed light on before.
1) WHETHER JOINT PETITION IS MAINTAINABLE
The initiation of insolvency proceedings can be made under Section 7 and Section 9 although the requirement is different for both. Under Section 7(1), filing of an application can be made by a creditor by himself or jointly where default in respect to financial debt has occurred. Section 7(2) provides for the process on how to make an application in the prescribed form and manner and 7(3) enlists the necessary documents. Unlike Section 7, for filing an application under Section 9, one must fulfill the requirements of Section 8 of the Act. Section 8(1) states that an operational creditor must deliver a notice of payment of the unpaid debt on the Corporate Debtor. This is a condition that must come to fulfillment before filing of an application under Section 9, unlike Section 7. Under the sub-Section (1) of Section 9 of the IBC,2016, the right to file triggers right after expiry of ten days from the delivery of the Demand Notice or a copy of the invoice. If the debtor does not respond by making the payment or does not serve a notice of dispute under Section 8(2), the creditor may file an application before the Adjudicating Authority for the initiation of the corporate insolvency resolution process. An application under Section 9 of the IBC,2016 is required to be filed in proper format and manner accompanied by the documents as mentioned in clauses (a), (b), (c), and (d) of sub-Section (3) of Section 9 of the IBC,2016. After a thorough reading of Section 8 and 9, it is clear that the notice under Section 8 is to be issued by an Operational creditor individually and the petition is to be filed individually and not jointly. Individual creditors have to serve an individual claim notice under Section 8. The claim will be different in both cases. The date of notice will be different in both cases. Separate forms will have to be filled in which shall contain individual data.
The Respondents’ contention relied on Rule 23A on the NCLT Rules, 2016 but Section 10 of the IBC,2016 has not adopted the said rule, hence Rule23A does not apply to the application under Section 9 of the IBC,2016. Therefore, the joint petition under Section 9 of IBC,2016 is not maintainable.
2) WHETHER THE CERTIFICATE ISSUED IS LEGAL
In order to understand the legality of this issue, it was important to understand the crux of the word ‘shall’ in sub-Section (3) of Section 9 of the IBC,2016. The court considered the ruling in Smart Timing Limited v. National Steel and Argo Industries Limited, and held that it was indeed mandatory to file a ‘certificate of recognised financial institution’ maintaining account of the Operational Creditor confirming that there is no payment of unpaid operation debt made by the Corporate Debtor. The provision of sub-Section 3 of Section 9 mandates the creditor to furnish a copy of the invoice demanding payment in case there is no notice given by the corporate debtor relating to a dispute of unpaid debt, a copy of the certificate from the ‘Financial Institution’ maintain accounts to confirm that no payment has been made by the debtor to the creditor in lieu of the unpaid debt in question. In order to understand the intensity and meaning of mandatory in this case, the court took help from the judgment passed by the Hon’ble Supreme Court in Manilal Shah v. Sardar Sayed Ahmed, where the Apex Court held that “where the statute itself provides consequences of breach or non-compliance, normally the provision has to be regarded as having mandatory in nature.” It is an important principle of Interpretation of Statutes that the words of a statute must prima facie be given their ordinary meaning, unless such construction leads to absurd meanings.
In the case at hand, the certificate attached by the Respondents had not been issued by any financial institution as defined in sub-Section 14 of Section 3 of the IBC,2016 but instead by Misr Bank who is a foreign bank, though are incorporated fairly within the laws of Germany, are not a recognised ‘financial institution’ by the RBI. Hence, the certificate has been issued by a Collecting agency and not a ‘Financial Institution’. Accordingly, the affidavit as prescribed in Form-5 for the Adjudicating Authority Rules has not been filed as well which mandates that ‘no notice of dispute received to be returned or it is returned when dispute was raised’, has to be enclosed by the ‘operational creditor’. Therefore, the application under Section 9 of the IBC,2016, was not maintainable.
3) WHETHER THE NOTICE SERVED IS IN ACCORDANCE TO SECTION 8 OF IBC,2016
Upon reading of Section 8(1) of the IBC,2016, it is clearly stating that upon occurrence of default, the Operational creditor is required to deliver the demand notice of unpaid operational debt and a copy of the invoice demanding payment of the amount in question. Rule 5(1) of the Adjudicating Authority Rules mandates the Operational creditor to deliver a demand notice as per Form-3 or an invoice as per Form-4. Clauses (a) and (b) also state that who can be authorized to act on behalf of an operational creditor. It is hence, understood that after going through Form-3 and Form-4, read with Rule 5(1) and Section 8 of the IBC,2016, the operational creditor must apply himself or through a person authorized to act on his behalf. He/she must state their authority and must hold a position in relation to the operation creditor and only such person can apply. In the current case, there is no notice and no record which states that the lawyer had been authorized by the Board of Directors of the Respondent, and nothing on record that suggests the lawyer’s relation to the Respondents and so the lawyer cannot issue any notice under Section 8 of the IBC,2016. The given notice is to be treated as any normal lawyer’s notice since it was not in the prescribed format and does not portray the consequences and seriousness of non-payment of Operational debt. Therefore, the petition under Section 9 is not maintainable.
4) WHETHER THEIR EXISTED A DISPUTE PRIOR TO THE NOTICE UNDER SECTION 8
In regards to this issue, the court took guidance from Kirusa Software Pvt. Ltd. v. Mobilox Innovations Pvt. Ltd, where the notice of winding up was issued by Respondents much later to the claim of dispute by the appellant, that the notice under Section 8 was not maintainable since the question of dispute had arisen prior to the notice. In the present case, the Respondents had issued a winding-up notice on 8th December 2016 before the issuance of the IBC,2016. The Appellant, however, had a detailed reply dated 3rd January,2017 disputing the claim before the purported notice mentioned in Section 8 of the IBC,2016. The court held that indeed there was a dispute in existence within the meaning of Section 8 read with Section 5(5) of the IBC,2016 and therefore, the petition under Section 9 was not maintainable. The NCLAT set aside the order passed by the Mumbai bench and ordered the petition was not maintainable under Section 9 of the IBC,2016.