Macquarie Bank Limited vs. Shilpi Cable Technologies

Facts of the Case

The Corporate Debtor/Respondent (Uttam Galva Metallics) defaulted in the payment to the Operational Creditor/Appellant (Macquarie Bank) amounting to USD 6,321,337 equivalent to Rs. 43,11,15,190. Although repeated reminders as to the payment of the debt via emails were made, but such communications could not influence the Debtor to make the payment, pursuant to which a Statutory Notice was sent by the Appellant under Section 433 and 434 of the Companies Act. The reply to such notice denied the existence of any such outstanding debt on the part of the Respondent. After, the Insolvency and Bankruptcy Code was enacted in 2016, the Appellant furnished a Demand Notice to the Corporate Debtor under Section 8 of the Code. The Respondent replied to the notice saying that there existed no outstanding default on its part and simultaneously, also questioned the validity of the Purchase Agreement. The Appellants approached the National Company Law Tribunal and applied for the initiation of the Corporate Insolvency Resolution Process.

NCLT Order

The NCLT rejected the application of the Appellant based on two grounds that:

(1) The application for initiation of the Corporate Insolvency Resolution Process was incomplete as it did not comply with the mandatory requirements under Section 9(3)(c) of the Insolvency and Bankruptcy Code which required a certificate from a financial institution with regards to the non-payment of the outstanding amount by the Corporate Debtor. The certificate from the Appellant Bank itself was not held to be a certificate from a financial institution as it was a foreign bank which did not fulfill any of the requirements to qualify as a “financial institution” as per Section 3 (14)[1] of the Code.

(2) There was an existence of dispute before the Demand Notice was furnished upon the Corporate Debtor as per Section 8(2)(a) of the IB Code which was also raised at the time when a reply to the Statutory Notice was furnished under Section 433 and 434 of the Companies Act by the Respondent.

NCLAT Decision

The Appellants aggrieved by the order of the NCLT approached the National Company Law Appellate Tribunal for remedy against the Respondent. But, the NCLAT upheld the NCLT order stating that the application has to be complete before the initiation of the Corporate Insolvency Resolution Process and that the appellant failed to comply with the mandatory requirement of furnishing a certificate by a financial institution in which the Corporate Debtor has its account with regards that it has failed to pay the outstanding debt. Moreover, it reiterated that the Appellant Bank was not a “financial institution” as per Section 3(14) of the IB Code. Also, as it is a mandatory document which acts as an evidence to the existence of default, it has to be necessarily furnished and without it the application is incomplete.

Furthermore, the Appellant tribunal took cognizance of the Demand Notice which was furnished by the lawyer of the Appellant and noted that such Demand Notice has to be in compliance with Form 3 under Rule 5 of the Insolvency and Bankruptcy Code Rules, 2016. It was also observed that such Demand Notice was invalid as it has to be furnished as per Form 3 by the Creditor himself or by any authorized person on his behalf and lawyer cannot come under such purview as there was absence of any authority by the Operational Creditor.

Thus, the appeal was dismissed based on such grounds and the issue relating to the ‘existence of the dispute’ adjudicated by the NCLT was left unmentioned in the said order of NCLAT.

Supreme Court’s Judgment

The Appellants further aggrieved by the order of the NCLAT appealed before the Hon’ble Supreme Court. It was contended by the Appellants that if Section 9(3)(c) is read conjointly with Rule 6 and Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, it could be observed that the requirement of the certificate by the financial institution is not mandatory but is only directory in nature as it is just another document along with the other documents which could be relied upon by the Operational Creditor in order to prove the existence of an Operational Debt. On the other hand the Respondent contended that Section 9 uses the word ‘shall’ which clearly shows the intention of the legislature to make it a necessary and a mandatory requirement and cannot be derogated upon.

The Hon’ble Supreme Court observed that a creative interpretation of Section 9(3)(c) is necessary in the present case as the literal interpretation would be unreasonable and would create hardships for Appellants and other foreign banks in the future. Also, the requirement of certificate as a document is not necessary for substantiating the existence of default as it can be proved by other documents as well. Also, in such cases where such certificates are impossible to furnish, serious inconvenience will be caused to the innocent persons like Appellant when such requirements are not even necessary to further the object of the Act.

While dealing with the other issue related to whether a lawyer can issue a demand notice on behalf of the Creditor, the Hon’ble Supreme Court read sections 8 and 9 of the IB Code conjointly along with Section 30 of the Advocates Act which talks about the Right of the Advocates to practice. The Hon’ble Supreme Court relied upon the judgment of “Byram Pestonji Gariwala v. Union Bank of India”[2] where a signature affected by the lawyer on behalf of his client on a document related to a compromise was held to be effective in law. It was observed in the judgment that “the courts in India have consistently realized the role of lawyer when it comes to disputes and the extent and nature of the implied authority to act on behalf of their clients, which included compromising matters on behalf of their clients. The Court held there is no reason to assume that the legislature intended to curtail such implied authority of counsel.”

Therefore, the decision of the NCLT and NCLAT was overruled by the Hon’ble Supreme Court and the matter was remanded back for consideration.

Conclusion

In my opinion, the Hon’ble Supreme Court did a fair job by overriding the procedural irregularities by observing the subjective nature of the case where the general procedure was clearly out of place. Also, the objective of the statute was kept in mind at all times by the Supreme Court and language of the statute was construed in a manner which is not unjust to any party. Moreover, a liberal interpretation of the procedural aspects of the case would help the creditors recover their debts in an efficient manner, while not allowing the debtors to pull out loopholes in order to evade liability while delaying the process on the expense of the creditor.

Author: Pratyush Rao, 5th year student at ILNU, Nirma University, intern at Khurana & Khurana, Advocates and IP Attorneys and can be reached at info@khuranaandkhurana.com.

References:

[1] Section 3 (14): “financial institution” means— (a) a scheduled bank; (b) financial institution as defined in section 45-I of the Reserve Bank of India Act, 1934; (c) public financial institution as defined in clause (72) of section 2 of the Companies Act, 2013; and (d) such other institution as the Central Government may by notification specify as a financial institution

[2] 1992 (1) SCC 31

[3] http://www.taxscan.in/section-93c-insolvency-bankruptcy-code-2016-directory-nature-says-supreme-court/15454/#popup1

[4]NCLT http://www.nclt.gov.in/Publication/Chandigarh_Bench/2017/Others/UttamGalvaMetallicsLimited.pdf

[5]NCLAT http://www.nclat.nic.in/final_orders/Principal_Bench/2017/insolvency/17072017AT962017.pdf

[6]Supreme Court judgment   https://drive.google.com/file/d/1_QCold0R9UcG1cCRE9JBzVCw4LNppJOM/view

[7] Certificate from a recognized financial institution is not a threshold bar to initiate Insolvency Proceedings: The Supreme Court’s view in Macquarie Bank Limited v. Shilpi Cable Technologies

[8] Ibc-Lawyer Can Issue Demand Notice of Unpaid Operational Debt on Behalf of Operational Creditor

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