In a recent judgement, the Supreme Court has clarified provisions within Insolvency and Bankruptcy Code, 2016 that had been interpreted in a narrow manner by the insolvency tribunals.
The case involving Macquarie Bank Limited (“MBL”) and Shilpi Cable Technologies Ltd. (“SCTL”), tackled two important questions,
- Firstly, whether lawyers have the authority to issue notices on behalf of the creditor they represent under Section 8 of the bankruptcy law
- Secondly, is the requirement mentioned in the law to submit a certificate from a financial institution while starting insolvency proceedings mandatory
The Court’s judgement issued on December 15 ruled that lawyers could issue notices on behalf of their clients and the requirement of a banker’s certificate was directory in nature.
IBC Provisions Reviewed By The SC
The Insolvency and Bankruptcy Code (IBC) requires that for any insolvency proceedings to start against a company the operational creditor – the entity facing default related to payment pending for good or services supplied to the debtor – must deliver a demand notice regarding the unpaid debt to the debtor .
Within the next 10 days after receipt of the notice, the debtor company must either pay the amount or inform the creditor of the existence of a dispute or the pendency of arbitrary proceedings or the presence of a suit from the time before the notice was received.
However if the company fails to do either, the creditor can file an application with the relevant NCLT asking for the initiation of corporate insolvency resolution process against the company in question.
The law requires certain set of documents to be filed along with the insolvency application, one of which is a certificate from the financial institution, with whom the creditor holds a bank account, stating that the default amount has not been yet received.
However the IBC’s definition of “financial institutions” can be interpreted in such a way that foreign banks are not considered as financial institutions.
The Case Details
In the case between MBL and SCTL, the insolvency application filed by MBL against SCTL was rejected by the NCLT.
MBL appealed the ruling in the NCLAT which upheld the decision by the NCLT, and also detailed out the grounds for rejecting MBL’s suit.
The reasons provided by NCLAT based on its interpretations of the IBC provisions were:
- The mandatory 10 days’ notice was issued by MBL’s lawyer and not the creditor MBL itself.
This interpretation by the tribunals caught several operational creditors and lawyers wrong footed since it is an accepted practice in India for lawyers to issue notices and litigation papers on behalf of their clients .
- MBL failed to attach a banker’s certificating confirming the lack of receipt of the default amount because it did not have a bank account in India. Under NCLAT’s interpretation this merited a rejection of the creditor’s appeal since the law required such a certificate.
Under this interpretation, operational creditors not having a presence in India or not having a bank account in the country were effectively cut off from the benefits provided by the legislation.
A More Inclusive Interpretation
The Supreme Court used the MBL v. SCTL case to overrule the narrow interpretations of the NCLT/NCLAT, and ruled that
- Lawyers have the right to issue insolvency notices on behalf of their Clients and in this specific case, issue notice under Section 8 of the Code to a debtor from the creditor
- The requirement to submit a banker’s certificate is only directory in nature, and not mandatory. With this the law provisions are now open to foreign creditors as well who may hold not bank accounts with an Indian financial institution.
The judgement in this case can be applied against several other cases that may be pending or have not been filed as a result of the limited interpretation of the IBC offered by NCLAT/NCLT.
In giving its ruling the Supreme Court considered several legal provisions and arguments, and also pointed out that current interpretations of NCLAT/NCLT would be against the provisions of the Constitution of India such as
- Article 14 which guarantees equality before law for foreigners as well. This section will not allow the artificial classification of Indian and foreign operational creditors; and
- Article 19(1)(g) which provides the fundamental right to practice one’s profession. The Supreme Court considers that Section 30 of the (Indian) Advocates Act, 1961 deals with this fundamental right, and, rules barring advocates from issuing insolvency notices on behalf of their clients under IBC would be in violation of this.
The Supreme Court judgement can be taken as a suggestion made to the NCLAT/NCLT to adopt a more inclusive interpretation of the law taking into account the objective of the legislation, rather depending on restricted and literal interpretations which may defeat the purpose of the legislation.
