22 March, 2018
Clasis Law recently represented Macquarie Bank in two Civil Appeals in the connected matters of Macquarie Bank Vs. Uttam Galva Metallics Limited and Macquarie Bank Vs. Shilpi Cable Technologies Limited, where a Supreme Court bench comprising of Justice R.F. Nariman and Justice Navin Sinha passed a common judgment dated December 15, 2017 in both the Appeals and held as follows:
(a) The filing of the Certificate under Section 9 (3) (c) of the Insolvency and Bankruptcy Code, 2016 (“Code”) is a procedural requirement and directory in nature; and
(b) The Demand Notices issued by the Advocates under Section 8 of the Code are valid and in order.
To provide a brief background, Section 9 (3) (c) of the Code envisages that along with an Application to initiate Insolvency Proceedings under Section 9 of the Code against the Corporate Debtor, the Operational Creditor ‘shall’ file a Certificate from the Financial Institution maintaining accounts of the Operational Creditor confirming that there is no payment of an unpaid operational debt by the Corporate Debtor.
It must be noted that the Section 9 (3) (c) of the Code categorically states that this Certificate has to be issued by a “Financial Institution” as defined under Section 3 (14) of the Code. The term Financial Institution as defined under Section 3 (14) of the Code includes a Scheduled Bank, a financial institution as defined under Section 45-I of the Reserve Bank of India Act, 1934, a public financial institution as defined in Clause 72 of Section 2 of the Companies Act, 2013 and any such other institution as the Central Government may by notification specify as a financial Institution.
In the abovementioned matters, Macquarie Bank had filed Applications under Section 9 of the Code before the National Company Law Tribunal (“NCLT”) to initiate Insolvency Proceedings against Uttam Galva Metallics Limited and Shilpi Cable Technologies Limited. Macquarie Bank being a foreign Bank and not having an account with any Financial Institution as defined under the Code, it could not provide for a Certificate as per the requirement of Section 9 (3) (c) of the Code. However, in order to reflect the debt of Uttam Galva Metallics Limited and Shilpi Cable Technologies Limited, Macquarie Bank filed its own Certificates under Section 9 (3) (c) of the Code, which reflected that no payment from the debtors had been received.
Although, the NCLT allowed the Application filed by Macquarie Bank under Section 9 of the Code in the case against Shilpi Cable Technologies Limited, however, Macquarie Bank’s Application under Section 9 of the Code against Uttam Galva Metallics Limited was rejected by the NCLT. The NCLT rejected Macquarie Bank’s Application initiating insolvency proceedings against Uttam Galva Metallics Limited on the ground that the filing of the Certificate under section 9 (3) (c) of the Code is a mandatory requirement and Macquarie Bank having failed to file the said certificate along with its Application cannot be allowed to initiate insolvency proceedings against Uttam Galva Metallics Limited.
In view of the above, subsequent appeals were filed before the National Company Law Appellate Tribunal (“NCLAT”) in both the Uttam Galva Metallics Limited and Shilpi Cable Technologies Limited. In both the Appeals the NCLAT held as follows:
(a) That Macquarie Bank was not a Financial Institution within the meaning of the Code and thus the Certificate filed by it is not in terms of the requirement under Section 9 (3) (c) of the Code. The said requirement being mandatory in nature, an Application in absence of the Certificate is not maintainable by Macquarie Bank and as such deserved to be dismissed; and
(b) That the Advocate/lawyer, a Chartered Accountant or a Company Secretary or any other person in absence of any authority by the Operational Creditor and since such person do not hold any position with or in relation to the Operational Creditor, cannot issue the Demand Notice under Section 8 of the Code.
In relation to the point (a) above, the NCLAT heavily relied upon its Order passed in the case of Smart Timing Steel Limited Vs. National Steel and Agro Industries Limited (“Smart Timing Case”). In the said Order, the NCLAT had held that the requirement of filing a Certificate under Section 9 (3) (c) of the Code is a mandatory requirement. An appeal against the judgment passed by the NCLAT in Smart Timing Case was also filed before the Supreme Court, however, the Supreme Court refused to interfere with NCLAT’s judgment and dismissed the said appeal.
Therefore, aggrieved by the Orders of the NCLAT in both the cases of Uttam Galva Metallics Limited and Shilpi Cable Technologies Limited, Macquarie Bank approached Supreme Court by filing Civil Appeals under the Code.
Macquarie Bank submitted before the Supreme Court that the NCLAT, vide its Orders against Macquarie Bank, has failed to implement the true legislative intent behind the passing of the Code as the Orders by NCLAT are rendering the Appellant (Macquarie Bank) remediless under the Code, which is not the intention of the legislature behind the Code. It was further submitted on behalf of Macquarie Bank that the requirement under Section 9 (3) (c) of the Code is a mere procedural one as the same is only required to prove the existence of debt which can be proved in so many other ways, including providing a certificate from the bank (and not necessarily a Financial Institution under the Code) maintaining the account of the Operational Creditor, reflecting that no payment was made by the debtor.
Further, Macquarie Bank also submitted that the Code is silent and nowhere states that Advocates cannot issue the Demand Notice under Section 8 of the Code. It was submitted on behalf of Macquarie Bank that the Advocate duly represented by the Operational Creditor shall have a “position in relation to” the Operational Creditor and therefore can be authorized to issue the Demand Notice under Section 8 of the Code on behalf of the Operational Creditor.
The submissions of Uttam Galva Metallics Limited and Shilpi Cable Technologies Limited before the Supreme Court were primarily limited to the precedent set in the Smart Timing Case and the use of the word “shall” with respect to the requirement of filing the Certificate under Section 9 (3) (c) of the Code.
After hearing both the parties, the Supreme Court passed its judgment and settled the legal position and held that the filing of Certificate under Section 9 (3) (c) of the Code is not a pre-requisite to trigger insolvency proceedings under the Code. The Court held that the filing of the Certificate under Section 9 (3) (c) of the Code is a procedural requirement and is directory in nature. The Court further held that the Demand Notices filed by Advocates under Section 8 of the Code are valid and in order.
Through this judgment the Supreme Court has implemented the true legislative intent behind the Code and has enabled the Operational Creditors, especially the foreign Operational Creditors, to initiate insolvency Proceedings against their debtors without being restricted by procedural requirements that are not mandatory in nature. This judgment, is thus, a huge respite especially for the foreign Operational Creditors who do not have an account with a Financial Institution within the meaning of the Code, as now they are not restricted by the said requirement to initiate insolvency proceedings under the Code.
For further information, please contact:
Mustafa Motiwala, Partner, Clasis Law
mustafa.motiwala@clasislaw.com
