Supreme Court Removes “Two Threshold Bars” Under Insolvency Law

Over the last few months, creditors initiating corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (the Code) have encountered setbacks on procedural counts that have poured cold water on their efforts in resorting to the much sought-after insolvency process. This is attributable to a highly technical and narrow interpretation of certain provisions of the Code adopted by the adjudicatory bodies, viz. the National Company Law Tribunal (NCLT) and its appellate body the National Company Law Appellate Tribunal (NCLAT). This approach has been subjected to a powerful critique by our guest contributors on this Blog on account of the rather incongruous and impractical consequences of such an interpretation. A more recent intervention of the Supreme Court to remove what they view as “two threshold bars” has restored order and vindicated the strong and clear positions canvassed by our guest contributors.

Background and Issues

The two hurdles posed by the adjudicatory authorities, and the issues they raise are discussed below by referring readers to previous posts on this Blog. The focus is largely on the legal questions involved, due to which an in-depth discussion of the facts becomes unnecessary.

In sequential terms, the Code requires operational creditors who initiate a CIRP to undertake two steps. First, such a creditor is required under section 8 to deliver a demand notice to the corporate creditor regarding the non-payment of dues. Second, and in the absence of payment or a dispute raised by the corporate debtor, the operational creditor may, under section 9, initiate the CIRP by filing relevant documents. Each of the issues discussed herein involves one of the above steps although, to be consistent with the approach of the Supreme Court, they are being discussed in reverse chronological order.

1. Certificate from Financial Institution

In a guest post, Aayush Mitruka discussed the requirement under section 9(3)(c) of the Code by which an application by an operational creditor to trigger a CIRP must be accompanied by “a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor.” The problem arose in the context of foreign creditors because the definition of “financial institutions” only include Indian banks and other institutions that would not be in a position to provide such a certificate to foreign creditors.

The question therefore was whether section 9(3)(c) is mandatory or directory. The NCLAT consistently found that such a certificate was an indispensable requirement, which effectively paid put to the efforts of foreign creditors to resort to the Code to recover their dues. In his post, Aayush went on to critique the rulings of the NCLAT, and highlighted a number of the practical difficulties such an interpretation would cause. He concluded by noting that the “issue is currently pending before the Supreme Court and it can only be hoped that the Court will mitigate the hardship of the creditors by ruling in their favour”.

2. Demand Notice by an Advocate

In another guest post, Satish Rai discussed issues involved in an earlier step in the process by which an operational creditor is required to issue a demand notice to the corporate debtor before initiating insolvency proceedings. More precisely, the question was whether such a notice can be issued by an advocate representing the creditor or whether it can only be issued by someone internal to the creditor, such as an executive or employee. Here again, adopting a narrow and technical interpretation, the NCLAT in two cases held that advocates are ineligible to issue a demand notice on behalf of their clients, and that such notice can only be sent by a person holding a position with the creditor. Satish lucidly raises seven points in objection to the approach adopted by the NCLAT that concludes that the rulings in question “need a review in the time to come”.

Supreme Court’s Ruling

Needless to say, the affected creditors in the cases discussed above preferred appeals to the Supreme Court. In a decision rendered on December 15, 2017 in Macquarie Bank Limited v. Shilpi Cable Technologies Limited, the Supreme Court reversed the positions adopted by the NCLAT in these cases, and remanded the relevant matters for reconsideration based on the legal outcome. Despite strong arguments raised by counsel on both sides, the Supreme Court found in favour of the creditors.

1. Certificate

The Supreme Court began with a detailed review of the Code and the provisions of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Based on this, it found that the requirement under section 9(3)(c) is not a “condition precedent to triggering the insolvency process under the Code”. The certificate is only a piece of evidence to confirm the existence of the debt rather than a precondition. Given the context of the Code and the procedural nature of section 9(3)(c), the Court found the provision to be directory in nature, and certainly not mandatory. The Court also adopted a pragmatic approach by noting that while the provisions of the Code were open to the triggered by a foreign creditor, there is no need to impose procedural hurdles in the way of such creditors. Such an approach avoids possible discrimination between foreign and domestic creditors. The Court left open the possibility that foreign creditors may offer evidence of the debt through means other than a certificate by a “financial institution”. In doing so, the Court avoided “impractical, unworkable and inequitable results” in “situations which are predominantly procedural in nature”.

2. Demand Notice

The Court began by paying attention to the language of section 8 of the Code, which referred to an operational creditor “delivering” a demand notice. This suggests that the intention was not to require the operational creditor to send the notice itself (through employees or officers) but through authorized agents as well. Similarly, the Adjudicating Authority Rules provide for demand notice (under section 8) as well as the application (under section 9) to carry the signature of the person “authorized to act”. Further, the relevant forms require the authorized agent to state his position with or “in relation to” the operational creditor. All of these expressions signify a wide meaning to the type of person that can sign and deliver the demand notice on behalf of the creditor, which includes a lawyer acting on behalf of a client.

The Court then considered the impact of the Advocates Act on the issue, wherein the expression “practice” is “of extremely wide import, and would include all preparatory steps leading to the filing of an application before a Tribunal”. It found that the Code and the Advocates Act can be read harmoniously to resolve any issue, thereby yielding the result that an operational creditor’s demand notice can be sent by its lawyer.

Some Observations

It is not necessary to analyse the Supreme Court decision on the substance, as Aayush and Satish have extensively and elegantly addressed the issues in their previous posts (here and here respectively), which resonate entirely with the approach adopted by the Supreme Court. Ultimately, this decision, along with several others emanating from the tribunals and the courts, perform the role of ironing out issues that have crept into the implementation process involving the Code.

Granted that the Code is a novel legislation and that it plays an enormous role in the banking sector and the financial markets, due to which such issues are bound to arise. But, a lot would depend on the manner in which the adjudicatory bodies interpret and enforce the legislation. Thus far, the response appears to be mixed. This instance is but an illustration of the narrow and hyper-technical approach adopted by the NCLT and the NCLAT in administering the Code. This leads to the imposition of several obstacles in the realization of the ultimate goals of the reforms that led to the enactment of the Code. It is even more vexing when the hurdles are procedural in nature. However, the silver lining is the swift and progressive intervention by the Supreme Court in several cases. Even though the Code has been in force for just about a year, several cases have not only already gone up to the Supreme Court, but rulings have been returned in a speedy manner, thereby perpetuating the fulfillment of the policy goals in the legislation. In doing so, the Supreme Court has been adopting a purposive interpretation of the Code that has largely resulted in pragmatic outcomes.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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