Breaking: IBC-Lawyer Can Issue Demand Notice Of Unpaid Operational Debt On Behalf Of Operational Creditor: SC [Read Judgment]

Also holds Section 9(3)(c) of the Insolvency and Bankruptcy Code is not mandatory for initiating insolvency proceedings.

Answering two important issues of the Insolvency and Bankruptcy Code, the Supreme Court, in Macquarie Bank Limited vs Shilpi Cable Technologies Ltd, has held that a lawyer on behalf of the operational creditor can issue a demand notice of an unpaid operational debt. The court also held that the provision contained in Section 9(3)(c) of the Code is not mandatory for initiating insolvency proceedings.

A bench of Justice RF Nariman and Justice Navin Sinha set aside the National Company Law Appellate Tribunal order which had dismissed an application seeking to initiate insolvency proceedings for non-compliance of the provision contained in Section 9(3)(c) of the Code, which, it held, is 'mandatory'. The NCLAT also held that an advocate/lawyer cannot issue a notice under Section 8 on behalf of the operational creditor in the following terms:

Lawyer can issue demand notice

The bench observed that on a conjoint reading of Section 30 of the Advocates Act and Sections 8 and 9 of the Code together with the Adjudicatory Authority Rules and Forms thereunder, a notice sent on behalf of an operational creditor by a lawyer would be in order.

"we must not forget that Section 30 of the Advocates Act deals with the fundamental right under Article 19(1)(g) of the Constitution to practice one's profession. Therefore, a conjoint reading of Section 30 of the Advocates Act and Sections 8 and 9 of the Code together with the Adjudicatory Authority Rules and Forms thereunder would yield the result that a notice sent on behalf of an operational creditor by a lawyer would be in order"

The court also rejected the argument that when Parliament wishes to include a lawyer for the purposes of litigation or to a pre-litigation stage, it expressly so provides, and this not being so in the Code, it must be inferred that lawyers are excluded when it comes to issuing notices under Section 8 of the Code.

"We are afraid that this argument must be rejected, not only in view of what has been held by us on a reading of the Code and on the harmonious construction of Section 30 of the Advocates Act read with the Code, but also on the basis of a judgment of this Court in Byram Pestonji Gariwala v. Union Bank of India, (1992) 1 SCC 31"

The bench also said: "The expression "an operational creditor may on the occurrence of a default deliver a demand notice….." under Section 8 of the Code must be read as including an operational creditor's authorized agent and lawyer."

In this regard, the bench referred to decision in Byram Pestonji Gariwala vs Union Bank of India, wherein the apex court had rejected the argument that a compromise in a suit had, under Order XXIII Rule 3, to be in writing and "signed by the parties" and held that a compromise effected by counsel on behalf of his client would be effective in law. The bench commented on the said decision: "This was turned down stating that Courts in India have consistently recognized the traditional role of lawyers 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."

Section 9(3)(c ) not mandatory

The NCLAT had also dismissed the application on the ground that the applicant did not file 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, as stated in Section 9(3) (c ) of the code.

Referring to sub-clause (c) of Section 9(3), the bench said it is clear that a copy of the 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 is certainly not a condition precedent to triggering the insolvency process under the code.

Rejecting the contention in this regard by the counsel, the bench observed: "If Dr. Singhvi's submissions were to be accepted, despite the availability of such documentary evidence contained in the Section 9 application as other information as may be specified, such application filed under Section 9 would yet have to be rejected because there is no copy of the requisite certificate under Section 9(3)(c). Obviously, such an absurd result militates against such a provision being construed as mandatory."

"Equally, the expression "shall" in Section 9(3) does not take us much further when it is clear that Section 9(3)(c) becomes impossible of compliance in cases like the present. It would amount to a situation wherein serious general inconvenience would be caused to innocent persons, such as the appellant, without very much furthering the object of the Act, …….., would have to be construed as being directory in nature,"  the bench said.