Issuance Of Certificate By Banks U/S Sec.9 Of I&B Code, 2016, An Extra Impossible Task Thrust Upon Banks

The recent order of the National Company Law Tribunal, Mumbai Bench, dated 31.07.2017 in TCP No.409/(MAH)/2017 in the matter titled as Magicrete Buildings Solutions Pvt Ltd vs Pratibha Industries Ltd, will lead banks and financial institutions into an extreme legal necessity which is almost impossible to perform.

As per Section 9 of the Insolvency and Bankruptcy Code, 2016, the banks are obliged to issue certificate to the operational creditor maintaining accounts with it, confirming that there is no payment of unpaid operational debt by the corporate debtor. The order is pursuant to a request by the counsel for the operational creditor before the NCLT seeking a direction to the ‘bank maintaining the account of the operational creditor’ to issue certificate as the bank was refusing to issue the certificate as mandated under Section 9 of the code. Based on the submission of the counsel, the NCLT ordered: “The Petitioner Counsel having reported that the Bank maintaining the Account of the Operational Creditor not issuing the Certificate as envisaged under Section 9 of the Insolvency and Bankruptcy Code, 2016, it is hereby made clear that all citizens of the Country are bound by the Statute governing the people of this Country, therefore, the Bank is not exempted under the Statute, whereby the respective Bank may issue Certificate as envisaged under the respective Section on creditor approaching the Bank.”

The above sweeping direction issued by the NCLT imposing strict liability upon the banks to issue certificate to every operational creditor would virtually halt the banking business. It has become the job of the bank, for no fault of it, to spend countless man-hours to identify the debts and defaults inter se debtor and creditors.

Interestingly, the NCLT has not issued any notice to the respective bank or not heard the submissions of the bank before the issuance of such a direction.

No doubt, it is the statutory requirement under Sec.9(2)(c) of the I&B Code, 2016, for initiation of corporate insolvency resolution process by operational creditor, to produce a certificate from the financial institutions maintaining its accounts confirming that there is no payment of an unpaid operational debt by the corporate debtor, it should never be the task of the banks to probe and identify the default of third parties just by holding an account.

Generally, a bank account is maintained for multiple banking transactions and not meant for a standalone purpose. In 99.9% situations, the bank accounts are used by an operational creditor for dealing with different transactions with different persons. There is no specific mechanism available with the banks to identify and compartmentalise different transactions between an operation creditor and corporate debtor. The banks have no access to the internal books and accounts of the operational creditor who maintains an account with the bank. In such a situation, how the bank can ascertain and certify that there is no payment of a particular ‘unpaid operational debt’ by the corporate debtor?

This important aspect has not been considered by the NCLT while issuing an order in rem to all the banks to compulsorily issue certificate under Section 9 of the I&BR Code, 2016, to every operational creditor whoever approaches them.

More importantly, there are no provisions either in the I&B Code, 2016, or in the Regulations of laying down any specific guidelines to the banks/financial institutions to be adopted prior to the issuance of certificate under Section 9. Only an appropriate amendment or framing of new regulation can solve the present issue faced by the banks. There should be an appropriate direction to the operational creditor to submit the authenticated copy of the ledger account of the particular corporate debtor with attestation of a chartered accountant or insolvency professional along with the application for issuance of certificate envisaged under Sec.9(2)(c) of the I&B Code. If such an authenticated and attested ledger account of the corporate debtor is produced before the bank, it can very easily compare the particular ledger account with the bank account of the operational creditor and can find out that whether there is any payment of an unpaid operational debt by the corporate debtor or not and can certify accordingly.

The code being at a testing stage, we can fondly hope that the Insolvency and Bankruptcy Board of India will take urgent steps to frame necessary regulations incorporating either the above suggestions or bring in certain other apt alternatives.