India: A Word Of Caution For All Operational Creditors - Demand Notice Served Through An Advocate Cannot Be Treated As Notice Under Section 8 Of Insolvency And Bankruptcy Code, 2016

How easy it was to hire an advocate, who used to draft a simple reminder known as Legal Notice/Demand Notice in a legal language and the same was served on the Debtor. Is it so easy under Insolvency and Bankruptcy Code 2016 (I&B Code 2016)? The answer is a big NO. Recently, the Hon'ble National Company Law Appellate Tribunal (NCLAT) while affirming the order of Hon'ble Adjudicating Authority (National Company Law Tribunal/NCLT) Chandigarh in Macquarie Bank Limited V/s Uttam Galva Metallics Limited³ has held that the demand notice issued through an Advocate/lawyer by the Appellant cannot be treated as notice under Section 8 of the I&B Code 2016.

The Hon'ble NCLAT, while deciding an appeal under Section 61 of I&B Code 2016, wherein the Appellant have challenged the impugned order of Hon'ble NCLAT, Chandigarh has held that the Adjudicating Authority, Chandigarh was correct in holding that the Application under Section 9 filed by the Operational Creditor/Appellant is not maintainable as the demand notice attached to said the Section 9 of I&B Code 2016 Application of the Operational Creditor/Appellant was not in accordance with the Law and accordingly the Application of the Operational Creditor was defective.

It is to be noted that whenever there is a default in payment of any dues on the part of the Corporate Debtor, an Operational Creditor may serve a Demand Notice under Section 8 of I&B Code 2016 in the mode and manner prescribed under the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (Adjudicating Authority Rules, 2016). The said Demand Notice is served under Form 3 of the Adjudicating Authority Rules 2016. The Operational Creditor can also serve the invoice due under Form 4 of the Adjudicating Authority Rules 2016. The Corporate Debtor need to within 10 days of such receipt of the notice in Form 3 or the invoice in Form 4 as the case may be either inform the Operational Creditor that there exists a dispute before the receipt of such notice/ invoice or repay the amount due. In case the Corporate Debtor fails to respond to such notice served upon it within the prescribed period of 10 days then Operational Creditor can proceed with filing an application under Section 9 in the mode and manner prescribed under the Adjudicating Authority Rules 2016 along with such supporting documents as provided therein to initiate the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. In the present case, the Operational Creditor/Appellant had served the notice under Section 8 of I&B Code 2016 however, the same was served through a lawyer of Singapore.

The Hon'ble NCLAT, while interpreting the clause (a) & (b) of sub-Rule (1) of Rule 5 of the Adjudicating Authority Rules 2016 observed that the Rules mandate an Operational Creditor to deliver the Corporate Debtor either the Demand Notice in Form-3 or a copy of an invoice attached with a notice in Form-4. If the Rule 5 of Adjudicating Authority Rules 2016 is read with the Form 3 or Form 4, it is clear that the persons who are authorized to give notice is an Operational Creditor or through a person authorized to act on behalf of the Operational Creditor who hold some position with or in relation to the Operational Creditor.

The Hon'ble Tribunal further observed "that it is only when the Operational Creditor serves the notice in Form 3 or Form 4 to the Corporate Debtor, it will understand the serious consequences of non-payment of "Operational Debt", otherwise like any normal pleader notice/Advocate notice or like notice under Section 80 of C.P.C or notice for initiation of proceeding under Section 433 of the Companies Act, 1956, the "Corporate Debtor" may decide to contest the suit/case if filed, as distinct Corporate Insolvency Resolution Process where such claim otherwise cannot be contested, except where there is an existence of dispute, prior of issuance of notice under Section 8". Accordingly, an advocate/lawyer or Chartered Accountant or a Company Secretary or any other person in absence of any authority by the Operational Creditor and if such person do not hold any position with or in relation to the Operational Creditor cannot issue notice under Section 8 of I&B Code 2016. In other word only the in-house Counsel, Chartered Accountant or a Company Secretary who holds a position with Operational Creditor and have been duly authorized by the Operational Creditor can serve a demand notice under Section 8 of the I&B Code 2016.

Footnote

3 Company Appeals (AT) (Insol) No. 96 of 2017

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