Macquarie Bank Limited V. Shilpi Technologies Limited: Solving Two Ambiguities in One Shot

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A year has passed since the effectuation of the Insolvency and Bankruptcy Code, 2016 (“Code”). As with a legislation as powerful, influential and complicated as this, the Code is still evolving with changes, doubts and subsequent clarity pouring in every other day. One such clarification was provided by the Supreme Court (“SC”), in Macquarie Bank Limited v. Shilpi Cable Technologies Ltd, where it established two much disputed procedural aspects of the Code.

The pre-cursor to the appeal: The NCLT and NCLAT had both quashed Macquarie’s application under Section 9 of the Code filing for initiation of insolvency proceedings against Shilpi, as the later hadn’t honoured two invoices raised by the former, to the tune of US$ 6,321,337.11/- (US Dollars Six Million Three Hundred and Twenty One Thousand Three Hundred and Thirty Seven point Eleven only).The grounds of dismissal of the application was (1) the non-compliance of Section 9(3)(c) of the Code, absence of certificate from a financial institution; and (2) the demand notice was issued by an advocate, instead of an employee or person who is holding a position in relation to the operational creditor in accordance with Section 8 of the Code.

Held: The SC rejected both these interpretations and held that (1) a certificate from a financial institution is not mandatorily required and (2) a demand notice can be issued by an advocate of the operational creditor and need not necessarily be an ‘insider’ or employer of the operational creditor. The reasoning of the court as it provided with these much sought out clarifications are summarised below.

Section 9 (3) (c) – Certificate from a financial institution

While the NCLT and NCLAT had held that the certificate from financial institutional was a mandatory requisite for admission of application under Section 9, the SC held that it is a procedural provision which is directory in nature.

While holding the same, it set out the distinction between Section 9 (1) of the Code, which lays down the conditions precedents for triggering application of the Code with respect to an operational debt which was mandatory in nature; Section 9 (2) as a matter of fact whereby either the corporate debtor has raised a dispute or not, while the language of Section 9 (3) itself denotes that it is confirmatory and thus only a piece of evidence, as important an evidence it may be and not a mandate under the Code.

Further, the court also brought out the anomaly that would arise if the section was to be interpreted as a mandatory one. Section 3 (14) of the Code defines financial institutions which is currently a very limited list of scheduled banks, financial institutions defined under Reserve Bank of India Act, 1934 or public financial institutions defined under the Companies Act, 2013 thus eliminating among other types of financial institutions, importantly foreign financial institution or unscheduled bank with which an operational creditor might maintain an account with. While the Code does provide for recognition of other institutions as a financial institution, the court refused to accept the argument that an operational creditor can approach the central government for recognising their respective foreign bank as a financial institution. Thus arises the issue that if a person otherwise qualified to be an operational debtor should he be disallowed from filing an application under Section 9 merely because his bank doesn’t qualify as ‘financial institution’ and he is thus unable to comply with the mandate of Section 9 (3)(c). The court further went on to observe that it would be violation of Article 14 of the constitution to make a distinction between an operational creditor who has a resident bank account and an operation creditor who maintains a foreign bank account. Thus, it was held that a provision impossible of compliance cannot be put as a mandatory requirement to the processing of an application under Section 9 of the Code.

Section 8 – Issue of Demand Notice by Advocates

The second issue in the matter, as to who is entitled to issue a demand notice on behalf of the operational creditor has been practically much debated issue with, since the NCLT’s judgment on the matter. The argument of the respondents on the matter was that other earlier legislations governing insolvency, such as the Companies Act 1956 and Recovery of Debts due to Bank and Financial Institutions Act, 1993 contain express provisions enabling a lawyer to do things on behalf of a party unlike the Code. Since it is not expressly allowed, it was deemed to be taken as prohibited.

However, the SC held that The Advocates Act, 1961 has to be read harmoniously with the Code. Section 30 of the Advocates Act, provides advocates with the right to practise. The court cited the case of Harish Uppal (Ex-Capt.) v. Union of India while elaborating on the right to practise and held that this includes preparatory steps like filing applications before tribunals. It held that the non-obstante clause of the Code will not override the Advocates Act as there is no inconsistency between the two.

Further, it also pointed out that the language of Section 8 which denotes ‘authorized to act’ and ‘position in relation to the operational creditor’ which expressions, refers both to an authorized agent or a lawyer acting on behalf of his client.

Conclusion: The two purposive interpretations provided by the SC comes as a huge respite for any creditor as it not only eases the process for filing for insolvency but also denotes the pro-ease of convenience and liberal approach taken by the SC in implementing the Code and is a step forward for the Code which was introduced with the view to simplifying the insolvency process.

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