Section 9(3)(c) of the Insolvency and Bankruptcy Code, 2016 is directory in nature, says Supreme Court [Read Judgment]

Recently a two-member bench of the Supreme Court of India, in the case of Macquarie Bank Limited Vs. Shilpi Cable Technologies Ltd. held that Section 9(3) (c) of The Insolvency and Bankruptcy Code, 2016 is directory in nature.

The appellant had approached the honorable court aggrieved by decision of NCLAT in dismissing the application to initiate the insolvency proceedings against the respondent on the grounds of non-compliance of Section 9(3) (c) of the Insolvency and Bankruptcy Code, 2016.

The issue before the honorable court was whether 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 given under Section 9(3) (c) of The Insolvency and Bankruptcy Code, 2016 is mandatory in nature.

Senior Counsel Mukul Rohatgi, appearing on behalf of the appellants contented that on reading Section 9(3)(c) along with Rule 6 and Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules,2016 makes it clear that it is clear that Section 9 (3)(c) is not mandatory, but only directory and that, in the said section, “shall” should be read as “may”. He cited a number of judgments for the proposition that when serious general inconvenience is caused to innocent persons or the general public without really furthering the object of the particular Act, the said provision should not be read as mandatory, but as directory only.

Senior Counsel Dr. A.M. Singhvi, appearing on behalf of the respondent submitted that the Code needs to be strictly construed and the provisions under Section 9 (3) should be interpreted accordingly. He stated that Section 9(3)(c) is a jurisdictional condition precedent, as it is clear from the expression “initiation” and the expression “shall”, both showing that the Section is a mandatory condition precedent which has to be satisfied before the adjudicating authority can proceed further. Citing the need of its evidentiary value, he argued that such a document helps to determine the fact of an unpaid debt.

Hearing both the parties, the honorable Court relied on Mobilox Innovations Private Limited v. Kirusa Software Private Limited, Civil Appeal No. 9405 of 2017 and laid out the requisite elements necessary to trigger the Code. The elements are:

1. occurrence of a default;
2. delivery of a demand notice of an unpaid operational debt or invoice demanding payment of the amount involved; and
3. the fact that the operational creditor has not received payment from the corporate debtor within a period of 10 days of receipt of the demand notice or copy of invoice demanding payment, or received a reply from the corporate debtor which does not indicate the existence of a pre-existing dispute or repayment of the unpaid operational debt.

The two member bench comprising of Justice R.F.Nariman and Justice Navin Sinha observed “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. The expression “confirming” makes it clear that this is only a piece of evidence, albeit a very important piece of evidence, which only “confirms” that there is no payment of an unpaid operational debt. Further, annexure III in the Form also speaks of copies of relevant accounts kept by banks/financial institutions maintaining accounts of the operational creditor, confirming that there is no payment of the unpaid operational debt, only “if available”. This would show that such accounts are not a pre-condition to trigger the Code, and that if such accounts are not available, a certificate based on such accounts cannot be given,”

Allowing the appeals the court held that Section 9(3)(c) of the Insolvency and Bankruptcy Code, 2016 is not mandatory but directory in nature.

The bench also directed the National Company Law Tribunal to proceed with the matters under the Code on a remand of these matters to it.