Smart Timing Steel Ltd. vs. National Steel and Agro Industries Ltd.

Citation: Company Appeal (AT) (Insolvency) No. 28 of 2017

Jurisdiction: National Company Law Appellate Tribunal (NCLAT)

Facts

Smart Timing Steel Ltd. (“Appellant”), being an Operational Creditor in this case, filed an application before the Adjudicating Authority (Mumbai Bench) for initiation of corporate insolvency resolution process under Section 9 of Insolvency & Bankruptcy Code (“Code”). It is important to note that the Appellant did not submit the certificate from the Financial Institution (maintaining its accounts) confirming that there is no payment of the operational debt by the Corporate Debtor, along with its petition, which is a mandatory requirement under Section 9 of the Code.

Later, when the Appellant was given an opportunity to file the above certificate, it failed to do so and submitted that it should be exempted from such compliance, as the bank of the Appellant is situated outside India. The Appellant in this case had no office or bank account in India with any of the scheduled banks, Financial Institution (as defined under Section 45 of RBI Act, 1934), Public Financial Institution (as defined under Section 2 (72) of the Companies Act, 2013) or with any other institution notified by Central Govt. as “ Financial Institution”. Consequently,  the Appellant failed to enclose such certificate from ‘Financial Institution’ maintaining its account.

The above petition of the Appellant was rejected by the Adjudicating Authority on ground of non-compliance with the provision of Section 9(3)(c) of the Code (i.e., non-filing of the above certificate). Aggrieved by the above order, the Appellant filed an appeal before NCLAT under Section 61 of the Code.

Issue

Whether filing a copy of certificate from the “Financial Institution” maintaining the accounts of the Operational Creditor (confirming that there was no payment of unpaid operational debt by the Corporate Debtor) is mandatory or directory?

Held

Referring to Section 9 of the Code, NCLAT observed that the entire provision of sub-clause (3) of Section 9 is “required to be mandatorily followed and it is not empty statutory formality”.

NCLAT then referred to some of the important provisions on this issue. It noted that The Insolvency and Bankruptcy (Application of Adjudication Authority) Rules 2016 (“Adjudication Authority Rules”) provides the procedure to be followed for filling an application for initiating corporate insolvency resolution process. As per Rule 6 of the Adjudication Authority Rules, an operational creditor should make such application under Section 9 of the Code, in Form 5 along with the relevant documents and record mentioned therein. Rule 6(2) mandates the petitioner to dispatch a copy of this application to the Corporate Debtor at its registered office.

Further, Section 9(3) of the Code mandates operational creditor to furnish: (a) copy of invoice (demanding payment) or demand notice delivered to the corporate debtor; (b) an affidavit to the effect that, there is no notice given by the corporate debtor related to dispute of unpaid operational debt, and (c) 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.

NCLAT in this case categorically identified the provisions mentioned in Section 9(5) of the Code (i.e., procedure to be followed by Adjudicating Authority) as mere procedural and hence directory in nature. Referring to the landmark judgment of Supreme Court in Manilal Shah vs. Sardar Sayed Ahmed[1], it reiterated that where a statute itself provides consequence of breach or non-compliance, such provision has to be regarded as having mandatory in nature.

NCLAT then relied on State of Mysore vs. V.K. Kangan[2], wherein Apex Court had held that:

The determination of the question whether a provision is mandatory or directory would, in the ultimate analysis, depend upon the intent of the law – maker. And that has to be gathered not only from the phraseology of the provision but also by considering its nature, its design and the consequences which would follow from construing it in one way or the other”.

NCLAT in this case, emphasized on the use of the word “shall” in Section 9(3) of the Code to conclude that such a provision (submission of certificate from the Financial Institution) is mandatory. Accordingly, it also rejected the submission of copy of the final award (saying that the amount was due and the corporate debtor had defaulted) by Sole Arbitrator, Hong Kong Special Administrative Region, as it was not a conclusive proof of whether or not the amount was actually paid pursuant to this award. It is only on the basis of evidence on record (certificate from Financial Institution), a court can determine whether or not such operational debt was paid by corporate debtor.

NCLAT later explained that the argument that the foreign companies having no office in India or no account in India with any “Financial Institution” will suffer has no substance as there are other provisions for such recovery suit, apart from the Code, that can be availed by a person.

Conclusion

In order to initiate corporate insolvency resolution process against a corporate debtor, an operational creditor must obtain a certificate from the Financial Institution maintaining its account, confirming that that there is no payment of an unpaid operational debt by the Corporate Debtor.

Editor: Vivek Verma

Full Text available here

Image from here


[1] (1955) 1 SCR 10

[2] (1976) 2 SCC 895

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s