7/April/2020

Insolvency Code … Continues

8. Insolvency resolution by operational creditor. - (1) An operational
creditor may, on the occurrence of a default, deliver a demand notice of
unpaid operational debtor copy of an invoice demanding payment of the
amount involved in the default to the corporate debtor in such form and
manner as may be prescribed.

(2) The corporate debtor shall, within a period of ten days of the receipt of
the demand notice or copy of the invoice mentioned in sub-section (1)
bring to the notice of the operational creditor

M/s Innoventive Industries Ltd. v. ICICI Bank- In this case, the Court
expounded the legislative intent behind enactment of the Insolvency and
Bankruptcy Code, 2016. The Court in the case explained the shift in Law
to render guidance to Courts and Tribunals while dealing with cases under
the Code. The Court stated that the moment initiation of the corporate
insolvency resolution process takes place, a moratorium is announced by
the adjudicating authority under the Code by which institution of suits and
pending proceedings etc. cannot be proceeded with which  continues until
the approval of a resolution plan as required by the Code. In the interim,
an interim resolution professional (IRP) is appointed to manage the affairs
of corporate debtors, it will accept the application if it is complete
9. Application for initiation of corporate insolvency resolution process by
operational creditor. (1) After the expiry of the period of ten days from the
date of delivery of the notice or invoice demanding payment under sub-
section (1) of section 8, if the operational creditor does not receive payment
from the corporate debtor or notice of the dispute under sub-section (2) of
section 8, the operational creditor may file an application before the
Adjudicating Authority for initiating a corporate insolvency resolution
process
(2) The application under sub-section (1) shall be filed in such form and
manner and accompanied with such fee as may be prescribed.

(3) The operational creditor shall, along with the application furnish-
(a) a copy of the invoice demanding payment or demand notice delivered by
the operational creditor to the corporate debtor;
(b) an affidavit to the effect that there is no notice given by the corporate
debtor relating to a dispute of the unpaid operational debt;
(c) a copy of the certificate from the financial institutions 1 Subs.
maintaining accounts of the operational creditor confirming that there is no
payment of an unpaid operational debt [by the corporate debtor, if
available;]
[(d) a copy of any record with information utility confirming that there is no payment of
an unpaid operational debt by the corporate debtor, if available; and
(e) any other proof confirming that there is no payment of any unpaid operational debt
by the corporate debtor or such other information, as may be prescribed
(4) An operational creditor initiating a corporate insolvency resolution process under
this section, may propose a resolution professional to act as an interim resolution
professional.

(5) The Adjudicating Authority shall, within fourteen days of the receipt of the
application under sub-section (2), by an order–
(i) admit the application and communicate such decision to the operational creditor
and the corporate debtor if, -

(a) the application made under sub-section (2) is complete;

(b) there is no [payment] of the unpaid operational debt;
(c) the invoice or notice for payment to the corporate debtor has been delivered by the
operational creditor;
(d) no notice of dispute has been received by the operational creditor or there is no
record of dispute in the information utility; and
(e) there is no disciplinary proceeding pending against any resolution professional
proposed under sub-section (4), if any
(ii) reject the application and communicate such decision to the
operational creditor and the corporate debtor, if -
(a) the application made under sub-section (2) is incomplete;
(b) there has been [payment] of the unpaid operational debt;
(c) the creditor has not delivered the invoice or notice for payment to the
corporate debtor;
(d) notice of dispute has been received by the operational creditor or there
is a record of dispute in the information utility; or
(e) any disciplinary proceeding is pending against any proposed
resolution professional:

Provided that Adjudicating Authority, shall before rejecting an application

under sub-clause (a) of clause (ii) give a notice to the applicant to rectify
the defect in his application within seven days of the date of receipt of
such notice from the Adjudicating Authority

(6) The corporate insolvency resolution process shall commence from the
date of admission of the application under sub-section (5) of this section.
Macquarie Bank Limited v. Shilpi Cable Technologies Ltd.- In this case, the
Supreme Court settled the legal proposition under the Insolvency and Bankruptcy
Code, 2016 to hold that:

(a)Section 9(3)(c) of the Code is directory and not mandatory in nature

(b)Demand notice under the Code can be issued by the Lawyer on behalf of the
operational creditor.

K. Kishan v. M/s Vijay Nirman Company Pvt. Ltd.-The Supreme Court also
noted that the operational creditors cannot use the Insolvency Code either
prematurely or for extraneous considerations or as a substitute for debt
enforcement proceduress

PR. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd In this
case, the Supreme Court has categorically held that the provisions of
the Insolvency and Bankruptcy Code, 2016 (Code) will override any
enactment which is inconsistent with the provisions of the Code.
Dena Bank vs. Bhikhabhai Prabhudas Parekh and Co. & Ors., to hold
that income-tax dues, being in the nature of Crown debts, do not take
precedence even over secured creditors, who are private persons.

Further in the case of  Surendra Trading Company Vs. Juggilal

Kamlapat Jute Mills Company Ltd. & Others- Supreme Court:
“The question before the NCLAT was as to whether time of fourteen days
under section 9(5) given to the adjudicating authority for ascertaining the
existence of default and admitting or rejecting the application is mandatory
or directory. NCLAT hold that the mandate of sub-section (5) of section 7 or
sub-section (5) of section 9 or sub-section (4) of section 10 is procedural in
nature, a tool of aid in expeditious dispensation of justice and is directory
The National Company Law Appellate Tribunal (‘NCLAT’) in
Unigreen Global Private Limited vs. Punjab National Bank
and Ors. (2017 SCC Online NCLAT 566) has compared
sections 7 and 10 of the Code and held that the test laid down by
the Supreme Court with regard to applications by financial
creditors under section 7 in M/s. Innoventive Industries Ltd.
versus ICICI Bank & Anr. (2018 1 SCC 407) is applicable to
Section 10 i.e. the moment the adjudicating authority is satisfied
that a default has occurred, the application must be admitted
unless it is incomplete, in which case it must give notice to the
applicant to rectify the defect within 7 days of receipt of a notice
from the adjudicating authority.
NCLAT in Krishna Kraftex Pvt. Ltd. versus HDFC Bank &
Ors. (2018 SCC Online NCLAT 357) set aside the judgment of
the adjudicating authority which had rejected the application
under section 10 on the ground that though the balance sheet of
the debtor showed its liability, there was no evidence to show a
claim had been lodged with the corporate debtor and was lying
unpaid. The NCLAT directed the adjudicating authority to admit
the application if it was complete.
Section 10 posits that an application may be rejected on two
grounds. Firstly, if the application is incomplete i.e. it does not
contain  the special resolution passed by shareholders of the
corporate debtor or the resolution passed by at least three-fourth
of the total number of partners of the corporate debtor approving
filing of the application, the information relating to its books of
account and such other documents required to be filed in terms
of the Code and the relevant rules and regulations, details
relating to proposed interim resolution professional etc.
However, the Adjudicating Authority shall, before rejecting an
application, provide 7 days to the applicant to rectify its defects.
The second ground for rejection is if any disciplinary proceeding
is pending against the proposed resolution professional.
In this regard, in Gaja Trustee Company Private Limited & Ors. vs. M/s.
Haldia Coke & Chemicals Pvt. Ltd. & Ors. (2018 SCC Online NCLAT
331), the NCLAT held that for filing an application praying for initiation of
insolvency against another debtor company, the authorisation of the Board of
Directors would be sufficient. However, when a debtor company was praying
for initiation of insolvency against itself under section 10, then a resolution
passed by shareholders would be a mandatory requirement.

In Vyomit Shares Stock & Investments Pvt. Ltd. Vs. Securities and
Exchange Board of India (2019 SCC Online NCLAT 287), the NCLAT has
held that where an applicant is generating sufficient income and profit, the
application filed under section 10 may be rejected on such ground.