Operational creditors face new challenges all the time

By Sachin Gupta, Dhir & Dhir Associates

An important aspect of the Insolvency and Bankruptcy Code, 2016, that needs to be addressed is whether an individual or a corporate body other than the operational creditor can act on behalf of the operational creditor when authorized to do so. Since the code has far reaching consequences once the process is set in motion, one needs to identify and understand the various checks and balances that must be in place to abide by the rules of the code.

Sachin GuptaPartnerDhir & Dhir Associates
Sachin Gupta
Dhir & Dhir Associates

Operational creditors need to meet the criterion of absence of any dispute over the defaulted amount, and to place on record a certificate from the financial institution as defined under the code along with a demand notice as stipulated. The demand notice must be strictly in accordance with the form as prescribed under the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (I&B Rules).

A few instances where the parties have failed to abide by the rules or strict instructions issued by the concerned authorities are outlined below.

The National Company Law Appellate Tribunal (NCLAT), in the matter of Uttam Galva Steels Ltd v DF Deutsche Forfait AG, noted that section 8(1) of the code states that during the occurrence of any default, the operational creditor must deliver a demand notice of unpaid operational debt and a copy of the invoice demanding payment of the amount involved in the default to the corporate debtor in the prescribed form and manner. Rule 5 of the I&B Rules specifies the format in which the demand notice or invoice demanding payment is to be issued by the operational creditor.

Thus in view of the provisions of the code, read with the rules, in the absence of authority from the board of directors, a person holding no position with or in relation to the operational creditor cannot issue a notice under section 8 of the code. A lawyer’s notice is distinct from notice given by the operational creditor in terms of section 8.

In the matter of Goa Antibiotics and Pharmaceuticals Ltd v Lark Chemicals Pvt Ltd, the NCLAT reiterated the law as laid down in the Uttam Galva Steels case, and found that the demand notice had been issued by a law firm and nothing on record suggested that the law firm held any position with or in relation to the operational creditor – Lark Chemicals. Additionally the demand notice had not been issued as per form 3 or form 4, as stipulated under rule 5 of the I&B Rules.

In view of the above, the initiation of the resolution process at the request of Lark Chemicals was not in compliance with the law and accordingly was set aside. The NCLAT also held that the resolution process cannot be either initiated or conducted in the absence of justification regarding a delay on the part of the operational creditor.

The insolvency resolution process against Goa Antibiotics involved debts which were due since 1998. The company submitted that the demand notice made under section 8(1) was not issued by Lark Chemicals but by a law firm and that the law firm had not mentioned its position and relation with Lark.

Another contentious topic is whether two or more operational creditors having same cause of action can file an application jointly. An operational creditor must issue a notice under section 8 of the code prior to filing of a petition under section 9. Since the claims and dates of default for each operational creditor are distinct, each of the operational creditors must file a separate section 8 notice raising its claim and seeking due payment of the amount in default.

In Uttam Galva Steels, the NCLAT also held that a joint petition under section 9 by one or more operational creditors is not maintainable. The operational creditors had filed a joint petition, relying on rule 23A of the NCLT Rules, 2016, but since rule 23A has not been adopted in terms of rule 10 of the I&B Rules, rule 23A was held to be inapplicable by the NCLAT.

Operational creditors have barely recovered from the ambiguity revolving around the term “dispute”, however, with each passing day they continue to encounter other challenges. It is only after meeting the diverse requirements as envisaged under the code that an operational creditor will be entitled to trigger the process and seek due resolution under the code. Key amendments have triggered diverse speculation and while loopholes exist, efforts are being made continuously to plug them to safeguard the key provisions.

Dhir & Dhir Associates is a leading full-service law firm in India. Sachin Gupta is a partner at Dhir & Dhir Associates.

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