Friday, April 14, 2017

NCLT Ruling under Section 8 of the Insolvency and Bankruptcy Code, 2016

[Guest post by Shayonee Dasgupta, who is a project finance lawyer with a leading law firm in India]

As the Insolvency and Bankruptcy Code, 2016 (IBC) is in the process of being implemented, the provisions relating to the initiation of insolvency resolution process by an operational creditor were recently examined by the Mumbai bench of the National Company Law Tribunal (NCLT) by way of an order dated March 6, 2017 in the matter of Essar Projects India Ltd. v. MCL Global Steel Private Limited (CP No. 20/1 & BP/NCLT/MAH/2017).

Facts

In 2013, MCL Global Steel Private Limited (Debtor) appointed Essar Projects India Limited (Essar) to carry out civil work, structural fabrication and erection of building sheds and other technological equipment as part of the 0.2 MTPA Steel Melt Shop Complex in Madhya Pradesh. Essar successfully completed the works by November 30, 2014 and, as previously agreed, raised invoices. 

Despite several reminders by Essar, the amount remained unpaid by the Debtor. Thereafter, in December 2016, Essar issued a demand notice under Section 8 of the IBC, demanding the repayment of INR 9,26,40,255.

The Debtor denied the contents of the notice and stated that the remedies under Sections 8 and 9 of the IBC were not available to Essar since the Debtor disputes the amount due to a disagreement regarding the quality of construction, timelines etc. and enforceability of the contract pursuant to which Essar was appointed by the Debtor. Subsequently, in January 2017, Essar sent a revised demand notice to the Debtor demanding a sum of INR 9,10,60,788 (which included the invoice amount of INR 6,7203,097 and the interest at the rate of 18% pa on the dues up to November 30, 2016 aggregating to INR 2,38,57,691). Finally, a petition for initiation of the corporate insolvency resolution process (Petition) was filed by Essar before the NCLT.

Arguments & Analysis

The Petition noted that the Debtor had never raised any dispute prior to the issuance of the statutory notice by Essar. The Petition also noted that the Debtor did not raise any disputes even when the previous invoices were issued in 2014 and 2015. Further, Essar also noted that the Debtor had not initiated any civil suit or other proceedings against Essar which is a pre-requisite under Section 8 of the IBC. Accordingly, Essar argued that the Debtor had disputed its liability only as an afterthought once the demand notice was issued.

The Bench examined Section 8 of the IBC, the provisions of which have been reproduced below:

8. (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—

(a) existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute; [Emphasis supplied]

(b) the repayment of unpaid operational debt—

(i) by sending an attested copy of the record of electronic transfer of the
unpaid amount from the bank account of the corporate debtor; or

(ii) by sending an attested copy of record that the operational creditor has
encashed a cheque issued by the corporate debtor.

Explanation.—For the purposes of this section, a "demand notice" means a notice served by an operational creditor to the corporate debtor demanding repayment of the operational debt in respect of which the default has occurred.

As is clear from the text of Section 8, the Bench noted that dispute raised by the Debtor in reply to the demand notice does not satisfy the requirements under Section 8. The Bench also noted that the Debtor had admitted the raising of the previous invoices and had brought up the dispute only once the demand notice was received. Section 8 clearly states that proceedings in relation to the dispute, if any, should be initiated prior to the receipt of the demand notice from an operational creditor.

Accordingly, the Bench held that the disputes raised by the Debtor were not sustainable and admitted the Petition.

Conclusion

The ruling clarifies that a debtor cannot raise a dispute as an afterthought to avoid the initiation of the insolvency resolution process by an operational creditor. The dispute should have been in existence prior to the issuance of the demand notice in order to satisfy the requirements under Section 8.

However, concerns have been raised regarding the effectiveness of Section 8 in protecting the interests of the operational creditor since no powers have been granted to the adjudicating authority to determine whether the dispute is bonafide or not.  In a scenario where the debtor initiates the dispute prior to the receipt of the demand notice in order to stall the initiation of the insolvency resolution process, the operational creditor may be left high and dry without any remedies under the IBC.

- Shayonee Dasgupta


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