Tuesday, April 18, 2017

Whether the provisions of the section 8 and 9 of IBC can be overruled where a creditor seeks for declaration of corporate insolvency against a debt defaulter.

Whether the provisions of the section 8 and 9 of IBC can be overruled where a creditor seeks for declaration of corporate insolvency against a debt defaulter.

In the case Essar Projects India Ltd. v. MCL Global Steel Private Limited (CP No. 20/1 & BP/NCLT/MAH/2017), the Mumbai bench of the National Company Law Tribunal (NCLT) dealt with the Insolvency and Bankruptcy Code, 2016 (IBC) and considered whether the provisions relating to the initiation of insolvency resolution process by an operational creditor ?

 Insolvency and Bankruptcy Code, 2016 (IBC)


Fact of the Case

M/s Essar Projects India Limited (Essar) (Creditor) carried out some construction work for MCL Global Steel Private Limited (Debtor).

Despite several reminders by Essar, the contractual amount for the construction was not paid to Essar by MCL.. Essar issued a demand notice under Section 8 of the IBC, demanding the repayment of INR 9,26,40,255 (which is principal amount and interest).

MCL claimed that the amount claimed by the ESSAR is a disputed one under section 8 &9 of IBC as there was a poor construction and bad quality of materials were used and project was not handed over to MCL in time.
Lastly, a petition for initiation of the corporate insolvency resolution process (Petition) was filed by Essar before the NCLT, Mumbai.

 Insolvency and Bankruptcy Code, 2016 (IBC)


Arguments & Scrutiny

·       Essar claimed that HCL never opened any claim well ahead of issue of statutory notice for debt due by Essar.
·       Essar claimed that its previous invoices for construction were duly accepted by HCL without any objection in 2014 and 2015.
·       Essar argued that HCL never initiated any civil suit or other legal or arbitral proceedings against Essar which is a pre-requisite under Section 8 of the IBC.
·       Essar demonstrated that HCL refusal to acknowledge the Essar claim is only an afterthought process.


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.

Views of the NCLT , Mumbai Bench:

It  is obvious from the wording of Section 8, the Bench observed that disagreement raised by the MCL in reply to the demand notice does not fulfil the needs under Section 8.

The NCLT Mumbai Bench also took into account that the MCL had acknowledged the raising of the earlier invoices and had taken up the dispute only once the demand notice was given by Essar.

It emphasised that 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.

Hence, the Bench viewed that the differences raised by the Debtor were not maintainable and allowed the Petition.


Concluding Remarks

·       HCL v Essar case clearly emphasises that a debtor cannot raise a dispute as a second thought to circumvent the commencement of the insolvency resolution process by an operational creditor.

·       The dispute should have been in existence well-ahead to the issuance of the demand notice so as to cater the needs under Section 8.


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