Smart Timing Steel Ltd. (Creditor) vs National Steel And Agro Industries Ltd. ...

(arising out of Order dated 31st January 2017 passed by NCLT, Mumbai Bench in C.P.No. 06/1 & BP/NCLT/MAH/2017)

Smart Timing Steel Ltd. . ..Operational Creditor

Vs.

National Steel and Agro Industries Ltd. .... Corporate Debtor

Present: For Appellants: Mr. Sanjay Grover, Advocate

For Respondents: Mr. Sandeep S.Deshmukha, Advocate

JUDGEMENT

SUDHANSU JYOTI MUKHOPADHAYA,J.

This appeal under Section 61 of Insolvency & Bankruptcy Code

(hereinafter referred to 'I & B Code' for short) has been preferred by appellant

against Order dated 31St January 2017 passed by 'Adjudicating Authority' in

Mumbai Bench in C.P.No. 06/1 & BP/NCLT/MAH/2017, which reads as

follows:

"The Petitioner/ Operational Creditor filed this Creditor

Petition u/s 9 of Insolvency and Bankruptcy Code without

filing certificate from the Financial Institution maintaining 2

Accounts of the operational Creditor confirming that there is

no payment of this unpaid Operational Debt by the Corporate

Debtor as set out in (c) of Subsection (2) of Section (9) of this

Code 2016.

Looking at non-filing of the certificate that is required to be

filed along with this petition, this Bench had already given

time to furnish the said document, but the counsel failed to

furnish the said certificate. When this Bench has put it to the

petitioner counsel how this Bench could pass this order

without furnishing the certificate mandatorily to be filed

along with the petition, the counsel appearing on behalf of

the Operational Creditor submits that it is impossible to file

copy of such Certificate from the Financial Institution for the

Bank of the operational creditor is situated outside India,

therefore, the compliances with such requirements shall be

exempted."

On perusal of Section 9 of Insolvency and Bankruptcy

Code, it is evident, that it is mandatory to file copy of the

Certificate from the Financial Institutions reflecting non-

payment of the operational debt impugned, for the Operation

Creditor has failed to annex copy of the said Certificate as

required u/s 9(3) (c) of the Code, this petition is liable to be

rejected.

Accordingly, the same is hereby rejected."

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2. The question for determination in this appeal is whether filing of "a copy

of certificate from the "Financial Institution" maintaining accounts of the

Operational Creditor confirming that there is no payment of unpaid

operational debt by the 'Corporate Debtor' as prescribed under clause (c) of

sub-section 3 of Section 9 of the 'I & B Code' is mandatory or directory.

3. The appellant who claimed to be 'Operational Creditor' filed an

application under Section 9 of 'I & B Code' for initiation of Corporate

Insolvency Resolution Process, enclosing some of the relevant documents.

However, no copy of "the certificate from the Financial Institution maintaining

account of the 'Operational Creditor" as prescribed under clause(c) of sub-

section (3) of Section 9 was enclosed. For the said reason the adjudicating

authority rejected the application.

4. For deciding the issue it is desirable to notice relevant provisions of 'I &

B Code' and Rules framed thereunder. Sub-section (14) of Section 3 defines

'Financial Institution' means--

(a) a scheduled bank;

(b) financial institution as defined in section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934); and

(c) Public financial institution as defined in clause (72) of section 2 of the Companies Act, 2013 (18 of 2013); and

(d) such other institution as the Central Government may by notification specify as a financial institution;

5. The appellant is a foreign company of Hong-Kong having no office or

bank account in India.

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6. As the appellant has no account in any scheduled bank or 'Financial

Institution' as defined in Section 45-I of the RBI Act 1934 nor having such

account with "Public 'Financial Institution" as defined in clause (72) of Section

2 of the Companies Act 2013 or with any other institution notified by Central

Government as 'Financial Institution', it failed to enclose any certificate from

'Financial Institution' maintaining account of the 'Operational Creditor'.

7. Learned counsel appearing on behalf of the appellant submitted that

the foreign companies and multi-national companies having no office or

having no account in India with any of the 'Financial Institution' will suffer to

recover the debt as due from 'Corporate Debtors' of India. The appellant being

a foreign based 'Operational Creditor', the 'Adjudicating Authority' was

required to interpret the provisions of 'I & B Code' in such a manner that

Section 9 would have taken in its fold all the 'Operational Creditors' who are

entitled to recover the debt defaulted by 'Corporate Creditors' of India.

Learned counsel for the appellant further submitted that the word 'shall' used

in sub-section (3) of Section 9 for furnishing documents etc. should be read

as 'may', and hold that sub-section (3) of Section 9 is directory. Reliance was

placed on Hon'ble Supreme Court decision in "Kailash Vs. Nanhku and

Others"- (2005) 4 SCC 480".

8. In the said case the Hon'ble Supreme Court while deciding the question

whether time limit of 90 days as prescribed by the Proviso appended to

Rule-i of Order VIII of CPC is mandatory or directory in nature? The Hon'ble 5

Supreme Court held that ordinarily the time prescribed by Order VIII, Rule I

has to be honoured but it held that the provision being part of the procedural

code is directory.

9. With due respect we are of the view that aforesaid decision of Hon'ble

Supreme Court in 'Kailash Vs. Nanhku and Others' is not applicable in the

present case, as clause (c) of sub-section (3) of section 7 does not relate to

prescription of time.

10. Section 9 deals with application for initiation of corporate insolvency

resolution process by 'operational creditor' which reads as follows: -

"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--

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(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 maintaining accounts of the operational

creditor confirming that there is no payment of an

unpaid operational debt by the corporate debtor; and

(d) such other information as may be specified.

(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

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

(b) there is no repayment of the unpaid operational debt;

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(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

(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 repayment 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.

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(6) The corporate insolvency resolution process shall commence

from the date of admission of the application under sub-section

(5) of this section".

11. On perusal of entire Section (3) along with sub-sections and clauses,

inclusive of proviso, it would be crystal clear that, the entire provision of sub-

clause (3) of Section 9 required to be mandatorily followed and it is not empty

statutory formality.

12. Sub-section (2) stipulates filing of an application under Section (1) only

in the form and manner and accompanied with such fees as may be

prescribed. The Insolvency and Bankruptcy (Application to Adjudicating

Authority) Rules 2016 (hereinafter referred to as 'Adjudicating Authority Rules

2016' for short) are also enacted in exercise of the power conferred by Clauses

(c), (d), (e), (f), of sub-section 239 read with sections 7, 8, 9 and 10 of the 'I &

B Code'. The rules provide the procedure required to be followed by filing an

application by corporate insolvency resolution process. As per Rule 6 of the

'Adjudicating Authority' Rules 2016, an operational creditor shall make an

application for initiating the corporate insolvency process under section 9, in

Form 5 accompanied with documents and records required therein. As per

sub-rule (2) of Rule 6 it is mandatory again to dispatch a copy of application

filed with the adjudicating authority, by registered post or speed post to the

registered office of the Corporate Debtor.

13. The provisions of sub-section (3) mandates the operational creditor to

furnish copy of invoice demanding payment or demand notice delivered by the

operational creditor to the corporate debtor, an affidavit to the effect that, 9

there is no notice given by the corporate debtor relating to dispute of unpaid

operational debt, 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 and such

other information as may be stipulated. Sub-section (5) of section 9 is

procedure required to be followed by Adjudicating Authority. One can say

that procedural part is not mandatory but is directory.

14. The provision being "directory" or "mandatory" has fallen for

consideration before Hon'ble Supreme Court on numerous occasions. In

Manilal Shah Vs. Sardar Sayed Ahmed (1955) 1 SCR 108, the Hon'ble Apex

Court held that where statute itself provide consequences of breach or non-

compliance, normally the provision has to be regarded as having mandatory

in nature.

15. One of the cardinal principles of interpretation of statute is that, the

words of statute must prima facie be given their ordinary meaning, unless of

course, such construction leads to absurdity or unless there is something in

the context or in the object of the statute to the contrary. When the words of

statute are clear, plain and unambiguous, then, the courts are bound to give

effect to that meaning, irrespective of the consequences involved. Normally,

the words used by the legislature themselves declare the legislative intent

particularly where the words of the statute are clear, plain and unambiguous.

In such case, effort must be to give a meaning to each and every word used

by the legislature and it is not sound principle of construction to brush aside

words in statute as being redundant or surplus, and particularly when such 10

words can have proper application in circumstances conceivable within the

contemplation of the statute.

16. For determination of the issue whether a provision is mandatory or not,

it will be desirable to refer to decision of Hon'ble Supreme Court in State of

Mysore Vs. V.K.Kangan (1976) 2 SCC 895. In the said case, the Hon'ble

Supreme Court specifically held:

"10. In determining the question whether a provision

is mandatory or directory, one must look into the subject-

matter and consider the importance of the provision

disregarded and the relation of that provision to the general

object intended to be secured. No doubt, all laws are

mandatory in the sense they impose the duty to obey on

those who come within its purview. But it does not follow that

every departure from it shall taint the proceedings with a

fatal blemish. 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."

16. Therefore, it is clear that the word 'shall' used in sub-section (3) of

section 9 of 'I & B Code' is mandatory, including clause 3 therein. 11

17. The appellant has enclosed a Final Award given by Sole-Arbitrator,

Hong Kong Special Administrative Region, People's republic of China dated

18th August 2014 to suggest that the respondent Corporate Debtor is liable to

pay the amount determined by arbitrator but defaulted to pay the amount.

Even if such submission is accepted, the Adjudicating Authority cannot

assume that the amount has not been paid pursuant to the award till on the

basis of evidence on record i.e. copy of certificate from the "Financial

Institution" maintaining accounts of the appellant confirming that there is no

payment of an unpaid operational debt by the Corporate Debtor".

18. From the record we find that the appellant was given opportunity to

complete the record by enclosing the certificate of "Financial Institution" and

thereby to remove the defects within 7 days but failed to do so.

19. In "J.K.Jute Mills Company Limited Vs. M/s Surendra Trading

Company - Company Appeal (AT) No. 09 of 2017", the Appellate Tribunal was

considering whether the time limit prescribed in 'I & B Code' 2016 for

admitting or rejecting the petition or initiation of Insolvency Resolution

Process is mandatory? The Appellate Tribunal, by Judgement dated 1St May

2017 held that proviso to sub-section (5) of section 7 and proviso to sub-

section (5) of section 9 granting "Financial Creditor/ Operational Creditor" to

complete the documents, if incomplete is mandatory.

20. In view of the aforesaid findings of this Appellate Tribunal in "J.K. Jute

Mills Company Limited, the appellant having failed to complete the

documents within 7 days, the Tribunal was right in dismissing the application

preferred by the Appellant.

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21. The argument that the foreign companies having no office in India or

no account in India with any "Financial Institution" will suffer in recovering

the debt from Corporate Debtor cannot be accepted as apart from the 'I & B

Code', there are other provisions of recovery like suit which can be preferred

by any person.

22. We find no merit in this appeal. It is accordingly dismissed. However,

in the facts and circumstances, there shall be no order as to cost.

(Mr. Balvinder Singh) (Justice S.J. Mukhopadhaya) Member (Technical) Chairperson

NEW DELHI 19th May, 2017

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