Ashutosh Gupta and Gaurav Rana

Moot Question IV, is Format of Demand Notice (I.E. Form 3 And 4) Are Mandatory or Directory In Nature

National Company Law Appellate Tribunal (NCLAT), in its recent order dated 24.02.2020 (Order) has removed the sword of Corporate Insolvency Resolution Period (CIRP) looming on Flipkart India Private Limited (Flipkart) in matter titled as Neeraj Jain Versus Cloundwalker Streaming Technologies Pvt. Ltd. Company Appeal (AT) (Insolvency) No. 1354 of 2019. In the Order NCLAT discussed and held various intrinsic facet relating to admission or rejection of the Application under Section 9 of Insolvency Bankruptcy Code, 2016 (“IBC” or “Code”) for instance, a. Whether format provided under Adjudicating Authority Rules, 2016 (“Rules”) like FORM 3 and 4 are mandatory or directory in nature and their usage depends on the nature of transaction or discretion of the Operational Creditor; b. Whether claim in respect of losses, damages or interest shall be treated as part of Operational Debt under IBC; c. Whether invoice is integral and inalienable part of Demand Notice and of the petition under Section 9 of the Code; d. Whether Bank Statement is a crucial document for admission or rejection of a Application under Section 9 of the IBC and e. Whether is it mandatory to issue notice of dispute in reply to demand notice, for raising dispute under IBC.

In this article we will be discussing the three questions; First whether format of demand notice prescribed under Rules has to be strictly followed, Second whether invoice is integral and inalienable of the petition under Section 9 of the Code, and Third whether bank statement is crucial document for admission or rejection of a petition (“Moot Questions”).

Before adverting to finding and rationale of the NCLAT on the Moot Questions, it is relevant to discuss the facts leading to the Order.

Facts of the case:

M/s. Cloudwalker Streaming Technologies Pvt Ltd. (“Operational Creditor”) filed Petition under Section 9 of the Code against the Flipkart claiming default of an amount of INR 26,95,00,000/- towards supply of LED TVs. The Operational Creditor has been importing and supplying LED TVs to the Corporate Debtor. The dealing between parties was crystallised under a Supply Agreement dated 29.12.2016 (“Supply Agreement”). As per Supply Agreement mechanism of order placement and invoice clearance was fixed between parties whereby Flipkart was required to place order via Purchase Order (“PO”) by email, thereafter Operational Creditor used to import LED TVs as required and deliver the same to the Flipkart at its desired location.

As per Operational Creditor, Flipkart took delivery first few batches of LED TVs and later on refused to take delivery on the ground of lack of warehouse space. In good gesture Operational Creditor warehoused the LED TVs for a temporary period. For said period Operational Creditor had paid excess custom duties. Flipkart had failed to collect more than 70% of the stock as ordered by them till March, 2018.

On 08.06.2019 Operational Creditor issued the demand notice under FORM 3 under Section 8 of the Code. No reply was made by the Flipkart to the notice of demand to the Operational Creditor. Later on said Demand Notice culminated into petition under Section 9 of Code. In reply to the Petition, Flipkart stated that it has made all the payments in respect PO issued by them from January, 2017 to April, 2018 and nothing is due, payable and defaulted by Corporate Debtor. Further Flipkart contended that no invoice or PO is attached with the Application. Flipkart also raised an objection that bank statements are also not attached with the Application. Thus, it is incomplete and needs to be dismissed on this ground. Flipkart, also objected the form of demand notice which was supposed to be in FORM 3 instead FORM 4 provided under Adjudicating Authority Rules, 2016 (“Rules”).

Adjudicating Authority rejected the contention of the Flipkart as it held that there was no pre-existing or post existing dispute and also observed that despite service of demand notice no payment was released or any notice of dispute was issued and therefore the Application was admitted before NCLT.

Submissions:

While addressing the first and second question, Operational Creditor submitted that, it is the discretion of the Operational Creditor, to either send the demand notice under Form 3 or send an invoice demanding payment of the amount due as per Form 4 of the Rules. In case, the operational creditor prefers for the first option; then in that situation, it is not required to send a copy of the invoice along with the Demand Notice. Also contented that if the notice is send in Form 3 then it is not necessary to annex invoices to the application in Form 5. To buttress his case operational creditor relied on the FORM 3 which does not require attachment of invoice instead any other documents may be attached to prove debt due and payable and defaulted.

Operational Creditor vehemently argued that the statutory requirement is only to give demand notice of the unpaid operational debt. The submission of the invoice may be needed if the demand is made by way of an invoice demanding payment. It is further stated that if the demand notice is given in Form 3, then the invoice is not a mandatory requirement. But if the notice is given in Form 4, then only, copy of the invoice demanding payment is to be delivered to the corporate debtor.

Flipkart argued that the Operational Creditor has failed to produce any invoices, purchase orders or any other documents to prove its claim and has filed a defective Application under Section 9. As per Flipkart there exist a formal mechanism, under the Supply Agreement wherein a Flipkart would issue a purchase order, against which the Operational Creditor was to issue an invoice at the time of supply of goods, against which the amounts would become payable.

It is further said that Part-V, Column 7 of Form 5 also mandates that a statement of the bank account where deposit or credit is normally received must be attached. The Operational Creditor has not attached even this bank statement. Though bank statement is a crucial document to establish, which amounts have been received, and lack thereof, merits rejection of Section 9 Application.

Rationale and Finding :

NCLAT brushed away argument of the Operational Creditor by relying on Regulation 7 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides a list of documents which are to be submitted by the operational creditors before Resolution Professional for filing claim, same is reproduced herein below:

PROOF OF CLAIMS

Claims by operational creditors.

(1) A person claiming to be an operational creditor, other than workman or employee of the corporate debtor, shall submit claim with proof] to the interim resolution professional in person, by post or by electronic means in Form B of the Schedule: Provided that such person may submit supplementary documents or clarifications in support of the claim before the constitution of the committee.

(2) The existence of debt due to the operational creditor under this Regulation may be proved on the basis of-

(a) the records available with an information utility, if any; or

(b) other relevant documents, including – (i) a contract for the supply of goods and services with corporate debtor; (ii) an invoice demanding payment for the goods and services supplied to the corporate debtor; (iii) an order of a court or tribunal that has adjudicated upon the non-payment of a debt, if any; or (iv) financial accounts”

NCLAT held that aforesaid Regulations categorically mandates an invoice demanding payment for the goods and services supplied for a claim by Operational Creditor. In addition to above NCLAT also drive support from list of documents required to be attached with the FORM 5 (i.e. format of application under Section 9 of IBC) under heading Annex VI of the said FORM which again mandates copies of Invoice to be attached with the Application under Section 9 of the IBC.

On the premises of above NCLAT held that the if the nature of operational debt is of nature where the invoice is generated as part of transaction, then in such cases invoices become an essential document to prove the existence of debt and in other cases any other documents may be submitted to prove the existence of debt.

NCLAT also noted that the proforma of Form 3, mandates to mention the amount of debt; details of transactions on account of which debt fell due; and the date from which such debt fell due. In column 7 of the said proforma, the phrase, ―List of documents attached to this application in order to prove the existence of operational debt and the amount in default” is provided.

Thus if the demand notice is sent in Form 3, then the Operational Creditor has to submit the document to prove the existence of operational debt and the amount in default along with the notice. The said document may either be invoice or any other document to prove the existence of the operational debt and the amount in default. This situation may arise when the operational debt, is of such nature where no invoice is generated. For example, if an operational debt is relating to the salary dues of an employee, then, in that case, the operational creditor will not have any invoice.

NCLAT also noted and held the interpretation of phrase – “OR” used in Section 8(1) of the IBC and held that word “OR” should not tender discretion on the Operation Creditor to send the demand notice in FORM 3 or 4 as per its convenience, instead use of form (i.e. 3 or 4) solely depends on the nature of transaction. NCLAT noted that legislature provisions are made with a larger perspective and to meet all eventualities that may arise in the implementation of the provisions. Therefore the use of the word “OR” in Section 8 cannot be interpreted as such, that the Insolvency and Bankruptcy Code has provided a choice or a discretion to an Operational Creditor, to provide an escape route from submission of the invoice, which can be treated as the most relevant document to prove the debt and amount in default.

NCLAT also noted that Operational Creditor in its petition solely relied on Supply Agreement and projection email of the Flipkart other than that neither purchase order nor invoices were attached. Further even bank statement as required under FORM 5 part V are not attached with the petition. In said context, NCLAT held that bank statement is a crucial document to help establish proof of default and in adjudication of claim of Operational Creditor, thus petition by Operational Creditor is not maintainable as it is filed without bank statement.

Order:

NCLAT held it is not discretionary on the Operational Creditor to issue demand notice in form 3 or 4, issuance of the said form depend on the nature of transaction, like in the cases wherein invoice forms part of the transaction then FORM 4 has to be followed in other cases FORM 3 has to be followed.

NCLAT also held that Invoice are relevant and intrinsic part of a petition and demand notice and has be attached with the demand notice as well with the Petition for proper and due adjudication of the claim of the operational creditor.

In addition to above NCLAT also opined that the Bank Statement are crucial documents for adjudication of claim of the operational creditor debt and important annexures required under the Act and forms provided therein.

ANALYSIS OF THE JUDGEMENT

It is interesting to note that in another case (Crompton Greavs Consumer Electricals Ltd. V K.P.R Industries (India) Ltd. (2018) 208 Comp cas 224 (NCLT)) Adjudicating Authority/NCLT relying on decision of Appellate Tribunal in Uttam Galva Steels Ltd. V D.F. Deutsche Forfait AG held where the notice under section 8 (1) of the code was not in the prescribed from and no authority of the board of directors for issue of the notice had been submitted, the petition of operational creditor was liable to be rejected.

That the said order of Adjudicating Authority was later on turned down by the NCLAT holding that Adjudicating Authority must have provided time to remove the defects instead of dismissal of the Petition. However in the instant case NCLAT dismissed the petition holding that demand notice form was incorrect.

Further whether any provision in law is “directory “or “mandatory” has fallen for consideration before Hon’ble Supreme Court on numerous occasions. In Munilal Shah v Sardar sayed ahemed, the Hon’ble Supreme Court held that where statute itself provide consequences of breach or con-compliance, normally the provision has to be regarded as having mandatory in nature. Further reliance is placed on the case of state of Mysore v V.K Kangan, wherein the Apex Court held that the determination of the question whether a provision is mandatory or directory would, in the ultimate analysis, depend upon the law-maker and that has to be gathered not only from the phraseology of the provision but also considering its nature, its design and the consequences which would follow from construing it one way or the other. Therefore format provided under the Rules are guidelines to be followed and non-following of one pattern or not, could not be considered as fatal error.

Further it is an well-guarded principle of law that procedural law is handmaid law and thus it cannot create hindrances and general inconvenience in the course of law and it shall be waived off to the extent it create inconvenience. Same was held by Hon’ble Supreme Court in Macquaries Bank Limited Vs Shilpi Cable Technologies Ltd. Civil Appeal No. 15135 of 2017. Therefore, merely non following a set format of a form must not lead dismissal of a petition under Section 9 of the Code. Further even legislature provided window under the law for curing any defects in the Petition.

Be that is may, by the present judgment in hand, format of demand  notice as provided under the rules, required to be treated as sacrosanct and has to be followed as per principle settled in the present judgement.

Authors are advocate at New Delhi and Managing Partner & Partner respectively at Indo Legal Services a boutique law firm in New Delhi.

Author Bio

Qualification: LL.B / Advocate
Company: Indo Legal Services LLP
Location: New Delhi, New Delhi, IN
Member Since: 18 Feb 2020 | Total Posts: 8
MR. GAURAV RANA(Advocate, CS) Mr. Rana, Advocate is a member of Bar Council Association of Delhi High Court, India and an Associate member of Institute of Company Secretaries of India. He has extensive experience in commercial litigation, arbitration and regularly argues at various fora. He advises View Full Profile

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One Comment

  1. NARESH SHAH says:

    Appreciate and very precise article . We have query : The 1 st petition was filed with form 3 , 4 and 5 which was withdrawn on Claim of business damages . We send legal notice to OC on the same day and after 15 days we invoked section 11 and nominated Arbitrator . And there after no follow up for the arbitration matter . After 5 month the OC had filed 2 nd petition with form 3 and 5 and changed the Head of claim from business cost to interest claim . Form 4 is mandatory ?

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