“The Insolvency and Bankruptcy Code”, brags to have the potential to emancipate the Indian economy from distressed and troubled businesses. Apart from unlocking the value stuck in “Dilapidated Businesses”, the code aims at stepping up India’s ranking in “Ease Of Doing Business. A cursory review of “The Code” would reveal that it is full of several triggering processes and that several timelines are being prescribed for actions by various agencies/persons. For example for “Corporate Person”, Section 5(14) mandates “Insolvency Resolution Process Period” to be 180 days while Section 55 prescribes for “Fast Track Corporate Insolvency Resolution Process” which as per Section 56(1) has to be completed within 90 days from insolvency commencement date.

The revival of Indian Economy needs an infusion of a fast track resolution mechanism and therefore timeliness is an essential prerequisite for the successful implementation of The Code. For aggressively pursuing “The Code”, it is essential that we understand the practical implications of several directory and mandatory provisions that are being made use of in the code. Generally, the intention of the legislature is expressed by mandatory and directory verbs such as ‘may’, ‘shall’ and ‘must’. The word “May” appears more than 500 times in the code and the word “Shall” appears more than 800 times. Adherence to strict timelines coupled with the existence of several “May’s and Shall’s” makes the understanding of “Mandatory And Directory Provisions” to be an absolutely indispensable requirement in the arena of implementing the code.  It is one of the rules of construction that a provision is not mandatory unless non-compliance with it is made penal. Mandatory provisions should be fulfilled and obeyed exactly, whereas in case of provisions of directory enactments substantial compliance is satisfiable.

Section 9(3)(c) of the code requires that for an Operational Creditor to initiate “Corporate Insolvency Resolution Process” he needs to file an application, accompanied by a proof evidencing that the “Operational Debt” stands unpaid. The Code makes use of the word “shall” in above-referred section, and therefore the questions that arise are:

 1) Should the proof be filed by “Operational Creditor ONLY” or can a lawyer filing the same on behalf of the Operational Creditor would still be in order?

2) Secondly can “ANY” proof evidencing nonpayment of operational debt would suffice or is it necessary to have exactly the same document as prescribed in the code? ( Sec 9(3)(c) prescribes 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). 

In context to above posed two questions, it is essential to note that when a legislature makes the use of the word “Must” it is an indicative of stronger imperative than when the legislature makes the use of the word “Shall”. The word ‘may’ must be taken in its natural, that is, permissive sense and not in its obligatory sense

Honourable Supreme Court in case of Macquarie Bank Limited Vs Shilpi Cable Technologies Ltd has held that Section 9(3)(c) is not a mandatory but only directory and that the word “shall” used in Section 9(3)(c) should be read as “may”. Thus the notice sent on behalf of an operational creditor by a lawyer would be in order. Further, the word “confirming” in Section 9(3)(c) shows that this is only one more document that can be relied upon by the operational creditor, apart from other documents, which may well prove the existence of the operational debt. Therefore, the Code requires that the creditor can only trigger the Insolvency Resolution Process on clear evidence of default and “clear evidence” need not only be in the shape of the certificate, referred to in Section 9(3)(c), as a condition precedent to triggering the Code.

Similarly, Section 9(5) of the code specifies that in case if the Adjudicating Authority was to reject the application filed by the Operational Creditor then too it shall before rejecting an application 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. Here too “The Code” makes use of the word “Shall” in above referred section, and therefore the question that arises is “Whether, under the proviso to Section 9(5), the rectification of defects in an application within seven days of the date of receipt of notice from the adjudicating authority was a hard and fast time limit which could never be altered?”. In the same case of Macquarie Bank Limited Vs Shilpi Cable Technologies Ltd, Honourable Supreme Court has held that the aforesaid provision of removing the defects within seven days is directory and not mandatory in nature. When such an application comes up for admission/order before the adjudicating authority, it would be for the adjudicating authority to decide as to whether sufficient cause is shown in not removing the defects beyond the period of seven days. Once the adjudicating authority is satisfied that such a case is shown, only then it would entertain the application on merits, otherwise, it will have right to dismiss the application.

It is said that “Camera Records But It Is The Artist Who Interprets”. Above discussion would have revealed the need for we professionals to develop the artistry of timely and correctly interpreting the newer statutes. Implementation of “The Insolvency and Bankruptcy Code” is a journey that Indian Economy has embarked upon. Knowing the bare provisions is the first step in the journey while meaningful application of the true intent of the statute is the second and most crucial step in the journey.

Disclaimer: Opinions expressed are current opinions only as of the date indicated. The Author does not accept any responsibility to update any opinions or other information contained in this material.This material should not form the primary basis for any decision that you make in relation to matters referred to herein.Review carefully the material and perform such due diligence as you deem fit, including consulting your own independent legal, tax, accountancy and other professional or specialist advisors, as necessary or appropriate.Neither the Author, nor any of his officers, directors, agents or employees, makes any warranty, express or implied, of any kind whatsoever, or assumes any responsibility for any losses, damages, costs or expenses, of any kind or description, relating to the adequacy, accuracy or completeness of this material or its use including, but not limited to, information provided by third parties. You should not construe silence by the Author, or any of his officers, directors, agents or employees as approval or endorsement of any statements made by a third party.
The Author is a partner with  YSP & Co LLP with over 20 years of experience in myriad areas of GST, Direct Tax, System Audits, Controllership and CFO Functions.The author could be reached at [email protected] / 8356097618 / 9619912774.

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June 2021