Is it mandatory to serve demand notice on corporate debtor?

demand-notice-served-by-an-operational-creditor

Introduction

In a recent case of Mobilox v Kirusa; Demand Notice was referred to in Insolvency & Bankruptcy Code. The facts of the case focused on the existence of a dispute and what constitutes it. Demand Notice was a part of it and held an imperative role in deciding the case in favor of Mobilox.

‘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’.

Operational creditor to issue a demand notice or copy of the invoice to the corporate debtor

The operational creditor shall send demand notice in form 3 or copy of the invoice in form 4 as contained in Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

The demand notice or copy of invoice shall be sent to the corporate debtor by post, by hand or email as specified in rule 5(2) of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

Copy of demand notice or invoice shall be forwarded to information utility.

Demand notice before initiating insolvency process is mandatory

If such demand notice is not issued in form 3 or 4, corporate insolvency process cannot be initiated by operational creditor- Calcutta Ispat v. Om Shakti Smelter (2017) 143 SCL 493=65 taxmann.com 55 (NCLT)  Senthil Kumar Karmegam v. Dolphin offshore Enterprises (2018) 145 SCL 26= 87 taxmann.com 341 (NCLT).

Joint demand notice and joint application not permissible

Application to initiate insolvency process is required to be initiated individually. Joint demand notice and joint application not permissible – Uttam Galva Steels v. DF Deutshe Forfait AG(2017) 143 SCL 318 = 84 taxmann.com 183 (NCLT).

Demand notice can be issued by Advocate or authorized Agent-

In Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd. (2017) 88 taxmann.com 180 (SC), it has been held that a demand notice of an unpaid operational debt can be issued by a lawyer/advocate or authorized agent on behalf of operational creditor. Section 30 of Advocates Act specifies powers of Advocate and these are not inconsistent with provisions of Insolvency Code.

(This principle should apply to holder of power of attorney also)

Earlier, in Uttam Galva Steels v. DF Deutshe Forfaith AG (2017) 143 SCL 318 = 84 taxmann.com 183 (NCLAT), it was held that any lawyer cannot issue demand notice. The only person authorized by an operational creditor can issue demand notice.

In SmartCity (Kochi) Infrastructure v. Synergy Property Development Services (2017) 144 SCL 521 = 87 taxmann.com 7 (NCLT), it was held that a law firm cannot issue notice on behalf of the operational creditor unless specifically authorized by Board of the company.

Now, these decisions stand overruled.

Conclusion

The IBC has clearly mentioned about the demand notice and what importance it holds before initiating an insolvency resolution process. Sending a demand notice to the corporate debtor before initiating IRP is mandatory. The Supreme Court in its landmark judgement on Mobilox case has made it very clear substantiating the above mentioned. Recovery of bad debt has become essential part of business for its smooth functioning.

The government has become vigilant and is ensuring to take right steps in the resolution of business sector cases. In order to achieve a better rank on Ease of Doing Business index these issues require attention and resolved in a better way.

For further queries get in touch with us at- stupti@centrik.in

 

Disclaimer – the above summary is based on the personal interpretation of the revised regulations, which may differ person to person. Hence, the readers are expected to take expert opinion before placing reliance on this article.

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