The horizon of due “delivery” of Demand Notice under section 8 of the IBC

Introduction

The Insolvency and Bankruptcy Code, 2016 (“the Code”) was enacted to amend and consolidate the laws relating to reorganization and insolvency of the corporate persons and to ensure a speedy revival of the corporate person(s). For this purpose, the Code has provided the remedy of applying to initiate the Corporate Insolvency Resolution Proceedings (“CIRP”) to two types of creditors, namely, the Financial Creditor(s) and Operational Creditor(s). Thus, in circumstances, where a Corporate Debtor commits a default of a minimum amount of Rs. 1 crore (earlier 1 lakh), the Financial Creditors and the Operational Creditors may apply for the initiation of the CIRP under section 7 and section 9 respectively, before the National Company Law Tribunal (“the Tribunal”).

However, pertinently, the right of Operational Creditors has been further subjected to two additional pre-requisites before approaching the Tribunal to trigger the revival and insolvency proceedings against a Corporate Debtor. First, the Operational Creditor before approaching under section 9 of the Code, is bound to issue and “deliver” a prior demand notice under section 8 of the Code. Second, the Code mandates non-existence of a “prior dispute” concerning the default of operational debt in question. If any of these additional conditions are not duly satisfied by the Operational Creditor, the application is liable to be rejected at the threshold.

Scope: The author in the present article attempts to examine the former condition i.e. prior demand notice. The author herein appreciates through several case laws the question of when can a prior demand notice be deemed as duly delivered under section 8 of the Code to qualify for the initiation of the CIRP.

The Legislative pre-requisite

The legislations have traditionally provided for two types of services, namely, actual service and substituted or deemed service.[1] For prior demand notice under section 8 of the Code, Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 mandates “delivery” of the demand notice in Form 3 along with a copy of the invoice in Form 4. The “delivery” under section 8(2) of the Code may be made at the “registered office” of the Corporate Debtor by hand, or speed post with acknowledgement due. Alternatively, the Operational Creditor can serve the notice through electronic mail to a “whole-time director or designated partner or key managerial personnel” of the Corporate Debtor.

Judicial analysis

The issue of what can be deemed as due “delivery” of demand notice under Rule 5, has been considered in several judicial decisions. Amongst them, the author has picked some of the important judgements as discussed below. A reading of these decisions projects that Rule 5 has to be given a strict interpretation and compliance to it, has to be strictly made. Failing this, the applications are highly likely to be dismissed.

To foremost note, in M/s Eastern Travels Private Limited v. M/s Swash Convergence Technologies Limited [2] (“Eastern Travels”) the Operational Creditor attempted “delivery” of the notice at the registered office address and the corporate office address. The notice at former was returned due to “no such company”, however, notice at later was delivered. Additionally, the Operational Creditor averred that an e-mail had also been sent to the official e-mail of the Corporate Debtor. Given these facts, the Operational Creditor pleaded the Tribunal to deem the “delivery” of service by placing a reliance on section 27 of the General Clauses Act, 1897 which states that the service by post shall be deemed to be effected in the ordinary course of post if has been “properly addressed” on such party.

The Tribunal held that the “delivery” of the notice under section 8 of the Code is mandatory. However, the Operational Creditor has failed to furnish “actual proof of delivery of notice under section 8” at the “registered office address as disclosed in Master Data of the Corporate Debtor” (para. 6) in the application or the affidavit under section 9(3)(b) of the Code. Additionally, the Operational Creditor has also not proved the “delivery” of notice by e-mail on prescribed persons under Rule 5. The Tribunal also held that section 27 of the General Clauses Act, 1987 would not come in play because Rule 5 already “prescribe the form and the manner” (para. 13) in which the notice is to be made.

Similarly, in Tirupati Balaji Overseas v. Oliver Engineering Pvt. Ltd [3] (“Tirupati Balaji”) the demand notice was not delivered on the “registered office” of the Corporate Debtor but only at a factory of the Corporate Debtor. Moreover, the e-mail was not sent on the address as provided in the master data and the Operational Creditor could also not prove that the delivery of e-mail was made to the persons prescribed under Rule 5.

The Tribunal held that Rule 5 does not merely mandate “delivery” of the notice but also prescribes how and to whom such “delivery” is to be made (para. 7). Thus, as the notice was not delivered at the “registered office” and e-mail could not be proved to have been used by the key managerial persons i.e. as defined in section 2(51) of the Companies Act, 2013, the Tribunal refused to deem “delivery” of the demand notice in terms of Rule 5 and dismissed the application (para. 8 & 9).

However, contrarily, in Alloysmin Industries v. Raman Casting Private Limited [4] the National Company Law Appellate Tribunal (“Appellate Tribunal”) held that Rule 5 allows the delivery at both, the “registered address” and the corporate office address. It held that if the delivery of notice has been duly made at either place, the application under section 9 may be admitted (para 6).

This has been subsequently recognized in several decisions, for instance, in the Supreme Industries Limited v. M/s Leel Electricals Limited [5] (para. 16). However, the Tribunal herein held that in the present case, there has been no “delivery” at either place i.e. the corporate office address or registered office address. Moreover, the Operational Creditor has not even attempted to deliver the notice personally or through e-mail. Thus, the Tribunal dismissed the application because a mere return of notice for “office closed” or “not known” cannot be deemed as due “delivery” under section 8 of the Code, particularly, when “delivery” through the available alternatives has not even been attempted (para. 17 & 19).

A strict approach can, however, be again seen from M/s Premraj Packagings Pvt. Ltd. v. M/s Unnao Distilleries & Breweries Ltd.[6] (“Premrag Packagings”) wherein the Tribunal did not deem delivery of demand notice as the notice at the “registered office” was returned due to “insufficient address”. Also, the e-mail though had been averred to have been sent on the e-mail id available on the master data of the Corporate Debtor, yet the Tribunal held that the Operational Creditor had not been able to prove that the e-mail was delivered to the designated persons like directors and managerial person under Rule 5 (para. 8). The Tribunal categorically re-affirmed that the “delivery” of the notice as quint-essential under section 8 in terms of Rule 5 vis-à-vis mere dispatch of the notice (para. 12-14).

However, most recently, in K. B. Polychem (India) Ltd. v. Kaygee Shoetech Private Limited [7] the notice could not be delivered at the “registered office” of the Corporate Debtor. However, the notice was delivered to one of the directors of the Corporate Debtor and the director has not specifically denied its service (pg. 13). In such circumstances, the Tribunal deemed the due “delivery” of demand notice.

Pertinently, the Appellate Tribunal, in this decision, appears to have widened the scope for service under Rule 5. The Appellate Tribunal in addition to Rule 5 referred to section 27 of the General Clauses Act, 1897 read along with section 114 of the Indian Evidence Act, 1872 to raise a presumption of “delivery” of notice for the purposes of section 8 of the Code despite the IBC being a “complete code” (pg. 6). To note, Eastern Travels (supra) the Tribunal had did not place reliance on section 27 as Rule 5 already was in place. Additionally, the Appellate Tribunal referred to Rule 38(4) & (5) of the National Company Law Tribunal Rules, 2016, Rule 38(4) & (5) which provides extensive power to the Tribunal to deem a proper service in particular circumstances and as and when it appears “just and convenient” to the Tribunal (pg. 10).

Author’s Analysis

A due “delivery” of the notice at the stage of inception of the proceedings serves two purposes. One, it checks initiation of the CIRP prematurely or for extraneous considerations. Two, it facilitates “informal negotiations” between the parties “which may result in a restructuring of the debt outside the formal proceedings” (Premraj Packagings, para. 12-13).

Thus, through these decisions, it can easily be concluded that compliance with section 8 and Rule 5 is mandatory. For this purpose, the demand notice must be sent with (a) copy of an invoice, (b) by hand or by post with acknowledgement due and status report, (c) preferably at “registered office” address and in alternative at the corporate office address or, (d) e-mail along with proof of the “delivery”, (e) “delivery” to the “whole-time director or designated partner or key managerial personnel”, and (f) the Operational Creditor shall file evidence by way of affidavit, clearly averring compliance with these above-said elements. The Operational Creditor must also examine if the address to which the notice has been dispatched is the current address of the Corporate Debtor.[8]

Where the Operational Creditor has duly complied with these pre-requisites and have exhausted all the alternatives but still the “delivery” could not be made, the Tribunal may order “delivery” by way of publication in newspaper i.e. constructive delivery. Additionally, the Operational Creditor must also show that the opposite party has been deliberately avoiding the service. Lastly, in a circumstance where the publication has been made but the Corporate Debtor still does not appear, the Tribunal may deem “delivery” of demand notice in the terms of Rule 5.[9]

A mere return of the demand notice or employment of limited efforts, will not lead to a deeming effect of “delivery” of the notice in terms of the language of section 9(3)(a) and Rule 5 (Tirupati Balaji, para. 6). The Tribunal has majorly called for strict compliance to Rule 5, given the fact that the Code is special legislation and the legislative text and intent are clearly expressed.

Thus, it is recommended that the parties must with bona-fide intent employ best efforts to deliver the demand notice by exhausting both the modes i.e. post or e-mail, to prescribed place and persons before approaching the Tribunal. It is only after this, the Tribunal may order for notice through publication. It is also pertinent to show that the opposite party has been intentionally avoiding the “delivery” of the notice. It is only a wholesome effect of these steps and satisfaction of these pre-requisites that a “delivery” of demand notice under section 8 can be deemed to have been made.

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[1] Section 3 (“a person is said to have notice”), The Transfer of Property Act, 1882; Order V, Rule 20, the Code of Civil Procedure, 1908.

[2] M/s Eastern Travels Private Limited v. M/s Swash Convergence Technologies Limited, C.P. No. IB-231/ND/2018, para. 6 & 13.

[3] Tirupati Balaji Overseas v. Oliver Engineering Pvt. Ltd, CP-IB-658/ND/2018, para. 7-9.

[4] Alloysmin Industries v. Raman Casting Private Limited, CA (AT) (Insolvency) No. 684 of 2018, para. 6.

[5] Supreme Industries Limited v. M/s Leel Electricals Limited, CP No. (IB) 328/ALD/2019, para. 16, 17, & 19.

[6] M/s Premraj Packagings Pvt. Ltd. v. M/s Unnao Distilleries & Breweries Ltd., IB No. 341/ALD/2019, para. 8 & 12-14.

[7] K. B. Polychem (India) Ltd. v. Kaygee Shoetech Private Limited CA (AT) (Ins) No. 1010 of 2019, pg. 6, 10, & 13.

[8] Sh. Sharad Kesarwani v. M/s. Planetcast Media Services Ltd. & Anr., CA (AT) (Ins) No. 272 of 2018, para. 6 & 7.

[9] The Sandesh Ltd v. Realm Media Solutions Pvt. Ltd. CA (AT)(Ins) No. 222 of 2018, para. 4, 5, & 6.

[The article has been authored by the founding editor and first appeared on Taxmann].