A FOREIGN FINANCIAL OR OPERATIONAL CREDITOR CANNOT INVOKE INSOLVENCY PROCEDURE IN INDIA IF HE DOES NOT PRODUCE A NO-DUE CERTIFICATE FROM INDIAN FINANCIAL INSTITUTION – A MAJOR HANDICAP TO BE PLUGGED INTO.

A FOREIGN FINANCIAL or operational CREDITOR CANNOT INVOKE INSOLVENCY PROCEDURE IN INDIA IF HE DOES NOT PRODUCE A NO-DUE CERTIFICATE FROM INDIAN FINANCIAL INSTITUTION – A MAJOR HANDICAP TO BE PLUGGED INTO.

Smart Timing Steel Ltd. versus National Steel and Agro Industries Ltd

FACTS OF THE CASE

In this case, Smart Timing Steel Ltd. (“Appellant”), being an Operational Creditor in this case, filed an application before the Adjudicating Authority (Mumbai Bench) for initiation of corporate insolvency resolution process under Section 9 of Insolvency & Bankruptcy Code (“Code”). It is important to note that the Appellant did not submit the certificate from the Financial Institution (maintaining its accounts) confirming that there is no payment of the operational debt by the Corporate Debtor, along with its petition, which is a mandatory requirement under Section 9 of the Code.

Later, when the Appellant was given an opportunity to file the above certificate, it failed to do so and submitted that it should be exempted from such compliance, as the bank of the Appellant is situated outside India. The Appellant in this case had no office or bank account in India with any of the scheduled banks, Financial Institution (as defined under Section 45 of RBI Act, 1934), Public Financial Institution (as defined under Section 2 (72) of the Companies Act, 2013) or with any other institution notified by Central Govt. as “ Financial Institution”. Consequently,  the Appellant failed to enclose such certificate from ‘Financial Institution’ maintaining its account.

DECISION OF THE NCLAT , MUMBAI BENCH

The above petition of the Appellant was rejected by the Adjudicating Authority on ground of non-compliance with the provision of Section 9(3)(c) of the Code (i.e., non-filing  the above certificate). Aggrieved by the above order, the Appellant filed an appeal before NCLAT under Section 61 of the Code).

DECISION OF THE NCLAT

Referring to Section 9 of the Code, NCLAT observed that the entire provision of sub-clause (3) of Section 9 is “required to be mandatorily followed and it is not empty statutory formality”.

NCLAT was of the view that the argument that 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 as it cannot be accepted as apart from the Insolvency code, there are other provisions of recovery like suit which can be preferred by any person.

Macquaire Bank Limited V/s Uttam Galva Metallics Limited

In the above case also , the same issue was raised . National Company Law  Appellate Tribunal (NCLAT), Chandigarh, have upheld the order of the Hon'ble NCLT Chandigarh wherein the Hon'ble Tribunal had held that the "Certificate from a foreign Bank cannot be considered as Certificate from financial institution as contemplated under Section 9 (3) (c) of the I&B Code 2016."

The Supreme Court has over ruled the NCLAT decision

However, the Supreme Court has over ruled the NCLAT decision on 15th December, 2017 In the matter of Macquarie Bank Limited Vs. Shilpi Cable Technologies Ltd. Civil Appeal no. 15135-2017 .  Hence, Section 9(3)(c) is no longer mandatory but only directory in nature.

MY VIEWS

Indian Insolvency code should not prescribe a procedure that cannot be satisfied or fulfilled against foreign suppliers. Such provisions will be considered as ultra vires of UNCITRAL Model Law on Cross-Border Insolvency (1997) to which Indian government is a signatory or the provisions of free trade advocated by World Trade Organisation to which Indian government is a signatory. 

By making it mandatory the certificate from an Indian financial institution , the foreign suppliers are put at handicap. Declaring it as a mandatory provision for getting a certificate from a Indian financial institution , it is submitted that it is against the natural justice.

Instead , foreign suppliers should be allowed to enclose the following along with their application for initiation of insolvency under IBC Code 2016.

·       Copy of the contract entered between Indian buyer and foreign supplier.

·       Copies of bill of lading and invoices.

·       Copies of the acknowledgement of receipt of goods

·       Copy of the notice served on Indian buyer demanding the payment.

·       An affidavit by foreign supplier or his power of attorney that no payment has been received  from the Indian buyer.

This is a serious gap in the Insolvency and Bankruptcy Code 2016 and this has to plugged immediately through suitable amendment.