2025 (5) TMI 82 - SC - IBC

Maintainability of section 9 petition - Initiation of CIRP - Service of demand notice - demand notice served by the Operational Creditor upon the Key Managerial Personnel (KMP) of the Corporate Debtor at its registered office constitutes valid service of the statutory demand notice under Section 8 of the Insolvency and Bankruptcy Code 2016 (IBC) or not - HELD THAT - It is well settled law that an operational creditor must send a demand notice of unpaid operational debt to the corporate debtor as mandated under section 8 of the IBC before initiating the proceedings under section 9 for CIRP and the failure to issue a proper demand notice can render the section 9 petition invalid. On a perusal of Form 3 notice dated 31.03.2021 issued by the appellant it is revealed that the same was addressed to the names of the KMP and delivered to the registered office of the respondent - Corporate Debtor viz. MESCO Kalinga Steel Limited. Even the subject and paragraph 1 of the notice clearly demonstrate that as per the IBC demand notice / invoice demanding payment in respect of unpaid operational debt due from the corporate debtor was issued and thereby the appellant called upon the Corporate Debtor to pay the operational debt within a period of ten days from the date of receipt of the notice failing which CIRP be initiated in respect of the Corporate Debtor - The contents of the notice clearly establish that the same was issued to the Corporate Debtor in respect of the operational debt due and payable by them. As such it cannot be said that the appellant did not comply with the statutory requirement of sending demand notice in Form 3 to the respondent - Corporate Debtor as provided under section 8 of the IBC before filing the section 9 petition seeking initiation of CIRP against the respondent in respect of the unpaid operational debt. Undoubtedly the purpose of sending a demand notice is to give the corporate debtor an opportunity to either repay the outstanding debt or dispute the debt if there are genuine reasons. In the present case the notice dated 31.03.2021 sent by the appellant to the KMP of the corporate debtor at the registered office address in the capacity of their official position explicitly demonstrates that the same was issued to the corporate debtor demanding the operational debt due and payable by them. However it is not the case of the respondent that no notice was sent by the appellant calling upon the respondent - Corporate Debtor to pay the operational debt. Further it is pertinent to point out that during the pendency of the section 9 petition the Corporate Debtor approached the Operational Creditor for settlement which was not fructified. The appellant has to establish as to what is the actual date of default failing which the application filed under section 9 of the IBC is incomplete. In this case the appellant mentioned the date of default as 19.11.2019 in terms of the contract dated 11.10.2019. As per the contract in respect of supply of LAM Coke by the appellant the respondent had to pay 100% in advance through RTGS / NEFT fund transfer or alternatively by opening of LoC prior to dispatch. Subsequently the contract was amended on various occasions relating to lifting and delivery of LAM Coke. Further at the request of the respondent by emails dated 12.11.2019 and 16.11.2019 the appellant permitted the respondent to lift the coals without making payment in advance / opening LoC prior to despatch. On this basis the respondent contended that the contract dated 11.10.2019 is novated and the default date mentioned in the petition is incorrect - However the NCLT declined to decide this question as the respondent raised the plea of novation of contract to nullify the occurrence of default without pleading the same and that the question of novation of contract is a mixed question of law and fact. The NCLAT also did not delve into this aspect as the same was not a subject matter of the appeal before it. The issue relating to the date of default by the Corporate Debtor and novation of contract if any being a mixed question of law and fact requiring detailed analysis based on the materials adduced by the parties is to be decided by the NCLT at the time of final disposal of the section 9 petition on merits. Conclusion - The demand notice dated 31.03.2021 issued by the appellant to the KMP of the Corporate Debtor and delivered at the registered office of the Corporate Debtor can be construed as a deemed service of demand notice as required under section 8 of the IBC. This appeal stands allowed by setting aside the orders impugned herein and the matter is remanded to the NCLT which shall entertain the section 9 petition and decide the same afresh on merits after providing reasonable opportunity to the parties by letting in oral and documentary evidence.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

• Whether the demand notice dated 31.03.2021, served by the Operational Creditor upon the Key Managerial Personnel (KMP) of the Corporate Debtor at its registered office, constitutes valid service of the statutory demand notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 (IBC), thereby enabling the initiation of a Corporate Insolvency Resolution Process (CIRP) under Section 9 of the IBC;
• The interpretation of the statutory requirements under Sections 8 and 9 of the IBC and Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (Adjudicating Authority Rules) concerning the manner and mode of service of the demand notice;
• Whether the procedural irregularity alleged by the Corporate Debtor regarding the addressees of the demand notice (being KMP rather than the Corporate Debtor itself) vitiates the validity of the notice and the consequent Section 9 petition;
• The impact of the absence of any prior dispute raised by the Corporate Debtor regarding the demand notice or the debt, and the effect of the Corporate Debtor's conduct during the pendency of the Section 9 petition;
• The question of the occurrence and date of default, including the contention of novation of contract raised by the Corporate Debtor;
• The extent to which procedural technicalities can be allowed to defeat substantive rights under the IBC framework.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Service of Demand Notice under Section 8 of the IBC on KMP of Corporate Debtor

Relevant Legal Framework and Precedents: Section 8(1) of the IBC mandates that an operational creditor must deliver a demand notice or copy of an invoice demanding payment of unpaid operational debt to the corporate debtor in the prescribed form and manner before initiating CIRP under Section 9. Rule 5(2)(a) and (b) of the Adjudicating Authority Rules provide that such notice may be delivered at the registered office by hand, registered post, or speed post, or by electronic mail to a whole-time director or KMP of the corporate debtor.

Precedents such as Rajneesh Aggarwal v. Amit J. Bhalla established that notice served on a director of a company is deemed notice to the company itself, emphasizing substance over form. Further, NCLAT decisions in K.B. Polychem (India) Ltd. and Shubham Jain v. Gagan Ferrotech Ltd. confirmed that service of demand notice on directors or KMP at the registered office constitutes valid service under Section 8.

Court's Interpretation and Reasoning: The Court observed that the demand notice dated 31.03.2021 was addressed to the named KMP of the Corporate Debtor at its registered office and clearly stated that it was a demand notice for unpaid operational debt due from the Corporate Debtor. The notice was issued in Form 3, the prescribed format under the IBC, and was delivered in the manner prescribed by the Rules.

The Court emphasized that the notice was sent in the official capacity of the KMP and not in their personal capacity, and the subject matter and content of the notice unequivocally identified the Corporate Debtor as the debtor. The Court held that this satisfies the statutory requirement of service on the corporate debtor through its KMP.

Key Evidence and Findings: The demand notice itself, the manner of delivery, and the absence of any denial by the Corporate Debtor that the notice was received were pivotal. The Corporate Debtor's conduct, including seeking settlement during the pendency of the petition, further reinforced the receipt and acknowledgment of the notice.

Application of Law to Facts: The Court applied the statutory provisions and precedents to hold that service on KMP at the registered office is valid and effective service on the Corporate Debtor, fulfilling the condition precedent for filing a Section 9 petition.

Treatment of Competing Arguments: The Corporate Debtor argued that the notice was not addressed to the Corporate Debtor itself and thus invalid. The Court rejected this narrow and technical interpretation, holding that the substance and object of the notice must be considered. The Court also distinguished between service on the corporate entity and personal service on individuals, finding that service on KMP in their official capacity suffices.

Conclusion: The Court concluded that the demand notice served on the KMP at the registered office was valid service under Section 8 of the IBC.

Issue 2: Effect of Procedural Irregularity Alleged by Corporate Debtor

Relevant Legal Framework and Precedents: The procedural requirements under the IBC and the Adjudicating Authority Rules are mandatory but are intended to facilitate the substantive right of the operational creditor to recover unpaid debts. The principle that procedural defects should not defeat substantive rights unless substantial prejudice is caused is well established in jurisprudence, including Sardar Amarjit Singh Kalra v. Pramod Gupta.

Court's Interpretation and Reasoning: The Court held that the procedural irregularity alleged, i.e., that the notice was not addressed directly to the Corporate Debtor but to its KMP, did not cause any prejudice to the Corporate Debtor. The Corporate Debtor was fully aware of the demand and had engaged in settlement discussions, indicating no confusion or lack of notice.

Key Evidence and Findings: The absence of any initial objection to the notice's validity and the Corporate Debtor's engagement in settlement talks were significant. The Court also noted that the demand notice explicitly identified the Corporate Debtor as the debtor.

Application of Law to Facts: The Court applied the principle that procedure is the handmaid of justice and should not be used to defeat substantive rights where no prejudice is caused.

Treatment of Competing Arguments: The Corporate Debtor emphasized strict compliance with procedural norms, but the Court prioritized the object and substance of the notice over formal defects.

Conclusion: The Court found the alleged procedural irregularity insufficient to invalidate the demand notice or the Section 9 petition.

Issue 3: Requirement of Default and Date of Default

Relevant Legal Framework and Precedents: Section 9 of the IBC requires the operational creditor to establish the occurrence of default. The date of default is crucial to determine the validity of the petition. Novation or modification of contracts may affect the date of default.

Court's Interpretation and Reasoning: The Court noted that the appellant identified the date of default as 19.11.2019, based on the original contract. The respondent contended the contract was novated, altering the default date. However, this was a mixed question of law and fact requiring detailed examination.

Key Evidence and Findings: The Court observed that the NCLT and NCLAT did not decide on the novation issue as it was not pleaded or fully argued. The Court held that this issue must be decided on merits by the NCLT after full opportunity to the parties.

Application of Law to Facts: The Court remanded the matter for fresh consideration on the issue of default and novation.

Treatment of Competing Arguments: The Court refrained from deciding the factual dispute on novation at this stage, emphasizing procedural fairness.

Conclusion: The issue of default and novation was to be examined afresh by the NCLT on merits.

Issue 4: Effect of Non-Receipt or Dispute of Demand Notice

Relevant Legal Framework and Precedents: Section 8(2) of the IBC provides that the corporate debtor may raise a dispute within ten days of receipt of the demand notice. Failure to raise a dispute or make payment enables the operational creditor to file a Section 9 petition.

Court's Interpretation and Reasoning: The Court noted that the Corporate Debtor did not raise any dispute regarding the demand notice or the debt at the initial stage. The Corporate Debtor's conduct of seeking settlement during pendency of the petition indicated acknowledgment of the debt and notice.

Key Evidence and Findings: No written dispute was raised within the statutory period. The Corporate Debtor admitted default in emails and did not contest receipt of the demand notice.

Application of Law to Facts: The Court held that the absence of dispute and failure to pay justified the operational creditor's filing of the Section 9 petition.

Treatment of Competing Arguments: The Corporate Debtor's late attempt to raise procedural objections was rejected as not pleaded or substantiated earlier.

Conclusion: The operational creditor complied with the statutory preconditions for filing the Section 9 petition.

Issue 5: Interpretation of Statutory Provisions and Rules Concerning Service of Demand Notice

Relevant Legal Framework and Precedents: Sections 8 and 9 of the IBC and Rule 5 of the Adjudicating Authority Rules prescribe the form, manner, and mode of service of demand notices. The statutory Form 3 requires the notice to be addressed to the corporate debtor at its registered office, and Rule 5(2)(a) and (b) permit service on KMP at the registered office or by electronic mail.

Court's Interpretation and Reasoning: The Court observed that the statutory provisions and rules allow service of demand notice on the corporate debtor through its KMP at the registered office. The Form 3 notice issued by the appellant complied with these requirements in form, content, and manner.

Key Evidence and Findings: The demand notice was in Form 3, addressed to the KMP at the registered office, and clearly stated the demand from the corporate debtor.

Application of Law to Facts: The Court held that service on KMP at the registered office is valid service on the corporate debtor under the IBC and the Rules.

Treatment of Competing Arguments: The Corporate Debtor's argument that service must be addressed directly to the corporate debtor entity was rejected as inconsistent with the statutory scheme.

Conclusion: The statutory framework permits and validates service of demand notice on KMP at the registered office as effective service on the corporate debtor.

3. SIGNIFICANT HOLDINGS

The Court held:

"The demand notice dated 31.03.2021 issued by the appellant to the KMP of the Corporate Debtor and delivered at the registered office of the Corporate Debtor, can be construed as a deemed service of demand notice as required under section 8 of the IBC."

"The approach of the NCLT and the NCLAT rejecting the section 9 petition on the technical ground that no notice was sent to the corporate debtor and the notice sent by the appellant to the KMP of the corporate debtor cannot be taken to be a notice issued under section 8 of the IBC, is incorrect and is unsustainable in law."

"The issue relating to the date of default by the Corporate Debtor and novation of contract, if any, being a mixed question of law and fact, requiring detailed analysis based on the materials adduced by the parties, is to be decided by the NCLT at the time of final disposal of the section 9 petition, on merits."

"Laws of procedure are meant to regulate effectively, assist and aid the object of doing substantial and real justice and not to foreclose even an adjudication on merits of substantial rights... Procedure has always been viewed as the handmaid of justice and not meant to hamper the cause of justice or sanctify miscarriage of justice."

The Court accordingly allowed the appeal, set aside the impugned orders of the NCLT and NCLAT, and remanded the matter to the NCLT for fresh adjudication on merits after providing reasonable opportunity to the parties to lead evidence and argue the case.