2025 (11) TMI 244 - AT - IBC

Service of demand notice under s.95(4)(b) read with Rule 7(1) and Form B is essential before initiating IRP proceedings

NCLAT held that service of the demand notice under s.95(4)(b) read with Rule 7(1) and Form B is an essential prerequisite to initiate IRP under s.95; Form ... Requirement to issue a demand notice as contemplated by Section 95(4)(b) of the Insolvency & Bankruptcy Code - due service of the demand notice as contemplated under section 95(4)(b) - HELD THAT:- If the entire set of contents of the demand notice as provided under Form B as above is taken into consideration, they show that service of the demand notice as prescribed in Rule 7(1) of the said Rules is an essential pre-requisite for initiating IRP proceedings under section 95 of the Code. For instance, the set of instructions, given in the concluding part of the Form – B, prescribe for serving a copy of the demand notice on the Guarantor, fourteen days in advance of filing of an Application under Section 95 of the Code and for attaching a copy of such served notice with the application made by the Creditor to the Adjudicating Authority. There has to be a harmonious interpretation of the role and purpose of the demand notice as set down under Section 95(4)(b) of the Code with the prescriptions made under Rule 7(1) of the said Rules as framed under Section 239 of I&B Code and that, if both are read conjointly, it emerges that in accordance with sub-section (4) of Section 95, a document recording failure by the debtor to pay the debt within 14 days of the service of the demand notice has to accompany the application to be filed under section 95(1), that as per Rule 7(1) of Insolvency and Bankruptcy (application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, the said demand notice under section 95(4)(b) shall be served on the guarantor in Form B and that as per the instruction contained in Form B, such demand notice may be served 14 days in advance of filing of the application under section 95. The plea of alleged non-service of demand notice is absolutely contrary to the own case of the Respondents, when, in the Writ Petitions preferred by them in September 2022 before the Hon’ble Apex Court immediately after service of notice of demand dated 17.08.2021, the Respondents had admitted in their pleadings that, notice was served upon them and if that be so, the finding recorded by the Ld. Tribunal qua the service of demand notice and its knowledge, can be said to be faulted, and contrary to the admitted case of the Respondents. The impugned order would stand quashed. The presumption would be that, the notice of demand / default under clause (b) of sub- section (4) of Section 95 of I & B Code, 2016, has been admittedly served upon the Respondents. Hence, the proceedings under Section 95 of I & B Code, 2016, cannot be said to have been vitiated in any manner on the grounds that, notice of demand was not served, because in the finding recorded by us, we have concluded that, the demand notice was served upon the Respondents in accordance with their own case. The impugned orders are quashed and the proceedings are remanded back to the Ld. Adjudicating Authority, to be proceeded further in accordance with law and to be decided on merits - Appeal allowed by way of remand. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether service of a demand notice as contemplated by Section 95(4)(b) of the Insolvency & Bankruptcy Code is mandatory (a condition precedent) or directory for initiation of insolvency resolution process (IRP) against personal guarantors. 2. Whether Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate Debtors) Rules, 2019 (and Form B) can render service of the demand notice mandatory notwithstanding the language of Section 95 and the scope of rule-making power under Section 239. 3. Whether the creditor discharged the burden of proving valid service of the demand notice where the personal guarantors had, in separate constitutional petitions, pleaded and admitted receipt/issue of the demand notice. 4. Legal consequences of a finding of non-service or defective service of demand notice on the maintainability of Section 95 proceedings and the appropriate remedy where the adjudicating authority rejected the application on that ground. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Mandatory vs. Directory Nature of Demand Notice under Section 95(4)(b) Legal framework: Section 95(1)-(7) requires an application by a creditor to be accompanied by documents including 'the failure by the debtor to pay the debt within a period of fourteen days of the service of the notice of demand' (cl. (b) of s.95(4)). Section 95(6) contemplates rules prescribing form and manner of application. Rule-making power is vested in the Central Government under s.239. Precedent treatment: No binding judicial precedent was relied upon by the Tribunal in the impugned judgment to alter statutory reading; assessment proceeded from statutory text and subordinate rules. Interpretation and reasoning: The Court construed Section 95(4)(b) conjointly with Rule 7(1) and Form B of the 2019 Rules. Rule 7(1) prescribes service of the demand notice in Form B and Form B contains express instructions to serve the notice fourteen days in advance and to attach proof of service to the Section 95 application. The Tribunal held that a harmonious reading of Section 95 and Rule 7(1)/Form B demonstrates that service of demand notice is a condition precedent to filing an application under s.95(1); the Rule and Form operationalise the requirement in s.95(4)(b). Ratio vs. Obiter: Ratio - Service of demand notice as prescribed by Rule 7(1)/Form B is a mandatory pre-requisite for initiating IRP under Section 95. Obiter - Observations on the policy/objective of the Code and undue technicality in reliance on defective service arguments. Conclusions: The demand notice requirement is not merely directory; Rule 7(1) and Form B, framed under s.239, make the service and proof of service mandatory for the purpose of Section 95 proceedings. Issue 2 - Validity and Scope of Rule 7(1) vis-à-vis Section 239(2)(n) Legal framework: Section 239(2)(n) empowers rule-making as to 'the form, the manner and the fee for making application for initiating the insolvency resolution process by the creditor under sub-section (6) of section 95.' Rule 7(1) prescribes that a demand notice under s.95(4)(b) shall be served on the guarantor in Form B and sets instructions for service and attachment. Precedent treatment: No precedent displacing or distinguishing the rules was applied; analysis focused on statutory delegation and the content of subordinate legislation. Interpretation and reasoning: The Tribunal rejected the contention that Section 239(2)(n) confines rule-making to only form, manner and fee of the application, thereby excluding rules regarding service of notice. It read s.95(6) (application in such form and manner as may be prescribed) together with s.239(2)(n) and found sufficient statutory foundation for Rule 7(1) to prescribe the demand notice format and service protocol. Given consonance between the Code and the Rules, Rule 7(1) binds and renders the prescribed service mandatory. Ratio vs. Obiter: Ratio - Rule 7(1) is a valid exercise of rule-making power and its prescriptions regarding service/Form B are binding for Section 95 applications. Obiter - Comments on the limits of rule-making power if rules were to conflict with clear statutory mandates (not directly presented here). Conclusions: Rule 7(1)/Form B validly prescribes mandatory steps for demand notice service; such subordinate legislation is in consonance with the Code and must be complied with when invoking Section 95. Issue 3 - Proof of Service Where Respondents' Pleadings in Separate Proceedings Admit Receipt Legal framework: Fact-admission principles and evidentiary effect of pleadings in judicial proceedings; requirement of proof of service to accompany the Section 95 application as per Rule 7(1)/Form B. Precedent treatment: No authority cited to negate the evidentiary value of admissions in pleadings; Tribunal relied on settled principle that admissions in judicial pleadings are strong evidence. Interpretation and reasoning: The Tribunal examined the respondents' writ petitions filed before the Supreme Court in which the respondents stated that a demand notice dated 17.08.2021 had been issued and served. The Court treated those averments as admissions of fact, concluding that the respondents had knowledge of the notice and could not now resile from that admission to challenge service before the Adjudicating Authority. The Tribunal held that when knowledge of the demand notice is established by the respondents' own pleadings in higher court proceedings, hyper-technical objections about address variances and pin-codes could not nullify the Section 95 process. Ratio vs. Obiter: Ratio - An admission of receipt/issue of a demand notice in the respondents' own judicial pleadings constitutes sufficient proof of service for purposes of Section 95 proceedings, and prevents later denial on hyper-technical grounds. Obiter - Remarks that disputes as to amounts/merits remain for adjudication on merits by the Adjudicating Authority. Conclusions: The creditor's case on service is supported by the respondents' admissions in separate constitutional petitions; such admission negates the adjudicating authority's finding of non-service and justifies treating the demand notice as served. Issue 4 - Effect of Defective or Non-Service Finding and Appropriate Remedy Legal framework: If mandatory pre-conditions to statutory proceedings are not met, the consequent proceedings may be vitiated; remedies include dismissal or remand for further proceedings in accordance with law. Precedent treatment: No conflicting precedent applied; Tribunal applied principles of rectification and remand where findings are contrary to admitted facts. Interpretation and reasoning: The Tribunal concluded that the Adjudicating Authority's rejection of the Section 95 applications rested on an erroneous finding that demand notice was not served. Because the record contained admitted facts of service, the Adjudicating Authority's conclusion was unsustainable. Rather than finally disposing on merits, the Tribunal quashed the impugned orders and remanded the matters for fresh adjudication on merits in accordance with law, permitting the Adjudicating Authority to proceed after treating the demand notice as served and after deciding any disputed issues on evidence and hearing. Ratio vs. Obiter: Ratio - Where an adjudicating authority dismisses a Section 95 application solely on a finding inconsistent with admitted facts (admission of service), such order is quashed and the matter remanded to decide merits. Obiter - Emphasis that technicalities should not defeat substantive rights where knowledge and admission exist. Conclusions: The orders rejecting Section 95 applications for alleged non-service were quashed; proceedings remitted to the Adjudicating Authority to proceed on merits with the presumption (based on admissions) that the demand notice was served, and to decide outstanding issues after hearing the parties.