SERVICE OF NOTICE ON THE KEY MANAGERIAL PERSONNEL OF CORPORATE DEBTOR

Initiation of CIRP by an operational creditor

An operational creditor of a corporate debtor can initiate corporate insolvency resolution process against the corporate debtor under sections 8 and 9 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short). Section 8 of the Code provides that an operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed. On receipt of the notice the corporate debtor shall respond to the notice within 30 days from the date of receipt. The corporate debtor is either to repay the outstanding dues payable to the operational creditor or raising a pending dispute.

Issue

The issue to be discussed in the article as to whether the a demand notice of unpaid operational creditor shall be issued to the corporate debtor or to the KMP of the corporate debtor and the notice issued to the KMP of the corporate debtor is deemed as a service to the corporate debtor with reference to decided case law.

Case law

In ‘VISA COKE LIMITED Versus M/s MESCO KALINGA STEEL LIMITED - 2025 (5) TMI 82 - Supreme Court, the appellant is the Operational Creditor, engaged in the business of manufacture and sale of Low Ash Metallurgical Coke 5 at its plant at Kalinganagar Industrial Complex, Jaipur Road, Odisha. The respondent in this case is the corporate debtor. Both the parties entered into a contract for sale and purchase of LAM Coke for 12,000 MT +/- 10% at seller's option subject to the terms viz.,-

• the respondent agreed to purchase the LAM Coke at the price of Rs. 18,800 per metric tonne + GST from the appellant;
• the delivery period was up to 10.11.2019; and
• 100% advance payment was to be paid by the respondent through RTGS/NEFT or by opening a Letter of Credit prior to dispatch of the material.

The respondent sent emails dated 12.11.2019 and 16.11.2019 to the appellant, requesting delivery of 1700 MT of LAM Coke, with an assurance that LoC would be opened shortly. Based on the same, the appellant issued delivery orders for 1700 MT of LAM Coke on credit basis, but payment was not made, and the same remained due and payable by the respondent. The Corporate Debtor sent an email on 25.11.2019, admitting their default and assured that the outstanding payment for 1700 MT of LAM Coke will be made at the earliest. However, no payment was made.  Therefore, the operational creditor initiated corporate insolvency resolution process against the corporate debtor under Section 9 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short). The National Company Law Tribunal (‘NCLT’ for short) rejected the said application holding that the alleged demand notice was sent to the Key Managerial Personnel of the Corporate debtor and not to Corporate Debtor. The notice was sent to the corporate debtor mandatorily under Section 8(1) of the Code.

Being aggrieved against the order the operational creditor filed an appeal before the National Company Law Appellate Tribunal (‘NCLAT’ for short).  The NCLAT confirmed the decision of NCLT. Therefore, the appellant filed the present appeal before the Supreme Court.  The Supreme Court heard the submissions of both the appellant and the respondent.  The issue to be considered by the Supreme Court, in the present appeal is, as to whether the notice dated 31.03.2021 served by the appellant upon the KMP of the respondent at their registered office is valid under Section 8 of the Code, so as to maintain a section 9 petition filed by the appellant for initiation of corporate insolvency resolution process against the respondent.

The Supreme Court observed that the purpose of sending notice to the corporate debtor under Section 8 of the Code is to give an opportunity to the corporate debtor either to pay the outstanding dues or to dispute the debt. In the present case, the notice dated 31.03.2021 was sent by the appellant to the KMP of the corporate debtor at its registered office in the capacity of their official position. This clearly shows that the same was issued to the corporate debtor demanding the operational debt due and payable by the corporate debtor. It is not the case of the corporate debtor that no notice was sent by the appellant calling up on the corporate debtor to pay its outstanding dues. The Supreme Court further observed that the corporate debtor approached the appellant for settlement, pending the application under Section 9 was pending. The said settlement proposal did not have its effects.

The Supreme Court relied on its own judgment in ‘Sardar Amarjit Sing Kalra (dead) represented by his Legal heirs & others v. Pramod Gupta (dead) represented by his legal heirs. In this case, the Supreme Court observed that the procedure in the law is 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 of citizens under personal, property and other laws. The Procedural law is always considered as the handmaid of justice. It is not to hamper the cause of justice or sanctify miscarriage of justice. It is well considered by the Courts that the procedural defect may fall within the purview of the irregularity, but it should not be allowed to defeat the substantive right accrued to the litigant without affording reasonable opportunity. A substantive right should not be defeated merely on technicality.

The Supreme Court observed that in the present case the respondent was unable to show any substantial prejudice being caused to them on account of such procedural irregularity. The Supreme Court was of the opinion that the notice issued by the appellant to the KMP of the corporate debtor, can be construed as a deemed service of demand notice as required under Section 8 of the Code. Therefore, the order of NCLT and NCLAT rejecting the application filed by the appellant under Section 9 of the Code on 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 as a notice issued under Section 8 of the code, is incorrect and unsustainable in law.

On conclusion, the Supreme Court found that the orders passed by the NCLT and NCLAT rejecting the application of the appellant under Section 9 of the Code deserve to be interfered with by the Supreme Court.

The Supreme Court allowed the appeal filed by the appellant. The Supreme Court set aside the impugned orders passed by the NCLT and NCLAT. The Supreme Court remanded the matter back to the NCLT with directions to consider the application of the appellant on merits after providing after affording a reasonable opportunity to the parties concerned by letting in oral and documentary evidence.

Conclusion

In view of the above case law it can be inferred that the demand notice for the payment of outstanding dues issued by the Operational Creditor under section 8 of the Code can be considered as a deemed service as required under Section 8 of the Code.