Supreme Court: Demand Notice Issued To KMP Of Corporate Debtor & Delivered At Its Registered Office Can Be Construed As Deemed Service U/S. 8 IBC

The Supreme Court held that a demand notice issued to the Key Managerial Personnel (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 under Section 8 of the Insolvency and Bankruptcy Code, 2016 (IBC).

The Court held thus in a Civil Appeal preferred against the Judgment of the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi.

The two-Judge Bench of Justice J.B. Pardiwala and Justice R. Mahadevan observed, “It is also a trite law that ‘the procedural defect may fall within the purview of irregularity, but it should not be allowed to defeat the substantive right accrued to the litigant without affording reasonable opportunity’16. In other words, a substantive right should not be allowed to be defeated merely on technicality. In the instant case, the respondent was unable to show any substantial prejudice being caused to them on account of such procedural irregularity. Therefore, in our opinion, the 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 Bench said that 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 to the KMP (Key Managerial Personnel) cannot be taken to be a notice issued under Section 8 of the IBC, is incorrect and is unsustainable in law.

AOR Pratiksha Mishra represented the Appellant while AOR Dhananjay Bhaskar Ray represented the Respondent.

Case Background

The Appellant was the Operational Creditor (seller) engaged in the business of manufacture and sale of Low Ash Metallurgical Coke (LAM Coke) at its plant at Kalinganagar Industrial Complex, Jaipur Road, Odisha. The Respondent was the Corporate Debtor (buyer) engaged in the business of minerals and metals. In 2019, the Appellant and the Respondent 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., (a) the Respondent agreed to purchase the LAM Coke at the price of INR 18,800 per metric tonne + GST from the Appellant; (b) the delivery period was up to 10.11.2019; and (c) 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. Subsequently, the contract was amended on many occasions with respect to delivery period and date of lifting under clause 3 of the contract.

Accordingly, the Appellant supplied LAM Coke to the Respondent and the payment was made. While so, the Respondent sent emails 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 on credit basis, but payment was not made, and the same remained due and payable by the Respondent. The Respondent admitted its default and assured that the outstanding payment will be made at the earliest. However, no payment was made which compelled the Appellant to issue a legal notice. On not receiving any response, the Appellant issued a demand notice at the registered address of the Respondent. As no reply was received, the Appellant filed an Application before the NCLT, which was dismissed. The NCLAT also dismissed its Appeal and hence, the case was before the Apex Court.

Reasoning

The Supreme Court after going through the facts of the case, noted, “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.”

The Court elucidated that 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”, it also said.

The Court further pointed out that during the pendency of the Section 9 Petition, the Corporate Debtor approached the Operational Creditor for settlement, which was not fructified.

“Yet another mandatory requirement to admit the section 9 petition is the occurrence of a ‘default’. It cannot be disputed that the trigger to initiate CIRP under section 9 of the IBC is occurrence of a “default” and not “mere existence of debt”. In other words, 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”, it added.

The Court was of the view that 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.

“In the ultimate analysis, we find that the orders passed by the NCLT and NCLAT rejecting the section 9 petition filed by the appellant, deserve to be interfered with by us”, it concluded.

Accordingly, the Apex Court allowed the Appeal and remanded the matter to the NCLT.

Cause Title- Visa Coke Limited v. M/s MESCO Kalinga Steel Limited (Neutral Citation: 2025 INSC 597)

Appearance:

Appellant: AOR Pratiksha Mishra

Respondent: AOR Dhananjay Bhaskar Ray, Advocates Saswat Kumar Acharya, and Abhijeet Agarwal.

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