Form 3 or Form 4 to Deliver the Demand Notice to CD?

  July 5, 2021

NCLT New Delhi Bench (Court II)

July 02, 2021

M/s Tudor India Pvt. Ltd (“Tudor”) was the Operational Creditor of the Corporate Debtor  Servotech Power Systems Limited, and it filed a Section 9 application for initiation of CIRP. The NCLT was faced with the issue of validity of the demand notice under Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. The rule provides two forms to an OC for delivering a demand notice to a CD – Form 3 ‘or’ Form 4. The word ‘or’ suggests the availability of a choice with the OC.

The NCLT noted that Form 3 requires filing a notice or invoice and has seven columns wherein detailed information is to be provided. On the other hand, Form 4 is a cover page of the invoice in which an OC can escape from providing details. Form 3 covers instances where the debt arose against an invoice or other documents that prove the existence of the debt (ex. – for supply of goods). It also covers debts where an invoice was not generated, like the salary of an employee. It also informs the CD of its statutory right of replying to the OC with a dispute notice within 10 days, unlike Form 4.

On this basis, the NCLT appreciated Form 3 and concluded that no prejudice could be caused to a party if a demand notice supported with invoices was delivered in Form 3.

Further, relying on the judgement in Vijaya Bank v. Shyamal Kumar Lodh, the NCLT concluded erroneous label of the form is not a ground for dismissal of the application and also noted, as held in the case of Macquarie Bank Limited v. Shilpi Cable Technologies Ltd., that the form to be used is a subject-matter of procedural law which cannot be considered mandatory.

However, this conclusion has the effect of making the provision of these two separate forms almost inconsequential in cases where an invoice or a document evidencing the debt is annexed.  It is also indirectly contradictory to the judgement in Neeraj Jain v. Cloudwalker Streaming Technologies Private Limited (“Neeraj Jain case“) wherein it was held that the use of the word ‘or’ in Section 8 does not provide discretion to the OC to escape from submitting an invoice.

Addressing the same, the NCLT held that the interpretation in the Neeraj Jain case does not deal with Rule 5 that the present case is concerned with, and is aimed at preventing OCs from not providing invoices. Further, the Neeraj Jain case was held to be applicable only in cases where an invoice or a document was not provided by the OC to prove the existence of a debt.

In respect of the current case, the usage of Form 3 by the OC has been held to be valid as it was annexed with an invoice, but the NCLT has quarantined this order from being applied as a precedent.

~ Vinisha Jain

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