Insolvency - Difference between demand notice issued in Form 3 or Form 4 under Rule 5 of Application to Adjudicating Authority Rules, 2016

IN THE MATTER OF: Tudor India Pvt. Ltd. (Operational Creditor) vs Servotech Power Systems Limited (Corporate Debtor), query was raised from the Corporate Debtor as to how the Demand Notice based on invoices issued in Form 3 is in compliance of Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 and whether the Demand Notice based on invoices sent by the Operational creditor was in compliance of Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 ?

Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, the contents of which reads as below -

Demand notice by operational creditor

5. (1) An operational creditor shall deliver to the corporate debtor, the following documents, namely :-

(a) a demand notice in Form 3; or

(b) a copy of an invoice attached with a notice in Form 4.

According to the Operational Creditor, the wording of Rule 5 which gives a choice to the Operational Creditor for selecting an appropriate Form. Referring to judgment in Neeraj Jain Vs Cloudwalker Streaming Technologies Private Limited in Company Appeal that when the Demand Notice under Section 8 of IBC, 2016 is sent in Form 3, either invoice or other document is necessary to be annexed.

In Neeraj Jain Vs Cloudwalker Streaming Technologies Private Limited in Company Appeal (AT) (Insolvency) No. 1354 of 2019, it has been observed that -

“37 Thus if the demand notice is sent in Form 3, then the Operational Creditor has to submit the document to prove the existence of operational debt and the amount in default along with the notice. The said document may either be invoice or any other document to prove the existence of the operational debt and the amount in default. This situation may arise when the operational debt, is of such nature where no invoice is generated. For example, if an operational debt is relating to the salary dues of an employee, then, in that case, the operational creditor will not have any invoice.”

43. However, it cannot be the discretion of the Operational Creditor to deliver the Demand Notice in Form 3 even if the operational debt involves transactions where corresponding invoices are generated but are not filed in court on the pretext that the Operational Creditor has chosen to send the Notice in Form 3.”

“44. The use of the phrase, ‘deliver a demand notice of unpaid operational debt or copy of an invoice demanding payment of the amount involved‘ in Section 8(1) does not provide the Operational Creditor, with the discretion to send the demand notice in Form 3 or Form 4 as per its convenience. Rather, it depends directly on the nature of the operational debt and applicability of Form 3 or Form 4 as per the nature of the transaction.”

“45. It is important to mention that legislative provisions are made with a larger perspective to deal with all the eventualities that may arise in the implementation of the said provisions. Therefore, the use of the word “OR” in Section 8 cannot be interpreted as such, that the Insolvency and Bankruptcy Code has provided a choice or a discretion to an Operational Creditor, to provide an escape route from submission of the invoice, which can be treated as the most relevant document to prove the debt and amount in default.”

Held:

The NCLAT held that to check whether the issuance of Demand Notice basing on Invoices in Form 3 instead of Form 4, will jeopardize the rights of the parties or will cause prejudice to any of the party, it is necessary to compare title, subject and contents of Form 3 with Form 4. That when one compares the title of the Form 3 (“FORM OF DEMAND NOTICE / INVOICE DEMANDING PAYMENT UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016”) with Form 4 (“FORM OF NOTICE WITH WHICH INVOICE DEMANDING PAYMENT IS TO BE ATTACHED”), one finds that the term ‘invoice’ is mentioned in the Titles of both Form 3 and Form 4.

Further, when the Subjects of Form 3 (Demand notice/invoice demanding payment in respect of unpaid operational debt due from [corporate debtor] under the Code) is compared with that of Form 4 (Notice attached to invoice demanding payment), one notices that the Form 4 is merely a Notice/cover page of the Invoice, whereas the subject of Form 3 clearly recognizes the term ‘Invoice’ demanding payment in respect of unpaid “operational debt”.

The definition of the “Operational Debt” includes the debt arising out of the provision of Goods and Services, which invariably are supplied against invoices. Thus, for establishing the default of the Operational Debt obviously there shall be invoices which are recognized under Column 7 (List of documents attached to this application in order to prove the existence of operational debt and the amount in default) of the Form 3 as an attachment to the other Document. This has also been observed the Neeraj Jain judgment.

It is further observed that subject of the Form 3 is Demand Notice/invoice, which requires the Operational Creditor to give comprehensive details of the operational debt in columns from 1 to 7 like Total amount of debt, Date of Default, Calculation of reaching the amount of Default, Particulars of Security held, Record with Information Utility etc. However, in contrast, the Form 4 provides an escape route to the Operational Creditor from disclosing these important facts.

Furthermore, the Form 3 educates the Corporate Debtor about its statutory right of sending the notice of dispute within 10 days from the receipt of demand notice. In addition to this, the Form 3 gives an opportunity to the Corporate Debtor in line with Section 8(2)(b) of IBC, 2016 to demonstrate a situation where a debt claimed is already discharged. Per contra, no such provisions are contained in Form 4, which rather keeps the Corporate Debtor in dark, who may not be that aware of the detailed provisions of IBC, 2016.

Hence, one finds that no prejudice can ever be caused to any of the parties if the Demand Notice based on Invoices is sent in Form 3.

Even if we assume that the Demand Notice with Invoices has to be sent in Form 4 only, quoting of incorrect Section or erroneous label cannot be a ground of dismissal of an Application as held by Hon’ble Supreme Court in the matter of Vijaya Bank Vs Shyamal Kumar Lodh Civil Appeal No. 4211 and 4212 of 2007 dated 6th July, 2010.

Holding the aforesaid presumption still true, if invoices are attached with Form 3 instead of Form 4, then what remains is only the incorrect label. Further, the applicability of which Form needs to be sent, is a procedural law and the Hon’ble Supreme Court has held in the matter of Macquarie Bank Limited vs Shilpi Cable Technologies Ltd Civil Appeal No.15135 Of 2017.

In the present case, documents were attached with the Demand Notice in Form 3. 

The law laid down by Hon’ble NCLAT in Neeraj Jain judgment, is primarily to curb the practice of not annexing invoice(s) in a transaction, where invoice(s) is not only generated but is also a relevant document to prove the existence of default. In the instant case, the Operational Creditor has sent the demand notice along with copy of the unpaid invoice. Further, the said Judgement has not expressly dealt with the interpretation of Rule 5 of I&B (Application to Adjudicating Authority) Rules 2016, which could be applied as a thumb rule for each and every case. Therefore, we are of the view that in the present case, the Demand Notice has been sent in letter and spirit of Section 8(1) read with Rule 5(1) of I&B (Application to Adjudicating Authority) Rules, 2016.