Macquarie Bank v. Shilpi Cable Technologies — Practical Impact on Operational Creditor Practice

Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd., (2018) 2 SCC 674, decided on 15 December 2017, established the procedural framework for operational creditors initiating the Corporate Insolvency Resolution Process under Section 9 of the IBC. Justice R.F. Nariman held that a demand notice under Section 8 can be validly issued by a lawyer, the certificate under Section 9(3)(c) is directory rather than mandatory, and an assignee of the original supplier qualifies as an operational creditor. This judgment removed critical procedural barriers that corporate debtors were using to resist Section 9 applications and is directly relevant to every practitioner advising trade creditors, foreign creditors, and insolvency professionals.

Case overview

Material facts and procedural history

Hamera International Pvt. Ltd. entered into a supply agreement dated 2 December 2015 with Shilpi Cable Technologies Ltd. for the supply of goods valued at US $6,321,337.11. On 27 July 2015, Hamera executed an assignment agreement with Macquarie Bank Ltd., Singapore, assigning all its right, title, and interest in the receivables under the supply agreement. Payment was due within 150 days from the date of the bill of lading, but Shilpi Cable failed to make payment despite repeated reminders.

Macquarie Bank's Indian lawyers issued a demand notice under Section 8 of the IBC. The NCLT admitted the Section 9 application, but the NCLAT set aside the admission on two grounds: (a) the demand notice issued by a lawyer was not valid, and (b) the application did not contain the certificate from a financial institution under Section 9(3)(c). Macquarie Bank appealed to the Supreme Court.

Ratio decidendi

Demand notice by a lawyer is valid

The Court conducted a harmonious reading of the Advocates Act, 1961 and the IBC. Section 30 of the Advocates Act provides that advocates have the right to practice in all courts and before all authorities and tribunals. The demand notice under Section 8 is a prerequisite to filing a Section 9 application and is a step in a legal proceeding. The Court held that there is no express or implied prohibition in the IBC against a lawyer issuing the demand notice on behalf of the operational creditor. Restricting the demand notice to personal issuance would be inconsistent with the Advocates Act and would create an unnecessary procedural barrier.

Section 9(3)(c) certificate is directory

Section 9(3)(c) requires the application to be accompanied by a copy of the certificate from a financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor. The Court held this is directory, not mandatory. While the certificate is an important evidentiary tool, the operational debt can be proved through other documentation: invoices, contracts, delivery receipts, correspondence, ledger extracts, and any other relevant material. Making the certificate mandatory would prejudice operational creditors who do not have banking relationships with Indian financial institutions.

Assignee stands in shoes of the creditor

The Court accepted that Macquarie Bank, as the lawful assignee of Hamera's rights under the supply agreement, was entitled to invoke Section 9 as an operational creditor. The assignment of receivables is a recognized commercial practice, and the IBC does not restrict operational creditor status to the original supplier alone.

Current statutory framework

The Section 9 framework has evolved since this judgment:

1. Section 9(1) — Operational creditor may file application after delivery of demand notice under Section 8 and expiry of 10-day period without payment or dispute notice
2. Section 9(3) — Application to be accompanied by: (a) copy of invoice/demand notice, (b) affidavit confirming non-receipt of dispute notice or payment, (c) certificate from financial institution OR other evidence of debt
3. Minimum threshold — Increased from Rs. 1 lakh to Rs. 1 crore by notification dated 24 March 2020 (during COVID-19)
4. Section 10A — Temporary suspension of Sections 7, 9, and 10 for defaults during 25 March 2020 to 25 March 2021 (COVID-19 period, now expired)
5. Pre-existing dispute — Remains the primary defence under Section 9, as clarified by Mobilox Innovations v. Kirusa Software (2018) 1 SCC 353

Practice implications

For operational creditors preparing Section 9 applications: The judgment establishes a clear procedural checklist:

• Issue demand notice under Section 8 in Form 3 (goods or services debt) or Form 4 (employee or workman debt) — this can be done through lawyers
• Wait 10 days for the corporate debtor to either pay or raise a dispute
• Prepare Section 9 application with: invoice copies, demand notice, proof of service, and evidence of debt (bank certificate if available, or alternative documentation such as ledger extracts, correspondence, and delivery proof)
• The application need not contain a bank certificate if other evidence of the debt is available

For corporate debtors defending Section 9 applications: The available defences are:

• Pre-existing dispute: The most effective defence. Show a genuine dispute that predates the filing of the demand notice — not a spurious or hypothetical one (Mobilox standard)
• Payment before the 10-day period expires: Full payment of the claimed amount within 10 days of receipt of the demand notice
• Challenge the "operational debt" characterization: Argue that the claim is not an "operational debt" within Section 5(21) — for example, that it arises from a financial transaction rather than supply of goods or services
• Procedural defences on the notice and application have been significantly weakened by this judgment

For foreign operational creditors: This judgment is particularly significant. Foreign creditors often face practical difficulties in obtaining certificates from Indian financial institutions. The Court's holding that the certificate is not mandatory removes this barrier. Foreign creditors should:

• Engage Indian lawyers to issue the demand notice (now explicitly authorized)
• Assemble alternative documentation to prove the operational debt: international invoices, shipping documents, bills of lading, assignment agreements, and payment records
• Be prepared to demonstrate that the supply of goods or services has an Indian nexus

For trade credit and receivables finance: The recognition that an assignee qualifies as an operational creditor has significant implications for the receivables finance industry. Banks and financial institutions that purchase trade receivables through factoring, forfaiting, or assignment transactions can invoke IBC remedies if the debtor defaults. This enhances the enforceability of trade credit instruments and may influence credit pricing.

For insolvency professionals: When a CIRP is initiated by an operational creditor, the IP should verify: (a) the validity of the demand notice (lawyer-issued notices are now valid), (b) the evidence of the operational debt (bank certificate is not the only permissible evidence), and (c) whether any genuine pre-existing dispute exists that should have prevented admission.

Key subsequent developments

• Mobilox Innovations v. Kirusa Software (2018) — Defined the standard for "pre-existing dispute" under Section 9; dispute must be genuine, not spurious or hypothetical
• K. Kishan v. Vijay Nirman Company (2018) — Held that an arbitral award does not necessarily negate a pre-existing dispute
• Swiss Ribbons v. Union of India (2019) — Upheld the differential treatment of financial and operational creditors under the IBC
• Section 9 threshold increase to Rs. 1 crore (2020) — Reduced the number of small-value Section 9 applications
• NCLAT decisions post-Macquarie Bank — Consistently applied the principle that Section 9(3)(c) is directory and demand notices by lawyers are valid

Frequently asked questions

Is it better to file as a financial creditor or operational creditor under the IBC?

Financial creditors under Section 7 have a simpler admission test (no demand notice requirement, no pre-existing dispute defence) and have voting rights in the Committee of Creditors (CoC). Operational creditors under Section 9 must issue a demand notice, wait 10 days, and are vulnerable to the pre-existing dispute defence. If a creditor qualifies as both (e.g., a bank that has also supplied services), filing under Section 7 is generally more advantageous.

Can the corporate debtor raise the pre-existing dispute defence after Macquarie Bank?

Yes. The pre-existing dispute remains the primary defence to a Section 9 application. Macquarie Bank addressed procedural issues (demand notice and bank certificate) but did not affect the substantive defence of pre-existing dispute. The standard is defined by Mobilox Innovations v. Kirusa Software — the dispute must be genuine and must predate the demand notice.

What documentation should replace the Section 9(3)(c) bank certificate?

Operational creditors should assemble: (a) copy of the contract or purchase order, (b) invoices with proof of delivery (shipping documents, signed delivery receipts), (c) correspondence showing acknowledgment of debt or payment discussions, (d) ledger extracts from the creditor's own accounts, (e) bank statements showing non-receipt of payment, and (f) any other relevant documentary evidence. The more comprehensive the documentation, the stronger the application.

Does this judgment apply to employees filing as operational creditors?

Yes. Employees are operational creditors under Section 5(20) as their wages and salary constitute an "operational debt" under Section 5(21). The demand notice under Section 8 can be issued by the employee's lawyer, and the bank certificate requirement is not mandatory. However, employees rarely use Section 9 in practice because the insolvency process is designed for larger commercial debts.

Can an operational creditor file a Section 9 application for disputed invoices?

No. If the corporate debtor raises a genuine pre-existing dispute regarding the invoiced amount within 10 days of the demand notice, the NCLT must reject the Section 9 application. The IBC is not designed as a debt recovery mechanism — it is an insolvency resolution tool. Disputed debts should be resolved through arbitration, civil suits, or other appropriate forums before the IBC can be invoked.