8/7/2017 Issuance Of Certificate By Banks U/S Sec.

Banks U/S Sec.9 Of I&B Code, 2016, An Extra Impossible Task Thrust Upon Banks | Live Law

Issuance Of Certi cate By Banks U/S Sec.9 Of I&B

Code, 2016, An Extra Impossible Task Thrust
Upon Banks
BY: RAJESH PANAYANTHATTA
AUGUST 5, 2017 9:39 PM

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The recent order of the National Company Law Tribunal, Mumbai Bench, dated 31.07.2017
in TCP No.409/(MAH)/2017 in the matter titled as Magicrete Buildings Solutions Pvt Ltd
vs Pratibha Industries Ltd, will lead banks and nancial institutions into an extreme legal
necessity which is almost impossible to perform.

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8/7/2017 Issuance Of Certificate By Banks U/S Sec.9 Of I&B Code, 2016, An Extra Impossible Task Thrust Upon Banks | Live Law

As per Section 9 of the Insolvency and Bankruptcy Code, 2016, the banks are obliged to
issue certi cate to the operational creditor maintaining accounts with it, con rming that
there is no payment of unpaid operational debt by the corporate debtor. The order is
pursuant to a request by the counsel for the operational creditor before the NCLT seeking
a direction to the ‘bank maintaining the account of the operational creditor’ to issue
certi cate as the bank was refusing to issue the certi cate as mandated under Section 9 of
the code. Based on the submission of the counsel, the NCLT ordered: “The Petitioner Counsel
having reported that the Bank maintaining the Account of the Operational Creditor not issuing
the Certi cate as envisaged under Section 9 of the Insolvency and Bankruptcy Code, 2016, it is
hereby made clear that all citizens of the Country are bound by the Statute governing the people
of this Country, therefore, the Bank is not exempted under the Statute, whereby the respective
Bank may issue Certi cate as envisaged under the respective Section on creditor approaching the
Bank.”

The above sweeping direction issued by the NCLT imposing strict liability upon the banks
to issue certi cate to every operational creditor would virtually halt the banking business.
It has become the job of the bank, for no fault of it, to spend countless man-hours to
identify the debts and defaults inter se debtor and creditors.

Interestingly, the NCLT has not issued any notice to the respective bank or not heard the
submissions of the bank before the issuance of such a direction.

No doubt, it is the statutory requirement under Sec.9(2)(c) of the I&B Code, 2016, for
initiation of corporate insolvency resolution process by operational creditor, to produce a
certi cate from the nancial institutions maintaining its accounts con rming that there is
no payment of an unpaid operational debt by the corporate debtor, it should never be the
task of the banks to probe and identify the default of third parties just by holding an
account.

Generally, a bank account is maintained for multiple banking transactions and not meant
for a standalone purpose. In 99.9% situations, the bank accounts are used by an
operational creditor for dealing with different transactions with different persons. There is
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8/7/2017 Issuance Of Certificate By Banks U/S Sec.9 Of I&B Code, 2016, An Extra Impossible Task Thrust Upon Banks | Live Law

no speci c mechanism available with the banks to identify and compartmentalise different
transactions between an operation creditor and corporate debtor. The banks have no
access to the internal books and accounts of the operational creditor who maintains an
account with the bank. In such a situation, how the bank can ascertain and certify that
there is no payment of a particular ‘unpaid operational debt’ by the corporate debtor?

This important aspect has not been considered by the NCLT while issuing an order in rem
to all the banks to compulsorily issue certi cate under Section 9 of the I&BR Code, 2016, to
every operational creditor whoever approaches them.

More importantly, there are no provisions either in the I&B Code, 2016, or in the
Regulations of laying down any speci c guidelines to the banks/ nancial institutions to be
adopted prior to the issuance of certi cate under Section 9. Only an appropriate
amendment or framing of new regulation can solve the present issue faced by the banks.
There should be an appropriate direction to the operational creditor to submit the
authenticated copy of the ledger account of the particular corporate debtor with
attestation of a chartered accountant or insolvency professional along with the application
for issuance of certi cate envisaged under Sec.9(2)(c) of the I&B Code. If such an
authenticated and attested ledger account of the corporate debtor is produced before the
bank, it can very easily compare the particular ledger account with the bank account of the
operational creditor and can nd out that whether there is any payment of an unpaid
operational debt by the corporate debtor or not and can certify accordingly.

The code being at a testing stage, we can fondly hope that the Insolvency and Bankruptcy
Board of India will take urgent steps to frame necessary regulations incorporating either
the above suggestions or bring in certain other apt alternatives.

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8/7/2017 Issuance Of Certificate By Banks U/S Sec.9 Of I&B Code, 2016, An Extra Impossible Task Thrust Upon Banks | Live Law

Rajesh Panayanthatta is an Advocate at Supreme Court of India, &

Insolvency Professional ( IP)

[The opinions expressed in this article are the personal opinions of the author. The facts and
opinions appearing in the article do not re ect the views of LiveLaw and LiveLaw does not assume
any responsibility or liability for the same]

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Topics: Issuance Of Certi cate | National Company Law Tribunal | Section 9 of the Insolvency and Bankruptcy Code |
U/S Sec.9 Of I&B Code 2016

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