Contributed by Chirayu Singh

Introduction

On December 4, 2023, the National Company Law Tribunal (NCLT) in New Delhi made a ruling on the importance of a valid demand notice by an operational creditor and its maintainability under sections 8 and 9 of The Insolvency and Bankruptcy Code, 2016 (IBC). The case in question was titled Willis Lease Finance Corporation (WLFC) versus Spicejet Ltd. The NCLT, New Delhi Bench concluded that an operational creditor must issue a valid demand notice under Section 8(1) of the IBC, and such notice should only be issued by the operational creditor defined under 5(20) of the IBC. If a demand notice is issued by an-other party towards whom no liability of operational debt exists, it will not be maintained under Section 9 of the IBC. To determine the liability of Spicejet Ltd. towards WLFC the lease agreement entered by the Spicejet Ltd. were examined and it was discovered that WLFC lacks a contractual relationship with Spicejet Ltd. to establish itself as an operational creditor.

Brief Facts

Willis Lease Finance Corporation (WLFC) has filed a petition under Section 9 IBC against Spicejet Ltd. The petition is regarding the amount due for lease by Spicejet. In November 2022, WLFC served a demand notice under Section 8 of IBC to Spicejet and then filed a claim in NCLT, New Delhi Bench. However, the Adjudicating Authority dismissed the petition as withdrawn in March 2023.

In the current case, WLFC did not issue a fresh demand notice and based their new petition to initiate CIRP on the previous demand notice dated November 4, 2022.

Spicejet Ltd. had entered into a lease agreement with several entities including Willis Lease (Ireland) Limited, WEST III Engines (Ireland) Limited, West IV Engines (Ireland) Limited, and West V Engines (Ireland) Limited. WLFC fought its grounds by keeping these invoices and lease agreements issued by the lessors to the lessee as an instrument to establish its contractual relationship with Spicejet Ltd. But if these agreements are examined closely it can be understood that WLFC is not one of the lessor and there exist no privity of contract between WLFC and Spicejet Ltd.   

Findings

The Adjudicating Authority reviewed the petition filed by WLFC under section 9 IBC to initiate the Corporate Insolvency Resolution Process (CIRP) for Spicejet Ltd., but found it lacking in both merits and maintainability, resulting in its dismissal. The tribunal determined that WLFC did not meet the operational creditor criteria under Section 5(20) IBC for this particular case, as Spicejet Ltd. had entered into a lease agreement with Willis Lease (Ireland) Ltd, WEST III, and so on as mentioned earlier and all invoices were issued under the name of Willis Lease (Ireland) Ltd. without any mention of WLFC as one of the lessors. Therefore, WLFC had no Locus Standi in the present matter since there was no privity of contract between WLFC and Spicejet Ltd.

The Adjudicating Authority stated that the demand notice issued by the WLFC was not clear regarding the criteria of a Valid Demand Notice under Section 8 of IBC. This was because there was no fresh demand notice issued for the specific case, and the WLFC based its claim on the demand notice dated 4^th November 2022, for which the petition was withdrawn in March 2023. A valid demand notice by an operational creditor to an operational debtor is a necessary condition for filing and maintaining a petition under Section 9 of IBC. Therefore, since the demand notice was not valid, the petition was deemed non-maintainable.

Analysis

Before analyzing any situation, it is crucial to understand the definition of an operational creditor as per the Insolvency and Bankruptcy Code (IBC). As per Section 5(20) of the IBC, an operational creditor is a person who is owed an operational debt, which also includes any person to whom such debt has been legally assigned or transferred.

Herein, there is no contractual relationship between Willis Lease Finance Corporation (WLFC) and Spicejet Ltd. WLFC cannot be considered an operational creditor in this case as they were not a signatory to any of the lease agreements, the invoice was not issued by or on behalf of WLFC, and no operational debt is owed or transferred to WLFC. Spicejet Ltd. has disproved WLFC’s claim of having a contractual relationship with them. In the case of Harrish Khurana v. One World Realtech (P) Ltd., it was held that the absence of privity of contract between parties fails to establish their relationship as an operational creditor and corporate debtor as required under Section 9 of IBC. Therefore, we can conclude that the absence of privity of contract between WLFC and Spicejet Ltd. fails to establish WLFC’s claim as an operational creditor.

According to Section 8 of the Insolvency and Bankruptcy Code (IBC), an operational creditor must send a valid demand notice to the debtor for the repayment of the operational debt. Without a valid notice, a petition cannot be maintained under Section 9

 of the IBC. This section allows an operational creditor to initiate the Corporate Insolvency Resolution Process (CIRP) only when it has served a valid demand notice and has not received the due amount within 10 days of that notice.

In the particular case, the petition filed by the operational creditor was dismissed because it was not maintainable. The notice served by WLFC was not a valid demand notice as it was issued on November 4, 2022, for a petition that was withdrawn in March 2023. This notice was an old notice related to another petition, so it cannot be treated as a valid demand notice in this case. This time, WLFC did not issue any demand notice and relied on the old one, which is not a valid demand notice anymore.

As WLFC failed to issue a valid demand notice to Spicejet Ltd., their petition is non-maintainable and without merit.

The purpose of a demand notice is to provide an operational debtor with a fair opportunity to pay back an operational debt. Section 9 of the IBC states that a demand notice must be delivered within 10 days to inform the debtor and allow for a fair chance to pay. If the demand notice is not valid or not served, it undermines the intention of the IBC. This was the reason why the tribunal concluded that the principle of Nandkishore Lalbhai Mehta v. New Era Fabrics was not applicable in this case. In this case, the validity of the demand notice became the main issue for maintainability, eclipsing the issue of whether WLFC is the operational creditor or not. Although initiating CIRP after a valid demand notice is uncertain, it remains a crucial factor. The absence of a valid demand notice makes the petition for initiating CIRP non-maintainable. This can be seen with the example of Shilpi Cable Technologies Limited (STCL), in which even after the issuance of a valid demand notice, the tribunal did not think it fit to initiate the CIRP.

Conclusion

To file a petition under Section 9 of IBC, an operational creditor must issue a valid demand notice under Section 8 of IBC. This notice should be issued at least 10 days before the filing of the petition for CIRP. It is important to note that if a demand notice has been issued for a previous petition, it will not be considered valid for a new one.

To be considered a valid demand notice under section 8 of IBC, it must be issued by an operational creditor as defined under Section 5(20) of IBC. If a notice is issued by someone who claims to be an operational creditor but is not, it will be considered invalid as there is no contractual relationship between the parties.

In the present case, NCLT dismissed the petition by WLFC as the notice served by them was invalid and did not meet the criteria of Section 8(1) of IBC. As a result, the petition was dismissed as non-maintainable under Section 9 of IBC.

If a valid demand notice is issued by the operational creditor then the petition will not be dismissed on the grounds of non-issuance or issuance of an invalid demand notice. But issuance of a valid demand notice also doesn’t assure the maintainability of suit as the tribunal can dismiss it on other grounds.

Therefore, it is clear from the tribunal’s order that they have rightly determined the violation of section 8 of IBC and have emphasized the importance of a valid demand notice.