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Whether Stamping of Documents is Necessary to Initiate Insolvency Proceedings Under the Insolvency and Bankruptcy Code, 2016?

Whether Stamping of Documents is Necessary to Initiate Insolvency Proceedings Under the Insolvency and Bankruptcy Code, 2016?

The intention of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘IBC’) is to rehabilitate the companies and individuals by way of the Corporate Insolvency Resolution Process (hereinafter referred to as ‘CIRP’).

It has been held by plethora of judgments, including M. Suresh Kumar Reddy v. Canara Bank, [Civil Appeal No. 7121 of 2022], that to initiate CIRP, a creditor or a Corporate Applicant must prove ‘debt’ and ‘default’ as defined under the provisions of the IBC. Significantly, a five- Judge Bench of the Hon’ble Supreme Court, in the case of N.N. Global Mercantile v. Indo Unique Flame [Civil Appeal No(s). 3802-3803 of 2020], has ruled that unstamped or insufficiently stamped documents will not be recognized as legally enforceable contracts under the Contract Act, in accordance with Section 33 and 35 of the Stamp Act, 1899. Notably, prior to the Supreme Court’s judgment in N.N. Global (supra), the Hon’ble National Company Law Appellate Tribunal (hereinafter referred to as ‘NCLAT’) in the matter of Praful Nanji Satra v. Vistra ITCL (India) Limited, has regarded the issue of insufficiency of stamp as a curable deficiency, and decided this does not impact the establishment of debt being due and payable.

Proving Debt and Default in terms of the IBC

It is worth emphasizing that, in line with the precedent set inSuresh Kumar Reddy (supra), a creditor or corporate applicant is only required to demonstrate the default on the underlying debt before the Hon’ble National Company Law Tribunal (hereinafter referred to as ‘NCLT’) to obtain an order for initiating the CIRP. It is important to note that proving debt and default stands on a separate pedestal from the enforcement of a contract.

The NCLT/NCLAT has often refrained from directly addressing this crucial question, instead tried to conclude debt and default by examining other documents submitted by an Applicant seeking to initiate CIRP. The Hon’ble NCLAT in Koncentric Investments v. Standard Chartered Bank, London [Comp. App. (AT) (Ins) No. 911 of 2021], did not decide whether stamping of documents is essential for initiating CIRP but has relied on the other documents to decide the issue of initiation of CIRP.

Going a little forward from the above reasoning, the Hon’ble NCLT recently in the matter of Bank of India Limited vs. BD & P Hotels (India) Private Limited, [CP (IB) No.226/MB-IV/2022], while taking into account the judgment passed by the Hon’ble Supreme Court in the matter of N.N. Global (supra) has held that the objection regarding the insufficiency of stamp duty raised by the Corporate Debtor is contradictory to its own admission, as the agreement had already been acknowledged in several OTS proposals and financial statements. Hence, the Hon’ble NCLT, without making a distinction based on facts or law, relied on the conduct of the parties regarding the said agreement, which is a well-established legal principle. The Hon’ble NCLT, to a certain extent, relied on the correspondence between the parties to determine whether there was a meeting of minds between the parties. In this context, reference is made to the case of Rickmers Verwaltung Gmbh vs. Indian Oil Corporation Ltd., [(1999) 1 SCC 1], wherein an unsigned piece of paper was termed as a valid contract under Section 2(h) of the Contract Act, 1872, based on consensus ad idem between the parties.

In a summary proceeding before the Hon’ble NCLT, it’s important to note that neither party is seeking the enforceability of a contract in the traditional sense, as this, would imply a creditor’s pursuit of debt recovery. The primary objective of IBC, as consistently emphasized by the Hon’ble Supreme Court, is not debt recovery but rehabilitation and reorganization of the Corporate Debtor. In view of the above, the NCLAT’s reasoning, which relies on the conduct of the parties, is legally sound and should be adhered to as a matter of principle.

IBC Acknowledges Oral Contracts

In the evolving jurisprudence of IBC, the Hon’ble NCLAT has established that debt can exist even based on an oral contract. This differs from arbitration agreements, where written contracts are typically necessary. The Hon’ble NCLAT in the matter of M/s Agarwal Polysacks Limited vs. M/s K. K. Agro Foods and Storage Limited [Company Appeal (AT) (Insolvency) No.1126 of 2022], has held as follows:

“31. The Adjudicating Authority, however, took a view that there should be financial contract between the parties which elucidate the rate of interest and date of repayment. The Adjudicating Authority took a view that there is no written agreement to establish the nature of transaction between the parties, hence, Appellant failed to prove the debt. We have already held that requirement of written financial contract is not a pre-condition for proving debt.”

Given that the Hon’ble NCLAT already recognizes the existence of oral contracts between parties as a basis for initiating CIRP, it’s important to note that oral contracts are practically impossible to be stamped and signed. Consequently, the conduct of the parties plays a crucial role in establishing the presence of debt and default, which are the sole essentials for initiating CIRP proceedings.

Way Forward: Stamp Duty can be paid at a Later Stage

Recently, in the case of John Cockerill India Ltd. vs. Sanjay Navare [Comm. Arb. Application (L) 10282/2023], the Hon’ble Bombay High Court addressed the issue of stamp duty on an arbitration agreement. The Court identified two available options, i.e., (a) Sending the impounded agreement/instrument to the concerned Collector of Stamps, who would then follow the procedure outlined in Section 40 of the Stamp Act for the payment of the proper stamp duty and penalty. (b) Utilizing Section 35 of the Stamp Act, allowing the Court to facilitate the deposit of the requisite stamp duty along with any associated penalty, as outlined in other sections of the Stamp Act. The Hon’ble High Court exercised the latter option and authorized the Prothonotary and Senior Master to receive the stamp duty and endorse it on the original Agreement within a specified timeframe of 10 days.

Building on the aforementioned points and considering the NCLT only has summary jurisdiction, the NCLT can also exercise option (a) as mentioned above, enabling it to direct the Resolution Professional to address the requisite stamp duty, along with any associated penalties stipulated under other sections of the Stamp Act, and facilitate the registration of the agreement. This approach shall lead to harmonious construction between the IBC and the Stamp Act hence safeguarding the interests of the state as well as the creditors. In a similar vein, the Hon’ble NCLT, in the case of BD & P Hotels (India) Private Limited (supra), directed the IRP/ RP to notify the collector of stamps to file a claim for any deficiency in stamp duty in case an objection is raised by the Corporate Debtor. The Hon’ble Supreme Court in a seven judge on 13.12.2023 bench overruled the law laid down in N.N.Global (supra), and further cleared the position that the agreements which are inadequately stamped are inadmissible under Section 35 of the Stamp Act however, non-stamping or inadequate stamping is a curable defect.

In conclusion, N.N. Global (supra) does not diminish the right of a Creditor or Corporate Applicant to file an Application seeking the initiation of CIRP, even if the documents are unstamped or the stamp duty is deficient. The above-mentioned points underscore that Corporate Debtors cannot evade insolvency proceedings, even if the underlying agreements lack proper stamping. It is evident that the law regarding the initiation of CIRP remains consistent, primarily requiring the establishment of default on the underlying debt in accordance with the provisions of the IBC.