Over the past few years, the constant interaction between Insolvency & Bankruptcy Code, 2016 (“IBC/Code”) and the Indian Stamp Act, 1899 (“Stamp Act”) has given rise to various intriguing questions, with one such primary question being “whether insufficient stamping can be a ground for rejection of an application under section 7 or 9 of the Code?”.

While the IBC lays down provisions and procedures regarding initiation of insolvency procedure, however, the plea of “insufficient stamping” vide the provisions of the Stamp Act has been used as a defense to claim that the agreement/instrument in question cannot be admitted into evidence to establish the existence of debt between the parties as the instrument is not in compliance with the thresholds under the Indian Evidence Act, 1872.

Through strenuous adjudication by the adjudicating authorities time and again, the adjudicating authorities have emphatically pronounced that non-stamping of documents does not render the corporate insolvency resolution process (“CIRP”) application filed to be non-maintainable when there exists other material on record to prove existence of default in payment of debt. However, the above dicta till now were mostly in relation to applications filed under Section 7 of the IBC by financial creditors.

Recently, on 25 November, 2022, the Hon’ble National Company Law Tribunal, New Delhi Bench (“NCLT”), in Standard Chartered Bank Singapore (Ltd.) vs. RCI Industries and Technologies Limited,[1] whilst adjudicating an application under Section 9 of IBC, inter alia extended the afore laid down principle to Section 9 applications filed by operational creditors (“Judgment”).  This comes as a welcome step for the countless operational creditors in the interplay between IBC and the Stamp Act.

In the present case, Standard Chartered Bank (Singapore) Ltd. (“SCB”) entered into a Receivable Purchase Agreement/Factoring Agreement (“RPA”) in Singapore with one Sizer Metals (“Sizer”). As per the RPA, all the receivables of Sizer from one RCI Industries and Technologies Limited (“the Corporate Debtor/RCI”) were assigned to SCB. RCI was duly informed of the assignment vide a notice of assignment of debt which was acknowledged by RCI. Sizer and RCI, subsequently, entered into a contract, for supply of goods by Sizer to RCI, resulting into six transactions taking place, basis which six invoices were issued. On failure of RCI in making the payments, SCB, as an operational creditor, filed an application under Section 9 of the IBC for initiation of the CIRP against RCI.

RCI, amongst several other contentions, primarily contended that since the RPA for assignment of debt, having been executed in Singapore, is not duly stamped under the provisions of the Stamp Act, the same must not be relied upon by SCB, to claim itself to be an operational creditor. RCI further relied upon the provisions of the Factoring Regulation Act, 2011 (“FRA”) to state that since SCB does not qualify as a ‘factor’ as per the definition given under the FRA, and it cannot, therefore, claim any exemptions as are available to factors when it comes to stamping of a document.

The main question, therefore, tabled before the NCLT was whether insufficient stamping of an agreement will vitiate the proceedings initiated under Section 9 of IBC.

Re: Interplay of IBC and Stamp Act

RCI has place reliance on Sections 3, 18 and 35 of the Stamp Act to argue that a document executed outside India, i.e. the RPA in the present case, would be inadmissible and cannot be relied upon to prove debt in India, unless sufficiently stamped. RCI also argued that lack of proper stamping vitiates reliance on the said documents and that the same should be impounded under Section 33 of the Stamp Act.

SCB on the other hand contended that under section 9 of the IBC, the test for admission of a CIRP only includes (1) establishment of a default on a debt payable, (2) and no pre-existing dispute. This test can be satisfied by placing reliance on any document and not necessarily the assignment of debt agreement. In this case, since the notice of assignment was acknowledged by RCI, followed by various emails where RCI had admitted to the debt being outstanding, the test stood satisfied. To substantiate its arguments SCB also placed reliance on a few judgments passed in section 7 IBC application on the subject of non-stamping.[2] It was also argued that non-stamping of the RPA is merely a procedural/technical defect, and does not hamper the proceedings, and the application will suffice when there are other materials on record which could be relied on for coming to the conclusion that the default has been committed by the Corporate Debtor in paying the debt.[3]

Interestingly, RCI raised another objection that the judgments being relied by SCB are in context of section 7 of IBC i.e., for a financial debt, whereas the present case pertains to an ‘operational debt’ under section 9 of the IBC. Such objection was also countered by relying upon the definitions of financial debt and operational debt, wherein in both the definitions the term ‘legally assigned’ finds a mention. Accordingly, it was argued that if the NCLTs/NCLAT have taken a view that a debt which otherwise assigned, though inadequately stamped, can be proved by other documents evidencing the debt and the default, then such principle is equally applicable to an application under section 9 of the IBC as well.

The NCLT agreed with the submissions made by SCB and stated the following:

“We are of the view that even if the documents in question i.e., the assignment/agreements have not been stamped under the provisions of Indian Stamp Act, such non-stamping of the said documents shall not render the instant application filed under Section 9 of the Insolvency & Bankruptcy Code, 2016 as non-maintainable, in view of other material n record which can be relied upon to come to the conclusion that the Corporate Debtor has committed default in payment of debt. Therefore, the present Application under Section 9 of IBC is maintainable.”

Re: Interplay of IBC and FRA

 Apart from the issue of insufficient stamping, RCI also raised objections by relying of the provisions of FRA to contend that SCB, being a foreign bank and having no certificate of registration under the Reserve Bank of India, 1934, was not legally capable of factoring receivables, and if the same was permitted, it would be violative of Section 23 of the Indian Contracts Act, 1932.

SCB on the contrary, submitted that the RPA, having been executed in Singapore, was not mandated to comply with the provisions of the FRA. This was substantiated by the fact that SCB was not seeking to enforce the RPA, but to initiate CIRP against the Corporate Debtor, which is distinct and independent.

NCLT agreed with the SCB on this count as well and held that the provisions of the FRA were not to have any holding/effect in the adjudication of the Section 9 application filed for initiation of CIRP. Further, after ascertaining that the debt was admitted via numerous email exchanges, absence of a pre-existing dispute and in light of the aforementioned position of law with the facts of the case, the NCLT admitted the Section 9 application.

Other defences/counter argument raised by SCB were with respect to the arguments having been raised by RCI as an afterthought and beyond the pleadings etc., which also finds mention in the Judgment.

Analysis/Personal Views

The Judgement herein furthers the resolve and intent of IBC by disallowing procedural lacunas in the nature of insufficiently stamped documents to give a right to desist to the defaulting corporate debtors and escape from the clutches of the Code. It advances the independence and pertinence of the Code in protecting the operational creditors from mere procedural irregularity, especially when there persists evidence to corroborate the default of the admitted debt.

While looking beyond the insufficiency of stamping in the documents, the adjudicating authorities have rightly upheld the spirit and intent of the Code by opining that the primary test remains of the debt and default and if the same can be proven by other documents, then NCLTs ought not rely upon insufficiently stamped documents as the sole basis for rejecting an application under Section 7 or 9 of the Code.