THE CONSOLIDATED NOTICE ISSUED FOR RECTIFICATION OF APPLICATION UNDER IBC – VALID?

Initiation of CIRP under Section 7

Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides the procedure for initiation of corporate insolvency resolution process (‘CIRP’ for short) by a Financial Creditor against a corporate debtor for the default in payment of financial debt. The financial creditor shall make an application in such form and manner and accompanied with such fee as may be prescribed.

Rectification of application

Section 7(5) (b) of the Code provides that where the Adjudicating Authority is satisfied that default has not occurred or the application is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application. The Adjudicating Authority shall, before rejecting the application give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.

Rule 28 of the National Company Law Tribunals, 2016 provides the procedure for rectification of mistakes in the application filed before the National Company Law Tribunal. The said rule provides that if, on scrutiny, the appeal is found to be defective, such document shall, after notice to the party, be returned for compliance and if there is a failure to comply within seven days from the date of return, the same shall be placed before the Registrar who may pass appropriate orders.

Issue

The issue to be discussed in this article as to whether the Registrar can send consolidated list of notices to more than one applicant to rectify the mistakes contained in the respective application under the provisions of the Code and NCLT Rules with reference to decided case law.

Case law

In Livein Aqua Solutions Private Limited Versus HDFC Bank Limited - 2025 (11) TMI 1637 - Supreme Court, the appellant company availed a loan of Rs.5.5 crores from the financial creditor, HDFC bank. The said loan was not repaid by the appellant company. Therefore, the said loan was declared as Non-Performing Asset on 04.08.2019. Since no amount has been repaid the Financial Creditor initiated CIRP against the appellant under Section 7 of the Code in Form 1 along with documents as required under the Code. The application was scrutinised by the concerned section. The National Company Law Tribunal (‘NCLT’ for short) conveyed the defects/objections in the filing of petitions/applications, including the application of the respondent-bank, but as the same were not removed/rectified, the Joint Registrar issued Notice dated 10.10.2023 in respect of 26 petitions/applications, including the application of the respondent-bank, calling upon all concerned to remove the defects within seven days failing which suitable orders would be passed under Rule 28(3).

The financial creditor bank failed to refile the application after removing the defects, leading to the Joint Registrar of the NCLT refusing to register the application, vide order dated 18.10.2023. Rule 63 provides that any

person aggrieved by the decision of the Registrar in the context of the scrutiny of the petition/application, as provided in Part-III and elsewhere in the Rules, may file an appeal against such order to the President of the Principal Bench and at other places, to a Member of the Bench designated by the President and the decision on the said appeal shall be final.

The financial creditor filed an application against the rejection order of its application. The order of NCLT was set aside and the NCLT was directed to give another opportunity to the bank for removing the defect within 7 days, subject to the payment of costs. Against the said order the appellant company filed an appeal before the National Company Law Appellate Tribunal (‘NCLAT’ for short). The said appeal was dismissed as infructuous since the application was rejected on 18.02.2024. The bank also filed an appeal before the NCLAT against the said impugned order of NCLT. The bank contended that the defect was curable by filing of a better affidavit in support of the application. The appellant company objected the same contending the very filing of the application under Section 7 of the Code by the financial creditor was non est as it was not in keeping with Rule 10(1). The NCLAT held that the rejection of the application filed by the respondent-bank could not be sustained. When an application is filed with a defective affidavit it would not be non est on that ground as the defect can be cured. The NCLAT chose to restore the company petition straightaway and remanded the matter to the NCLT for decision on merits, without requiring the defective affidavit to be cured.

Being aggrieved against the order of NCLAT, the appellant company filed the present appeal before the Supreme Court. The Supreme Court stayed further proceedings of NCLT. The Supreme Court considered the submissions of the parties to the appeal and documents on record. The Supreme Court observed that no notice was given to the respondent-bank under the proviso to Section 7(5)(b) of the Code. The notice dated 10.10.2023 was a consolidated notice issued by the Joint Registrar of the NCLT in relation to 26 petitions/applications, calling upon all concerned to take notice and to remove the defects therein within a period of 7 days, failing which all such cases would be dealt with under Rule 28(3). This notice was put up on the NCLT’s website as well as the notice board/cause list of the NCLT. The respondents-bank’s application under Section 7 of the Code found mention at Serial No. 6 of the tabulated statement giving the details of 26 defective petitions/applications. Similarly, the order dated 18.10.2023 passed by the Joint Registrar of the NCLT was in relation to 42 defective petitions/applications. There was no mention either in the notice dated 10.09.2023 or the order dated 18.10.2023 of the proviso to Section 7(5)(b) of the Code.

The Supreme Court further observed that Section 7(5)(b) of the Code requires the notice to be given to the applicant itself to rectify the defect in the application within seven days of the receipt of such notice. Rule 38(5) provides that notice or process may also be served on an authorised representative of the applicant or the respondent, as the case may be, in any proceeding or on any person authorised to accept a notice or a process, and such service on the authorised representative shall be deemed to be proper service. Rule 38(5), thus, permits service of notice on the authorized representative of the applicant or the respondent, as the case may be. The Supreme Court held that mere filing of a ‘defective’ affidavit in support of an application would, however, not render the very application non est and liable to be rejected on that ground as it is neither an incurable nor a fundamental defect. The rules of procedure are made to further the cause of justice and not to prove a hindrance thereto. Non-compliance with any procedural requirement relating to an application for relief should not entail automatic dismissal or rejection, unless the relevant statute or rule so mandates, and procedural defects and irregularities which are curable should not be allowed to defeat substantive rights or to cause injustice. The Supreme Court further held that procedure, a handmaiden to justice, should never be made a tool to deny justice or perpetuate injustice, by any oppressive or punitive use.

The Supreme Court found no error having been committed by the NCLAT in holding to this effect. However, it observed that the NCLAT ought to have asked the respondent-bank to cure the defective affidavit at least at that stage instead of ignoring the same and directing the NCLT to proceed to hear the company petition on merits and in accordance with law. To that extent, the NCLAT was in error.

The Supreme Court directed the financial credit to rectified the defects within 7 days from the date of the order of Supreme Court and the NCLT to hear the matter in accordance with law.