2017 (4) TMI 1248 - HC - Insolvency and Bankruptcy

Court upholds natural justice in Insolvency Code, requires fair opportunity for debtor

Sree Metaliks Limited and another Versus Union of India and Anr.

The court dismissed the challenge to the vires of Section 7 of the Insolvency and Bankruptcy Code, 2016, affirming the requirement for the National ... Initiation of corporate insolvency resolution process by financial creditor - Procedure under Insolvency and Bankruptcy Code, 2016 - whether the Code of 2016 does not afford any opportunity of hearing to a corporate debtor in a petition filed under Section 7 of the Code of 2016? - Held that:- When the NCLT receives an application under Section 7 of the Code of 2016, therefore, it must afford a reasonable opportunity of hearing to the corporate debtor as Section 424 of the Companies Act, 2013 mandates it to ascertain the existence of default as claimed by the financial creditor in the application. The NCLT is, therefore, obliged to afford a reasonable opportunity to the financial debtor to contest such claim of default by filing a written objection or any other written document as the NCLT may direct and provide a reasonable opportunity of hearing to the corporate debtor prior to admitting the petition filed under Section 7 of the Code of 2016. Section 7(4) of the Code of 2016 requires the NCLT to ascertain the default of the corporate debtor. Such ascertainment of default must necessarily involve the consideration of the documentary claim of the financial creditor. This statutory requirement of ascertainment of default brings within its wake the extension of a reasonable opportunity to the corporate debtor to substantiate by document or otherwise, that there does not exist a default as claimed against it. The proceedings before the NCLT are adversarial in nature. Both the sides are, therefore, entitled to a reasonable opportunity of hearing. Rule 10 of the Rules of 2016 states that, till such time the Rules of procedure for conduct of proceedings under the Code of 2016 are notified, an application made under Sub-section (1) of Section 7 of the Code of 2017 is required to be filed before the adjudicating authority in accordance with Rules 20, 21, 22, 23, 24 and 26 or Part-III of the National Company Law Tribunal Rules, 2016. Adherence to the principles of natural justice by NCLT or NCLAT would not mean that in every situation, NCLT or NCLAT is required to afford a reasonable opportunity of hearing to the respondent before passing its order. In a given case, a situation may arise which may require NCLT to pass an ex-parte ad interim order against a respondent. Therefore, in such situation NCLT, it may proceed to pass an ex-parte ad interim order, however, after recording the reasons for grant of such an order and why it has chosen not to adhere to the principles of natural justice at that stage. It must, thereafter proceed to afford the party respondent an opportunity of hearing before confirming such ex-parte ad interim order. In the facts of the present case, the learned senior advocate for the petitioner submits that, orders have been passed by the NCLT without adherence to the principles of natural justice. The respondent was not heard by the NCLT before passing the order. It would be open to the parties to agitate their respective grievances with regard to any order of NCLT or NCLAT as the case may be in accordance with law. It is also open to the parties to point out that the NCLT and the NCLAT are bound to follow the principles of natural justice while disposing of proceedings before them. In such circumstances, the challenge to the vires to Section 7 of the Code of 2016 fails. Issues Involved:1. Vires of Section 7 of the Insolvency and Bankruptcy Code, 2016.2. Adherence to principles of natural justice by the National Company Law Tribunal (NCLT).3. Procedures for application under Section 7 of the Insolvency and Bankruptcy Code, 2016.Detailed Analysis:1. Vires of Section 7 of the Insolvency and Bankruptcy Code, 2016:The petitioner challenged the constitutionality of Section 7 of the Insolvency and Bankruptcy Code, 2016, arguing that the Code does not provide an opportunity for a corporate debtor to be heard in a petition filed under this section. The petitioner contended that the absence of a hearing violates the principles of natural justice. The respondent countered by stating that the NCLT is required to follow the principles of natural justice as per Section 424 of the Companies Act, 2013, and thus, the challenge to the vires of the Code is misplaced. The court concluded that the challenge to the vires of Section 7 of the Code of 2016 fails.2. Adherence to Principles of Natural Justice by the National Company Law Tribunal (NCLT):The petitioner argued that the NCLT passed an order without affording an opportunity of hearing, thus breaching the principles of natural justice. The respondent pointed out that the petitioner did not press this point in the appeal before the NCLAT and had no objection to the admission of the insolvency petition. The court emphasized that the principles of natural justice require that a party must be heard before being condemned. Section 424 of the Companies Act, 2013 mandates the NCLT to apply these principles, and the NCLT must afford a reasonable opportunity to the corporate debtor to contest the claim of default before admitting a petition under Section 7 of the Code of 2016.3. Procedures for Application under Section 7 of the Insolvency and Bankruptcy Code, 2016:The court examined the procedural aspects of Section 7, which allows a financial creditor to file an application to initiate corporate insolvency resolution process against a corporate debtor. The court noted that the NCLT must ascertain the existence of default within 14 days of receiving the application and must provide a reasonable opportunity to the corporate debtor to contest the claim. The court also referred to Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, which requires the financial creditor to dispatch a copy of the application to the corporate debtor. Rule 10 of the Rules of 2016 states that the procedures under the National Company Law Tribunal Rules, 2016 will apply until specific rules are notified.The court acknowledged that while the NCLT is not bound by the Code of Civil Procedure, 1908, it must still apply the principles of natural justice. In exceptional situations, the NCLT may pass an ex-parte ad interim order but must provide reasons for doing so and subsequently afford the respondent an opportunity of hearing before confirming such an order.Conclusion:The court dismissed the challenge to the vires of Section 7 of the Code of 2016, affirming that the NCLT and NCLAT must adhere to the principles of natural justice in their proceedings. The petition was disposed of without any order as to costs, and the parties were allowed to agitate their grievances in accordance with the law.