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

The court dismissed the challenge to the vires of Section 7 of the Insolvency and Bankruptcy Code, 2016, affirming the requirement for the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) to adhere to principles of natural justice. The court emphasized the necessity for the NCLT to provide a reasonable opportunity for the corporate debtor to contest claims before admitting a petition under Section 7. The petition was disposed of without costs, permitting parties to address their concerns within legal frameworks.

---

---

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.

---