Tribunal clarifies Regulation 35A as directory, not mandatory. Fraud found in application; appeal allowed for proper evaluation.

The Tribunal held that Regulation 35A of the CIRP Regulations is directory, not mandatory. It clarified that the time period under Section 46 of the Code does not apply to transactions under Sections 49 and 66. The Tribunal found substantial pleadings of fraud in the application and concluded that the Adjudicating Authority erred in rejecting it. The Tribunal allowed the appeal, set aside the Authority's order, and revived the application for further consideration, emphasizing the need for a proper evaluation in accordance with the law to benefit the Corporate Debtor.

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Issues Involved:
1. Compliance with Regulation 35A of the CIRP Regulations, 2016.
2. Mandatory or directory nature of Regulation 35A.
3. Applicability of the time period under Section 46 of the Code to transactions under Sections 49 and 66.
4. Adequacy of pleadings of fraud in the application.
5. Error in rejecting the application by the Adjudicating Authority.

Issue-wise Detailed Analysis:

1. Compliance with Regulation 35A of the CIRP Regulations, 2016:
The Resolution Professional (RP) filed an application (I.A. No. 742/2020) beyond the 135-day period prescribed under Regulation 35A of the CIRP Regulations. The Adjudicating Authority rejected the application on the grounds of non-compliance with Regulation 35A and Section 46 of the Code. The RP argued that Regulation 35A is directory, not mandatory, and that the application should not be dismissed solely due to the timeline.

2. Mandatory or Directory Nature of Regulation 35A:
The Tribunal held that the timeline in Regulation 35A is directory, not mandatory. It emphasized that the use of "shall" in Regulation 35A does not necessarily make it mandatory. The Tribunal cited the Supreme Court’s judgment in 'Surendra Trading Company vs. Juggilal Kamlapat Jute Mills Company Limited and Ors.' which held that procedural timelines in the Code are directory. The Tribunal stated that holding the timeline as mandatory would cause serious inconvenience and injustice to the Corporate Debtor, as undervalued and fraudulent transactions would escape scrutiny.

3. Applicability of the Time Period under Section 46 of the Code to Transactions under Sections 49 and 66:
The Tribunal clarified that the timeline under Section 46, which applies to undervalued transactions, does not extend to transactions defrauding creditors (Section 49) or fraudulent trading (Section 66). The Tribunal noted that Section 49 and Section 66 do not prescribe a specific time limit for filing applications. Therefore, the Adjudicating Authority erred in applying the Section 46 timeline to the RP's application under Sections 49 and 66.

4. Adequacy of Pleadings of Fraud in the Application:
The Tribunal examined the application and found substantial pleadings indicating fraudulent transactions under Sections 49 and 66. The RP alleged that the lease transaction was carried out to defraud creditors and was executed without the consent of the creditor bank. The Tribunal noted that the Adjudicating Authority failed to consider the lack of response from the respondents, which should have led to an adverse inference against them.

5. Error in Rejecting the Application by the Adjudicating Authority:
The Tribunal concluded that the Adjudicating Authority committed an error in rejecting the application. It emphasized that the respondents did not file any reply to the allegations, and the RP had made substantial pleadings of fraud. The Tribunal also noted that the pending civil suit (T.S. No. 97/2017) did not affect the RP's application under the Code, as the suit did not challenge the lease deed and was inter se between the lessor and lessee.

Conclusion:
The Tribunal allowed the appeal, set aside the Adjudicating Authority's order, and revived the application before the Adjudicating Authority for a decision on merits. The Tribunal emphasized that the Adjudicating Authority should consider the application in accordance with the law to benefit the Corporate Debtor.

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