2025 (11) TMI 1637 - SC - IBC

SC clarifies Section 7(5)(b) IBC notice must go to applicant, not just Rule 38(5) authorised representative

Livein Aqua Solutions Private Limited Versus HDFC Bank Limited

SC held that mere service of notice on the authorised representative under Rule 38(5) of the NCLT Rules does not satisfy the mandatory requirement of ... Rejection of application u/s 7 of the Insolvency and Bankruptcy Code, 2016, verified on 26.07.2023 but supported by an affidavit deposed to on 17.07.2023 - HELD THAT:- 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 IBC. Pertinently, the proviso to Section 7(5)(b) of the IBC requires the notice thereunder to be given to the applicant itself to rectify the defect in the application within seven days of the receipt of such notice. In this regard, Rule 38 of the NCLT Rules, titled ‘Service of notices and processes’ assumes significance as Rule 38(5) therein 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. Issuance of a notice to an authorized representative of the respondent-bank was not enough to satisfy the mandate of the proviso to Section 7(5)(b) of the IBC. The IBC, being the substantive legislation relating to the application filed by the respondent-bank under Section 7 thereof, the notice to cure the defects therein necessarily had to be given under the said provision and compliance with the Rules, independently framed for the National Company Law Tribunal, was not sufficient. Thus, even though the Registry of the NCLT issued process under Rule 28 of the NCLT Rules, the same was insufficient as there was no communication of a notice under the proviso to Section 7(5)(b) of the IBC at any time - thus no error having been committed by the NCLAT in holding to this effect. However, 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. Appeal disposed off. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, supported by a defective affidavit, is liable to be treated as non est and rejected at the threshold. (2) Whether compliance with Rule 28 of the National Company Law Tribunal Rules, 2016, and issuance of a consolidated/general notice by the Registry, satisfies the mandatory requirement of notice under the proviso to Section 7(5)(b) of the Insolvency and Bankruptcy Code, 2016, before rejection of a Section 7 application as incomplete. (3) Whether the National Company Law Appellate Tribunal was justified in restoring the Section 7 application and remanding the matter for decision on merits without first directing cure of the defective affidavit. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Nature and effect of a defective affidavit supporting a Section 7 IBC application Legal framework: The application was filed under Section 7 of the Insolvency and Bankruptcy Code, 2016, in Form 1 as required by Rule 4(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Form 1 and Rule 4(1) do not require an affidavit. The requirement of verification by affidavit arises from Rule 34(4) of the National Company Law Tribunal Rules, 2016, which mandates that every petition or application shall be verified by an affidavit in Form NCLT-6. Interpretation and reasoning: The Court noted that the affidavit requirement stems from the procedural NCLT Rules and not from the substantive scheme of Section 7 or the IBC Application Rules. The objection of the corporate debtor itself characterised the petition as 'defective' and not 'non est', and the argument that the petition was non est was raised only later in appeal. The Court held that filing a defective affidavit is a procedural defect, neither fundamental nor incurable. Relying on precedents that rules of procedure are meant to further, not hinder, the cause of justice, and that curable procedural defects should not defeat substantive rights, the Court rejected the contention that a defective supporting affidavit renders the Section 7 application void or non est. Conclusions: A defective affidavit supporting a Section 7 application under the IBC does not render the application non est or liable to outright rejection. It is a curable procedural defect, and the application cannot be dismissed at the threshold solely on that ground. Issue (2): Compliance with the proviso to Section 7(5)(b) IBC and effect of Rule 28 NCLT Rules process Legal framework: Section 7(5)(b) of the IBC empowers the Adjudicating Authority to reject an incomplete Section 7 application, but its proviso mandates that, before such rejection, a notice must be given to the applicant to rectify the defect within seven days of receipt of that notice. Rule 28 of the NCLT Rules provides for scrutiny of petitions/applications, communication of defects, return for rectification and, in default, refusal to register. Rule 38(5) of the NCLT Rules allows service of notices and processes on an authorised representative of a party, such service being deemed proper. Interpretation and reasoning: The scrutiny section and the Joint Registrar of the NCLT issued consolidated notices and orders under Rule 28 in relation to multiple defective petitions/applications, including the Section 7 application in question, and published them on the website and notice board. These communications did not advert to the proviso to Section 7(5)(b) IBC, nor were they shown to be specific notices addressed to the applicant itself as required by the proviso. The Court relied on the interpretation in Dena Bank v. C. Shivakumar Reddy that the proviso obliges the Adjudicating Authority to give notice to the applicant to rectify the defect, and that while the seven-day period is directory, the obligation to give such notice is mandatory. The Court held that compliance with the NCLT Rules' scrutiny procedure, including consolidated/general notices and Registrar's orders, cannot substitute for, or dispense with, the specific statutory notice mandated under the proviso to Section 7(5)(b) IBC. The IBC, as the substantive legislation governing the application, requires its own notice requirement to be satisfied. Conclusions: The consolidated notice and subsequent order issued under Rule 28 of the NCLT Rules did not amount to compliance with the mandatory requirement of notice under the proviso to Section 7(5)(b) of the IBC. In the absence of such statutory notice to the applicant to rectify defects, rejection/refusal to register the Section 7 application on the ground of incompleteness was unsustainable. The NCLAT correctly held that the proviso to Section 7(5)(b) had not been complied with. Issue (3): Propriety of the NCLAT's direction restoring the petition without curing the defective affidavit Legal framework: Section 7(5)(b) of the IBC (with proviso as interpreted in Dena Bank) permits curing of defects in Section 7 applications. Rule 63 of the NCLT Rules provides for an appeal against scrutiny decisions of the Registrar, and the decision on such appeal is final at that stage. Interpretation and reasoning: The NCLAT correctly held that a Section 7 application filed with a defective affidavit is not non est and that such a defect is curable. However, having recognised the defect and the curable nature thereof, the NCLAT proceeded to restore the company petition and remand it to the NCLT for decision on merits without insisting on rectification of the defective affidavit. The Court held that, while the NCLAT was right in setting aside the rejection which was contrary to the proviso to Section 7(5)(b), it erred in ignoring the admitted procedural defect in the affidavit and in not directing its cure before the matter proceeded on merits. Conclusions: The NCLAT was correct in holding that the rejection of the Section 7 application could not be sustained for non-compliance with the proviso to Section 7(5)(b) IBC and that the defect in the affidavit was curable. However, it erred in straightaway restoring the petition and remanding it for decision on merits without directing rectification of the defective affidavit. The proper course is to allow curing of defects and thereafter proceed on merits. Final operative directions The Court directed the financial creditor to cure all defects in the Section 7 application, including the defective affidavit, within seven days, whereupon the National Company Law Tribunal, Ahmedabad Bench, shall take up the matter for hearing in accordance with law and due procedure. Each party was directed to bear its own costs.