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

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 notice to the applicant under the proviso to Section 7(5)(b) IBC for curing defects in a Section 7 application. As no proper notice under the proviso was ever issued, the rejection of the application solely on that basis was unsustainable, and NCLAT rightly held so. However, SC found NCLAT erred in not directing the creditor-bank to cure the defective affidavit at its stage and simply remanding for hearing on merits. The appeal was disposed of with these clarifications.

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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.

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