TaxTMI 
TaxTMI 
2017 (9) TMI 1566
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that the time of seven days prescribed in proviso to sub-section (5) of Section 9 of the Insolvency and Bankruptcy Code, 2016 (for short, the 'Code') is mandatory in nature and if the defects contained in the application filed by the 'operational creditor' for initiating corporate insolvency resolution against a corporate debtor are not removed within seven days of the receipt of notice given by the adjudicating authority for removal of such objections, then such an application filed under Section 9 of the Code is liable to be rejected. The precise question of law which was framed by the NCLAT for its decision is to the following effect: "Whether the time limit prescribed in Insolvency & Bankruptcy Code, 2016 (hereinafter referred to as Code 2016) for admitting or rejecting a petition or initiation of insolvency resolution process is mandatory?" 3) Chapter II of Part II of the Code deals with corporate insolvency resolution process. Under Section 7 of the Code, financial creditor (as per the definition contained in Section 5(7)) can initiate corporate insolvency resolution process. Section 8, on the other hand, deals with insolvency resolution by operational creditor.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsolvency resolution process under this section, may propose a resolution professional to act as an interim resolution professional. (5) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order- (i) admit the application and communicate such decision to the operational creditor and the corporate debtor if,- "(a) the application made under sub-section (2) is complete; (b) there is no repayment of the unpaid operational debt; (c) the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor; (d) no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility; and (e) there is no disciplinary proceeding pending against any resolution professional proposed under sub-section (4), if any. (ii) reject the application and communicate such decision to the operational creditor and the corporate debtor, if- "(a) the application made under sub-section (2) is incomplete; (b) there has been repayment of the unpaid operational debt; ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... existence of any eventuality stated in sub-section (2), it may order rejection of such an application. 5) One of the conditions, with which we are concerned, is that application under sub-section (2) has to be complete in all respects. In other words, the adjudicating authority has to satisfy that it is not defective. In case the adjudicating authority, after the scrutiny of the application, finds that there are certain defects therein and it is not complete as per the provisions of sub-section (2), in that eventuality, the proviso to sub-section (5) mandates that before rejecting the application, the adjudicating authority has to give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice. 6) Sub-section (5) of Section 9, thus, stipulates two time periods. Insofar as the adjudicating authority is concerned, it has to take a decision to either admit or reject the application with the period of fourteen days. Insofar as defects in the application are concerned, the adjudicating authority has to give a notice to the applicant to rectify the defects before rejecting the application on that ground and seven days period is g....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eject and close the Petition preferred by Respondents. After we reserved the judgment if any order has been passed by the Adjudicating Authority, except order of dismissal, if any, are also declared illegal." 9) Before we pronounce as to whether the aforesaid rendition by the NCLAT is justified or not, it would be apposite to take stock of certain essential facts. 10) Before the enactment of the Code, the relevant legislation dealing with such subject matters was the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as 'SICA'). Under this Act, an industrial undertaking, on becoming sick (i.e. where its net worth got eroded), could file a reference under Section 15(1) of SICA, before the Board for Industrial and Financial Reconstruction (for short, 'BIFR') constituted under SICA. BIFR, on admitting such a reference, was supposed to undertake the exercise whether such a sick company can be revived or not. For this purpose, BIFR would appoint an Operating Agency (OA) which was supposed to explore the possibility of revival plan in consultation with the other stakeholders, particularly the creditors. If such reconstruction/revival scheme prepared b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ated by the corporate debtor or Rainey Park. While the matter was pending with BIFR, Sick Industrial Companies Repeal Act was passed on the enactment of the Code with effect from May 28, 2016. Resultantly, all proceedings before BIFR and AAIFR stood abated. With this embargo, Section 22(1) of SICA also vanished. 12) In these changed circumstances, the operational creditor served another demand notice dated January 06, 2017, in the statutory format prescribed under the Code, upon the corporate debtor calling up it to pay the outstanding dues. As it was not paid, the operational creditor filed application for initiation of corporate insolvency resolution process under Section 9 o the Act. The chronology of events which took place from the date of filing of the said application till the passing of the impugned order by the NCLAT are mentioned herein below: 10.02.2017 The appellant filed the application under Section 9(2) of the Code, being CP No. 10/ALD/2017, before the adjudicating authority under the Code. 14.02.2017 The registry of the adjudicating authority pointed out some procedural defects on the basis of the check list prepared for scrutiny of the pe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n rupees. 09.03.2017 In light of the foregoing scenario, the Adjudicating Authority for providing substantial justice inter alia directed the respondent No. 1/Corporate Debtor to maintain status quo in respect of its immovable property until further orders. 21.03.2017 The interim order passed by the Adjudicating Authority, Allahabad Bench on 09.03.2017 was challenged by the respondent No. 1/Corporate Debtor under Section 61 of the IB Code, 2016 before the National Company Law Appellate Tribunal (NCLAT) being Company Appeal No. 9 of 2017. The NCLAT on 21.03.2017 issued notice in the said appeal inter alia observing that question of law is involved in this case and directing the Adjudicating Authority not to admit the application filed under the IB Code, 2016 by the appellant. 01.05.2017 The NCLAT has allowed the AT No. 09/2017 on the ground that the application and Section 9 petition filed by appellant herein was incomplete, defected and was fit to be rejected. Hence, the NCLAT was pleased to direct NCLT to reject and close the application filed by the appellant under Section 9 of the IB Code, 2016 passed in the impugned order inter alia rejecting....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reafter scanned through the scheme of the Code by pointing out various steps of the insolvency resolution process and the time limits prescribed therefor. It is of relevance to mention here that the corporate insolvency resolution process can be initiated by the financial creditor under Section 7 of the Code, by the operational creditor under Section 9 of the Code and by a corporate applicant under Section 10 of the Code. There is a slight difference in these provisions insofar as criteria for admission or rejection of the applications filed under respective provisions is concerned. However, it is pertinent to note that after the admission of the insolvency resolution process, the procedure to deal with these applications, whether filed by the financial creditor or operational creditor or corporate applicant, is the same. It would be relevant to glance through this procedure. 16) On admission of the application, the adjudicating authority is required to appoint an Interim Resolution Professional (for short, 'IRP') in terms of Section 16(1) of the Code. This exercise is to be done by the adjudicating authority within fourteen days from the commencement of the insolvency date. Thi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly held by the NCLAT also, that time is the essence of the Code. Notwithstanding this salutary theme and spirit behind the Code, the NCLAT has concluded that as far as fourteen days time provided to the adjudicating authority for admitting or rejecting the application for initiation of insolvency resolution process is concerned, this period is not mandatory. For arriving at such a conclusion, the NCLAT has discussed the law laid down by this Court in some judgments. Therefore, we deem it proper to reproduce the discussion of the NCLAT itself in this behalf: "32. In P.T. Rajan Vs. T.P.M. Sahir and Ors. (2003) 8 SCC 498, the Hon'ble Supreme Court observed that where Adjudicating Authority has to perform a statutory function like admitting or rejecting an application within a time period prescribed, the time period would have to held to be directory and not mandatory. In the said case, Hon'ble Apex Court observed: "48. It is well-settled principle of law that where a statutory functionary is asked to perform a statutory duty within the time prescribed therefor, the same would be directory and not mandatory. (See Shiveshwar Prasad Sinha v. The District Magistrate of M....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (supra) held that: "10. All the rules of procedure are the handmaid of justice. The language employed by the draftsman of processual law may be liberal or stringent, but the fact remains that the object of prescribing procedure is to advance the cause of justice. In an adversarial system, no party should ordinarily be denied the opportunity of participating in the process of justice dispensation. Unless compelled by express and specific language of the statute, the provisions of CPC or any other procedural enactment ought not to be construed in a manner which would leave the court helpless to meet extraordinary situations in the ends of justice. 11. The mortality of justice at the hands of law troubles a judge's conscience and points an angry interrogation at the law reformer. 12. The processual law so dominates in certain systems as to overpower substantive rights and substantial justice. The humanist rule that procedure should be the handmaid, not the mistress, of legal justice compels consideration of vesting a residuary power in the judges to act ex debito justitiae where the tragic sequel otherwise would be wholly inequitable. Justice is the goal of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....irectory." 18) The NCLAT has also held that fourteen days period is to be calculated 'from the date of receipt of application'. The NCLAT has clarified that date of receipt of application cannot be treated to be the date of filing of the application. Since the Registry is required to find out whether the application is in proper form and accompanied with such fee as may be prescribed, it will take some time in examining the application and, therefore, fourteen days period granted to the adjudicating authority under the aforesaid provisions would be from the date when such an application is presented before the adjudicating authority, i.e. the date on which it is listed for admission/order. 19) After analysing the provision of fourteen days time within which the adjudicating authority is to pass the order, the NCLAT immediately jumped to another conclusion, viz. the period of seven days mentioned in proviso to sub-section (5) of Section 9 for removing the defect is mandatory, with the following discussion: "44. However, the 7 days' period for the rectification of defects as stipulated under proviso to the relevant provisions as noticed above is required to be complied....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd application was not examined on merits. In the former case it would be travesty of justice that even if the case of the applicant on merits is very strong, the applicant is shown the door without adjudication of his application on merits. If the latter alternative is accepted, then rejection of the application in the first instance is not going to serve any purpose as the applicant would be permitted to file fresh application, complete in all aspects, which would have to be entertained. Thus, in either case, no purpose is served by treating the aforesaid provision as mandatory. 22) Various provisions of the Code would indicate that there are three stages: (i) First stage is the filing of the application. When the application is filed, the Registry of the adjudicating authority is supposed to scrutinise the same to find out as to whether it is complete in all respects or there are certain defects. If it is complete, the same shall be posted for preliminary hearing before the adjudicating authority. If there are defects, the applicant would be notified about those defects so that these are removed. For this purpose, seven days time is given. Once the defects are remove....
X X X X Extracts X X X X
X X X X Extracts X X X X
....make take it for granted that they would be given unlimited time for such a purpose. There may also be cases where such applications are frivolous in nature which would be filed for some oblique motives and the applicants may want those applications to remain pending and, therefore, would not remove the defects. In order to take care of such cases, a balanced approach is needed. Thus, while interpreting the provisions to be directory in nature, at the same time, it can be laid down that if the objections are not removed within seven days, the applicant while refilling the application after removing the objections, file an application in writing showing sufficient case as to why the applicant could not remove the objections within seven days. When such an application comes up for admission/order before the adjudicating authority, it would be for the adjudicating authority to decide as to whether sufficient cause is shown in not removing the defects beyond the period of seven days. Once the adjudicating authority is satisfied that such a case is shown, only then it would entertain the application on merits, otherwise it will have right to dismiss the application. The aforesaid proces....