Insolvency in NCLT- Defects, Listing & Admission of an Application

Time Limit For Rectification And Admission is Directory

It is pertinent to note that Section 9 (5) of Insolvency and Bankruptcy Code, 2016 provides the time limit for admission and rejection of the application and also the time limit for rectification of the defect in the application:

SECTION 9(5)

“Section 9 (5) – The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order—

• Admit the application and communicate such decision to the operational creditor and the corporate debtor if,—
• the application made under sub-section (2) is complete;
• there is no repayment of the unpaid operational debt;
• the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor;
• no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility; and
• there is no disciplinary proceeding pending against any resolution professional proposed under sub-section (4), if any
• reject the application and communicate such decision to the operational creditor and the corporate debtor, if—
• the application made under sub-section (2) is incomplete;
• there has been repayment of the unpaid operational debt;
• the creditor has not delivered the invoice or notice for payment to the corporate debtor;
• notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or
• any disciplinary proceeding is pending against any proposed resolution professional:

Provided that Adjudicating Authority, shall before rejecting an application under sub-clause (a) of clause (ii) give a notice to the applicant to rectify the defect in his application within seven days of the date of receipt of such notice from the adjudicating Authority.”

In Surrender Trading Company V. Juggilal Kamlapat Jute Mills Company Limited And Others

ISSUE – Whether the stipulated time limit is directory or mandatory in nature?

National Company Law Appellate Tribunal

NCLAT held that such stipulated time is mandatory in nature.

“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.”

NCLAT further 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 time 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.”

Supreme Court

The Supreme Court dealt this issue in detail and analyzed the relevant provision and explained the entire process of filing up to listing as a 3 stage procedure and held as under;

“Various provisions of the Code would indicate that there are three stages:

• First stage is the filing of the application. When the application is filed, the Registry of the adjudicating authority is supposed to scrutinize 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 removed then the application would be posted before the adjudicating authority.
• When the application is listed before the adjudicating authority, it has to take a decision to either admit or reject the application. For this purpose, fourteen days time is granted to the adjudicating authority. If the application is rejected, the matter is given a quietus at that level itself. However, if it is admitted, we enter the third stage.
• Admission of the application, insolvency resolution process commences. Relevant provisions thereof have been mentioned above. This resolution process is to be completed within 180 days, which is extendable, in certain cases, up to 90 days. Insofar as the first stage is concerned, it has no bearing on the insolvency resolution process at all, inasmuch as, unless the application is complete in every respect, the adjudicating authority is not supposed to deal with the same. It is at the second stage that the adjudicating authority is to apply its mind and decide as to whether the application should be admitted or rejected. Here adjudication process starts. However, in spite thereof, when this period of fourteen days given by the statute to the adjudicating authority to take a decision to admit or reject the application is directory, there is no reason to make it mandatory in respect of the first stage, which is pre-adjudication stage.

Further, we are of the view that the judgments cited by the NCLAT and the principle contained therein applied while deciding that period of fourteen days within which the adjudicating authority has to pass the order is not mandatory but directory in nature would equally apply while interpreting proviso to sub-section (5) of Section 7, Section 9 or sub-section (4) of Section 10 as well. After all, the applicant does not gain anything by not removing the objections inasmuch as till the objections are removed, such an application would not be entertained. Therefore, it is in the interest of the applicant to remove the defects as early as possible.

24) Thus, we hold that the aforesaid provision of removing the defects within seven days is directory and not mandatory in nature. However, we would like to enter a caveat.

25) We are also conscious of the fact that sometimes applicants or their counsel may show laxity by not removing the objections within the time given and 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 process indicated by us can find support from the judgment of this Court in Kailash v. Nanhku & Ors., (2005) 4 SCC 480.

Conclusion

The following can be considered towards the conclusion on defect, listing and admission in NCLT under IB Code:

Ratio 1 – There can be 3 stages for an application.

Stage 1 – Scrutiny of the application by the Registry, if no defect then it will go for second stage, if there is a defect then it has to be removed within 7 days.

Stage 2 – If an application is defect free or defect has been removed, then it will be listed for hearing on admission within 14 days from the date of existence of defect free application. If it is admitted, then it will be in third stage.

Stage 3 – The resolution process has to be completed within 180 days and /or within further extended period of 90 days.

Ratio 2 – The period of fourteen days within which the adjudicating authority has to pass the order is not mandatory but directory in nature would equally apply while interpreting proviso to sub-section (5) of Section 7, Section 9 or sub-section (4) of Section 10 as well.

Ratio 3 – The 7 days rectification period prescribed under IBC is directory in nature. However, reasonable justification is a must where such defects are not removed within the stipulated period of time.

AMLEGALS –  ANANDADAY MISSHRA, FOUNDER ADVOCATE 

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