Time Period Under ‘IBC’ Mandatory or Recommendatory

Introduction:

In this editorial author discuss the provisions under of I&B Code, 2016 in respect of different – 2 time limits mentioned under the Act i.e.

• Section 12. (1) Subject to sub-section (2), the corporate insolvency resolution process shall be completed within a period of one hundred and eighty days from the date of admission of the application to initiate such process.
• Section 7. (4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), ascertain the existence of a default.
• Section 7. (5) Adjudicating Authority shall, before rejecting the application under clause (b) of sub-section (5), give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority

The question arises whether time limits mentioned above are Mandatory in Nature or Recommendatory in nature. Answer of this question has been decided by the Supreme Court, NCLAT and NCLT in different – 2 judgments as mentioned below one by one.

Question 1. Whether the time period of 7 days given to a Financial Creditor/ Operational Creditor/Corporate Applicant to rectify defects in an application is mandatory or directory?

Case element:

Case Name	M/s Surendra Trading Company Vs. Juggilal Kamalpat Jute Mills Co. Ltd & Ors.
Court	Hon’ble Supreme Court
Order Date	19th September, 2017
Appeal Against	NCLAT order of J K Jute Mills Company Limited vs. M/s Surendra Trading Company dated: 1st May, 2017

NCLAT Order: NCLAT, in J K Jute Mills Company Limited vs. M/s Surendra Trading Company [Company Appeal (AT) No. 09 of 2017], decided on 1st May, 2017, while considering various timelines under the Code, held that, the period of 7 days given to a Financial Creditor/Operational Creditor/ Corporate Applicant who has filed an application, to cure the defects in such application, is mandatory and failure to remove such defects entails rejection of application.

A. Factual Background:

• Legal Provisions:

Section 7. (5) Adjudicating Authority shall, before rejecting the application under clause (b) of sub-section (5), give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.

Section 9. (5) 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.

• Appeal filed in Supreme Court for the question of law whether time period of 7 days Mandatory or Recommendatory is.

B. Finding of Honourable Supreme Court:

Hon’ble Supreme Court states that,

• While considering the time period of 7 days given to an applicant to cure the defects, held, that the said time period is not mandatory and is merely directory and the failure to cure the defects in 7 days time period would not entail dismissal of application
• The Honourable Supreme Court observed that it has to be seen whether the rejection would be treated as rejection of application on merits thereby debarring filing of fresh application or the same is merely an administrative order.
• In the former case, it would lead to travesty of justice as even though the case may have merits, the applicant would be shown the door without adjudication.
• If it is the latter case, then rejection of application in the first instance is not going to serve any purpose as applicant would be entitled to file fresh application which would have to be entertained. Thus, in either case, no purpose is served by treating the aforesaid provision as mandatory.

Honourable Supreme Court, while only considering the time period of 7 days given to an applicant to cure the defects, held, that the said time period is not mandatory and is merely directory and the failure to cure the defects in 7 days time period would not entail dismissal of application.

The period of 7 days notice period granted by NCLT to Financial Creditor, Operational Creditor, Corporate Applicant for curing defects in an application filed under section 7, 9 or 10 of the Code is Directory, subject to the rider above mentioned.

Question 2. Whether the time period of 14 days provided under the Code to NCLT to either admit or reject an application is Mandatory or Directory?

Case element:

Case Name	J K Jute Mills Company Limited vs. M/s Surendra Trading Company
Operational Creditor	Surendra Trading Company
Corporate Debtor	J K Jute Mills Company Limited
Court	National Company Law Tribunal
Order Date	1st May, 2017
Appeal Against	NCLT, Allahabad Bench

The application was not decided by NCLT, Allahabad Bench, within the period of 14 days and hence, J K Jute filed an appeal contending that the NCLT had become functus officio.

A. Factual Background:

• Legal Provisions:

Section 7. (4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3).”

• Appeal filed in NCLAT after expiry of 14 days in Allahabad NCLT Bench.

C. Finding of Honourable Supreme Court:

Hon’ble NCLAT states that,

• The nature of provisions contained in Sub-section (4) of Section 7, sub-section (5) of section 9 and sub-section (4) of section 10 of the Code are merely procedural in nature, the same cannot be treated to be a mandate of law and the object behind these provisions is only to prevent delay in hearing and disposal of cases.
• NCLT Observed That:
• The time period of 14 days prescribed under sub-section (4) of the section 7, sub-section (5) of section 9 and sub-section (4) of section 10 are to be counted from the date of receipt of application. The word date of receipt of application cannot be treated to be ‘date of filing of the application Therefore, 14 days’ period granted to the Adjudicating Authority under the provisions of the Code cannot be counted from the ‘date of filing of the application’ but from the date when such application is presented before the Adjudicating Authority i.e., ‘the date on which it is listed for admission/order
• In the appeal, NCLAT while considering various time lines under the Code, held that the time period of 14 days, within which NCLT is mandated to either admit or reject an application filed by Financial Creditor/Operational Creditor/Corporate Applicant, is only directory and not mandatory.

The time period of 14 days within which NCLT is mandated to either admit or reject application under section 7, 9 or 10 of the Code is DIRECTORY.

Question 3. Whether the time period of 180 days or 270 days (including 90 days extended period), provided under the Code for completion of CIRP is mandatory or directory?

Case element:

Case Name	J K Jute Mills Company Limited vs. M/s Surendra Trading Company
Operational Creditor	Surendra Trading Company
Corporate Debtor	J K Jute Mills Company Limited
Court	National Company Law Tribunal
Order Date	1st May, 2017
Appeal Against	NCLT, Allahabad Bench

The application was not decided by NCLT, Allahabad Bench, within the period of 14 days and hence, J K Jute filed an appeal contending that the NCLT had become functus officio. 

A. Factual Background:

• Legal Provisions:

Section 12. (1) Subject to sub-section (2), the corporate insolvency resolution process shall be completed within a period of one hundred and eighty days from the date of admission of the application to initiate such process.

Appeal filed in NCLAT after expiry of 14 days in Allahabad NCLT Bench.

B. Finding of Honourable Supreme Court:

Hon’ble NCLAT states that,

NCLAT observed that u/s 46: The resultant effect of non-completion of insolvency resolution process within the time limit of 180 days + extended period of 90 days i.e. total 270 days will result in to initiation of liquidation proceedings under section 33.

Failure to complete the CIRP within the above period of 180 days, unless extended by a onetime extendable period of 90 days, would entail liquidation of the Corporate Debtor under the provisions of the Code.

Thus, the time period of 180 days or 270 days (including 90 days extended period) for completion of CIRP is MANDATORY.

CONCLUSION:

On the basis of Judgement of Hon’ble Supreme Court and Hon’ble NCLAT  it can be conclude like this.

A. The period of 7 days notice period granted by NCLT to Financial Creditor, Operational Creditor, Corporate Applicant for curing defects in an application filed under section 7, 9 or 10 of the Code is Directory, subject to the rider above mentioned.

B. The time period of 14 days within which NCLT is mandated to either admit or reject application under section 7, 9 or 10 of the Code is DIRECTORY.

C. The time period of 180 days or 270 days (including 90 days extended period) for completion of CIRP is MANDATORY.

(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at [email protected])