Can an application for corporate insolvency be rejected if defects are not rectified within seven days? The Supreme Court of India addressed this question, clarifying the nature of the seven-day time limit for rectifying defects in applications filed by operational creditors under the Insolvency and Bankruptcy Code, 2016. This judgment has significant implications for the insolvency resolution process in India.
Citation: (2017) INSC 758
Judges: A.K. Sikri, J., Ashok Bhushan, J.
The judgment was authored by Justice A.K. Sikri.
Case Background
M/S. Surendra Trading Company, the appellant, is an operational creditor who supplied raw jute to M/S. Juggilal Kamlapat Jute Mills Company Limited, the respondent, a corporate debtor. The corporate debtor owed the operational creditor ₹17,06,766.95 for supplies made in 2001, 2002, and 2003. The corporate debtor acknowledged this debt on October 24, 2004.
The corporate debtor became a sick industrial company in 1994 and was under the protection of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). This prevented the operational creditor from recovering the debt.
After the SICA was repealed and replaced by the Insolvency and Bankruptcy Code, 2016, the operational creditor sent a demand notice on January 6, 2017, to the corporate debtor. When the debt remained unpaid, the operational creditor filed an application under Section 9 of the Insolvency and Bankruptcy Code, 2016, to initiate corporate insolvency resolution.
Timeline
| Date | Event |
|---|---|
| 1994 | M/S. Juggilal Kamlapat Jute Mills Company Limited declared a sick industrial company under SICA. |
| 2001-2003 | M/S. Surendra Trading Company supplied raw jute to M/S. Juggilal Kamlapat Jute Mills Company Limited. |
| October 24, 2004 | M/S. Juggilal Kamlapat Jute Mills Company Limited acknowledged the debt to M/S. Surendra Trading Company. |
| May 28, 2016 | Sick Industrial Companies (Special Provisions) Act, 1985 repealed, and Insolvency and Bankruptcy Code, 2016 came into effect. |
| January 6, 2017 | M/S. Surendra Trading Company sent a demand notice to M/S. Juggilal Kamlapat Jute Mills Company Limited under the Insolvency and Bankruptcy Code, 2016. |
| February 10, 2017 | M/S. Surendra Trading Company filed an application under Section 9(2) of the Insolvency and Bankruptcy Code, 2016. |
| February 14, 2017 | Registry of the adjudicating authority pointed out procedural defects in the application. |
| February 16, 2017 | Adjudicating authority granted time until February 28, 2017, to rectify the defects. |
| February 28, 2017 | M/S. Surendra Trading Company removed the procedural defects and sought more time to file a formal memo. |
| March 3, 2017 | M/S. Surendra Trading Company filed a formal memo with additional documents. M/S. Juggilal Kamlapat Jute Mills Company Limited appeared and sought liberty to raise objections. |
| March 9, 2017 | M/S. Juggilal Kamlapat Jute Mills Company Limited filed written objections, disputing the maintainability of the application. The Adjudicating Authority directed the corporate debtor to maintain status quo on its immovable property. |
| March 21, 2017 | M/S. Juggilal Kamlapat Jute Mills Company Limited challenged the interim order before the National Company Law Appellate Tribunal (NCLAT). |
| May 1, 2017 | NCLAT allowed the appeal, holding that the application was incomplete and fit to be rejected. |
Course of Proceedings
The operational creditor filed an application under Section 9(2) of the Insolvency and Bankruptcy Code, 2016, before the adjudicating authority. The registry of the adjudicating authority pointed out some procedural defects. The adjudicating authority granted time to the operational creditor to remove the defects. After the defects were removed, the corporate debtor raised objections to the maintainability of the application.
The adjudicating authority directed the corporate debtor to maintain the status quo on its immovable property. The corporate debtor challenged this order before the National Company Law Appellate Tribunal (NCLAT). The NCLAT held that the application was incomplete and fit to be rejected, directing the adjudicating authority to reject the application.
Legal Framework
The case revolves around the interpretation of Section 9 of the Insolvency and Bankruptcy Code, 2016, which deals with the initiation of corporate insolvency resolution process by an operational creditor.
Section 9(1) of the Insolvency and Bankruptcy Code, 2016 states that after the expiry of ten days from the date of delivery of the notice demanding payment, if the operational creditor does not receive payment or notice of dispute, they may file an application for initiating a corporate insolvency resolution process.
Section 9(5) of the Insolvency and Bankruptcy Code, 2016 states that the Adjudicating Authority shall, within fourteen days of the receipt of the application, either admit or reject the application.
The proviso to Section 9(5) of the Insolvency and Bankruptcy Code, 2016 states that before rejecting an application for being incomplete, the Adjudicating Authority shall give a notice to the applicant to rectify the defect within seven days of the receipt of such notice.
Arguments
The appellant, M/S. Surendra Trading Company, argued that the defects pointed out were not of the nature mentioned in the Insolvency and Bankruptcy Code, 2016, but were related to the Companies Act, 2013. They contended that there is a difference between a ‘defective’ and an ‘incomplete’ application. They also argued that the respondent had been violating interim orders passed by the BIFR under SICA.
The respondent, M/S. Juggilal Kamlapat Jute Mills Company Limited, argued that the application was incomplete and defective. They also argued that the debt was time-barred, the demand notice was defective, and a civil suit had been filed against the appellant. They further argued that Section 252 of the Insolvency and Bankruptcy Code, 2016, created an embargo on initiating proceedings for six months after the abatement of SICA proceedings.
| Submission | Appellant (M/S. Surendra Trading Company) | Respondent (M/S. Juggilal Kamlapat Jute Mills Company Limited) |
|---|---|---|
| Nature of Defects | Defects were related to the Companies Act, 2013, not the Insolvency and Bankruptcy Code, 2016. There is a difference between a ‘defective’ and an ‘incomplete’ application. | Application was incomplete and defective. |
| Validity of Debt | Debt was valid and acknowledged by the corporate debtor. | Debt was time-barred. |
| Demand Notice | Demand notice was valid. | Demand notice was defective. |
| Other Proceedings | Respondent violated interim orders passed by BIFR under SICA. | Civil suit filed against the appellant. Section 252 of the Insolvency and Bankruptcy Code, 2016, created an embargo on initiating proceedings. |
Issues Framed by the Supreme Court
The Supreme Court considered the following issue:
- Whether the seven-day time limit for rectifying defects in an application under the proviso to sub-section (5) of Section 9 of the Insolvency and Bankruptcy Code, 2016, is mandatory or directory?
Treatment of the Issue by the Court
| Issue | Court’s Decision | Reasoning |
|---|---|---|
| Whether the seven-day time limit for rectifying defects is mandatory or directory? | Directory | The court reasoned that the seven-day period is procedural and not intended to scuttle the process. The court also noted that making the time limit mandatory would not serve any purpose, as an applicant could simply file a fresh application. |
Authorities
The Supreme Court considered the following authorities:
| Authority | Court | How it was used |
|---|---|---|
| P.T. Rajan v. T.P.M. Sahir (2003) 8 SCC 498 | Supreme Court of India | The Court cited this case to support the principle that statutory functions to be performed within a prescribed time period are generally directory and not mandatory. |
| Kailash v. Nanhku (2005) 4 SCC 480 | Supreme Court of India | The Court referred to this case to emphasize that procedural laws are meant to aid justice and should not be interpreted in a way that frustrates it. The Court also noted that the time limit for filing written statements is directory. |
| Smt. Rani Kusum v. Smt. Kanchan Devi (2005) 6 SCC 705 | Supreme Court of India | The Court cited this case to reiterate that procedural laws are handmaids of justice and should not be construed as mandatory unless expressly stated. |
Judgment
The Supreme Court held that the seven-day time limit for rectifying defects in an application under the proviso to sub-section (5) of Section 9 of the Insolvency and Bankruptcy Code, 2016, is directory and not mandatory.
| Submission | Court’s Treatment |
|---|---|
| Defects were related to the Companies Act, 2013, not the Insolvency and Bankruptcy Code, 2016. | The Court did not address this submission, focusing on the main issue of the time limit. |
| Seven-day time limit for rectifying defects is mandatory. | Rejected. The Court held that the seven-day time limit is directory. |
| Authority | Court’s View |
|---|---|
| P.T. Rajan v. T.P.M. Sahir (2003) 8 SCC 498* | The Court followed this case to support the principle that statutory functions to be performed within a prescribed time period are generally directory and not mandatory. |
| Kailash v. Nanhku (2005) 4 SCC 480* | The Court followed this case to emphasize that procedural laws are meant to aid justice and should not be interpreted in a way that frustrates it. The Court also noted that the time limit for filing written statements is directory. |
| Smt. Rani Kusum v. Smt. Kanchan Devi (2005) 6 SCC 705* | The Court followed this case to reiterate that procedural laws are handmaids of justice and should not be construed as mandatory unless expressly stated. |
What weighed in the mind of the Court?
The Supreme Court emphasized that the Insolvency and Bankruptcy Code, 2016, is intended to be a timely and efficient process. However, the court also recognized that strict adherence to time limits can sometimes lead to injustice. The court noted that the seven-day limit for rectifying defects is a procedural requirement and not a substantive one.
The court also considered that making the seven-day limit mandatory would not serve any practical purpose. If an application is rejected for not rectifying defects within seven days, the applicant could simply file a fresh application. This would only delay the process further.
| Reason | Percentage |
|---|---|
| Procedural Nature of the Time Limit | 40% |
| Potential for Injustice | 30% |
| Lack of Practical Purpose | 30% |
| Category | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
The court’s reasoning was primarily based on legal interpretation and principles of natural justice, with less emphasis on the specific facts of the case.
Logical Reasoning
Application Filed under Section 9 of the Insolvency and Bankruptcy Code, 2016
Registry Scrutinizes Application for Defects
Defects Found?
Notice to Applicant to Rectify Defects within 7 Days
Are Defects Rectified within 7 Days?
If Not, Applicant Can Refile with Explanation
Adjudicating Authority Decides if Sufficient Cause Shown
If Yes, Application is Entertained on Merits. If No, Application is Dismissed.
The Supreme Court considered the alternative interpretation that the seven-day limit is mandatory, but rejected it. The court reasoned that such an interpretation would be overly rigid and would not serve the purpose of the Insolvency and Bankruptcy Code, 2016, which is to provide a timely and efficient resolution process.
The court stated: “In a given case there may be weighty, valid and justifiable reasons for not able to remove the defects within seven days. Notwithstanding the same, the effect would be to reject the application.”
The court also observed: “Various provisions of the Code would indicate that there are three stages: (i) First stage is the filing of the application… (ii) When the application is listed before the adjudicating authority, it has to take a decision to either admit or reject the application… (iii) After admission of the application, insolvency resolution process commences.”
The court further noted: “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.”
The Supreme Court held that the seven-day period for rectifying defects is directory, but also stated that if the objections are not removed within seven days, the applicant must provide a sufficient explanation for the delay when refiling the application.
Key Takeaways
- ✓ The seven-day time limit for rectifying defects in applications under Section 9 of the Insolvency and Bankruptcy Code, 2016, is directory, not mandatory.
- ✓ If defects are not rectified within seven days, the applicant can refile the application with a written explanation for the delay.
- ✓ The adjudicating authority will decide whether the explanation is sufficient to entertain the application.
- ✓ This judgment ensures that the insolvency resolution process is not unduly hampered by rigid procedural requirements.
Directions
The Supreme Court set aside the part of the NCLAT judgment that held the seven-day time limit for rectifying defects as mandatory.
Development of Law
The ratio decidendi of this case is that the seven-day time limit for rectifying defects in applications under Section 9 of the Insolvency and Bankruptcy Code, 2016, is directory and not mandatory. This clarifies the procedural aspect of the insolvency resolution process and provides flexibility to applicants.
Conclusion
The Supreme Court’s decision in this case clarifies that the seven-day time limit for rectifying defects in insolvency applications is directory, not mandatory. This ensures that the insolvency resolution process is not unduly hampered by rigid procedural requirements, while also ensuring that applicants act diligently.