M/S. Surendra Trading Company Vs. M/S. Juggilal Kamlapat Jute Mills Company Limited and Others

M/S. Surendra Trading Company Vs. M/S. Juggilal Kamlapat Jute Mills Company Limited and Others

By:- Rishi Saraf

IN THE SUPREME COURT OFINDIA
CITATION                         [2017] ibclaw.in 08 SC Civil Appeal No. 8400 of 2017
APPELLANT   M/S. Surendra Trading Company
RESPONDENT   M/S. Juggilal Kamlapat Jute Mills Company Limited and Others
JUDGMENT DATE  19-Sep-17
STATUTES/CONSTITUTION            INVOLVED/RELEVANT PROVISIONSInsolvency and bankruptcy code – Section 5(2) Rule 6 Section 7  section 8 sub-section(4) (5) of section 9 section 9 section 10 & 12 Order VIII, Rule 1 of CPC Companies Act 2013 Sick Industrial Companies (Special Provisions) Act, 1985 (repealed)
JUDGEA.K. SIKRI, J.
ISSUES RAISEDWhether time of 14 days given to NCLT for admitting or rejecting an application is mandatory or directory? Whether part of the NCLAT order justified? Whether the period of 7 days given to the applicant for rectifying the defects is mandatory or directory? Whether such a rejection would be treated as rejecting the application on merits thereby debarring the application from filing fresh application or it is to be treated as an administrative order?
IMPORTANCE OF JUDGMENTSupreme Court relaxes time period for rectifying defects in the application by holding that seven days time limit under Insolvency and Bankruptcy Code, 2016 for removal of defects in insolvency plea is not mandatory.

ABSTRACT

The Insolvency and Bankruptcy Code, 2016 was brought forward by the Government of India to hasten the process of insolvency resolution in India which in past took about an average of 4.3 years. This act was also implemented to deal with the massive amount of cases of non- performing loans of bank.

In this present case the Supreme Court decided that the condition of time limit provided under IBC, 2016 under section 9(5) and its proviso is only directly and not mandatory.

The present case analysis aims to scrutinize the background, facts, issues raised, and arguments on both sides and highlights concepts made in the case.

FACTS OF THE CASE

 In the present case, the operational creditor, Surendra Trading Company filed an application under Section 8 of the Insolvency And Bankruptcy Code against the corporate debtor, J.K Jute Mills Company Ltd, for a claim amounting to Rs. 17,06,766 “unpaid debt”. The application was filed without complying with Rule 6 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 which provides for certain perquisites which need to be completed while filing an application under Insolvency And Bankruptcy Code.

Thereafter, Surendra Trading Company was given a seven-day additional period to rectify the defect in the application in accordance to Section 9(5) of the Code which they failed to do within the requisite time and claimed that the time period under Section 9(5) is not mandatory. The NCLAT thereby held that the 7 day time period to remove the defects in the application is mandatory in nature and the 14 days time period to ascertain the existence of default is discretionary. The appeal was further filed to the Supreme Court.

ISSUES RAISED

  • Whether part of the NCLAT order justified?
  • Whether time of 14 days given to NCLT for admitting or rejecting an application is mandatory or directory?
  • Whether the period of 7 days given to the applicant for rectifying the defects is mandatory or directory?
  • Whether such a rejection would be treated as rejecting the application on merits thereby debarring the application from filing fresh application or it is to be treated as an administrative order?

 RELEVANT PROVISIONS –

SICA Sick Industrial Companies (Special Provisions) Act, 1985 (repealed)

INSOLVENC AND BANKRUPTCY CODE, 2016

Section 9: Application for initiation of corporate insolvency resolution process by operational creditor.

(ii) Reject the application and communicate such decision to the operational creditor and the corporate debtor, if—

IBC stipulates time limits for taking certain actions by either the operational creditor or adjudicating authority. As per section 9(1), an application can be filed after the expiry of a period of 10 days from the delivery of notice or invoice demanding payment, which is in tune with the provisions contained in section 8 that gives 10 days time to the corporate debtor to take any of the steps mentioned in section 8(2). As per section 9(5), once such an application is filed and received by the adjudicating authority, 14 days time is granted to the adjudicating authority to ascertain whether default on the part of the corporate debtor and operational creditor exists or not. In case the adjudicating authority, after the scrutiny of the application, finds that there are certain defects therein, the proviso to section 9(5) mandates that before rejecting the application, the adjudicating authority has to give notice to the applicant to rectify the defect in his application within 7 days of receipt of such notice

Order VIII, Rule 1 of CPC – According to Order–VIII Rule 1 CPC within 30 days of service of summons the defendant shall file his written-statement of defence. By the Code of Civil Procedure (Amendment) Act, 2002 this period of 30 days has been extended to 90 days by incorporating a proviso to Rule 1.

ARGUMENTS OF THE PETITIONERS

The appellant submitted before the apex court that in the instant case the defects which were pointed out in the NCLAT tribunal due to which application was rejected were not of the nature mentioned in the IB Code but were in terms of the Companies Act 2013.

The counsel for appellant argued that Section 9(5) of the Code did not apply in the instant case inasmuch as there has to be difference between ‘defective’ application and ‘incomplete’ application.

He also submitted that the respondent had been violating interim orders passed by BIFR in the proceedings pending before it under SICA.

It was also argued by the counsel of appellant that numbers of notices were sent to the creditor regarding the debt and the matter was pending under BIFR through SICA Act which was repealed due to enactment of the new act. Then he went further to explain the chronology of the events.

The counsel argued that Section 9(5) cannot be held mandatory relying on various case laws and citing that the purpose of the IBC is to hasten the process of  debt recovery not to eliminate the applicants with the strict time bound provisions.

ARGUMENTS BY THE RESPONDENTS

The Counsel appearing for respondent argued that the claim of appellant was earlier rejected by the tribunal as it was clearly violation of the provisions mentioned in the IBC. It was clearly mandated in the IBC in sub-section (5) of  Section 7 or proviso to sub-section (5) of Section 9  or proviso to sub-section (4) of Section 10  that appellant has to file an application within 7 days with corrections otherwise application would be rejected.

The council also argued that the application filed before the NCLT was defective The NCLAT has held that period of fourteen days prescribed for the adjudicating authority to pass such an order is directory in nature, whereas period of seven days given to the applicant/ operational creditor for rectifying the defects is mandatory in nature. 

The NCLAT relied on various judgments to reach its conclusion, it held issue one to be directory in nature but held issue two be mandatory.  It stated that sub-section (5) of section 7 and section (5) of section 9 or proviso to sub-section (4) of section 10 to remove the defect within 7 days are mandatory, and on failure applications are fit to be rejected.

JUDGMENT

The Supreme Court was worried about the validity of the NCLAT’s decision, which ruled that the 7-day time limit set forth in the proviso to section 9(5) of the IBC for accepting or rejecting a petition or initiating the insolvency resolution procedure is required.

The Hon’ble Apex Court has on numerous occasions interpreted the word ‘shall’ to mean ‘may’. It cited cases such as P.T. Rajan Vs. T.P.M. Sahir and Ors. (2003) 8 SCC 498, Garbari Union Co-operative Agricultural Credit Society Limited & Anr. V. Swapan Kumar Jana & Ors. (1997) 1 CHN 189), where it was held that the statutory obligations are directory and not mandatory.

Also the Apex Court relied on judgments [(1998) 4 SCC 543: AIR 1998 SC 1827] where it was rightly held that- A procedural law should not ordinarily be construed as mandatory; the procedural law is always subservient to and is in aid to justice. Any interpretation which eludes or frustrates the recipient of justice is not to be followed.

The Apex Court also relied on Order 8 Rule 1 CPC which provided for 30 days limit  and said that “it is to expedite and not to scuttle the hearing. The provision spells out a disability on the defendant. It does not impose an embargo on the power of the court to extend the time.”

The Supreme Court ruled that the NCLAT’s determination that a 7-day time limit is required without any reasonable reasoning. It went on to say that the 180-day deadline set forth in the IBC for completing the resolution procedure could not be used to support NCLAT’s decision because the 180-day deadline begins on the date the application is accepted. Prior to that, time spent scrutinising the application, correcting flaws in the application, or NCLT admitting the application, among other things, cannot be considered. It is not to be considered as a legally submitted application unless the objections are withdrawn. Only once the application is complete in every way is it allowed to be considered. It was noted that there might be significant, reasonable, and justifiable grounds for not being able to remove the flaws within seven days in a specific situation. As a result, the Court determined that the clause requiring the removal of faults within seven days is advisory rather than required.

To prevent abuse, the Court mandated that each request for a time extension be considered in a balanced manner. If the objections are not eliminated within seven days, the applicant must file a written application while refilling the application after eliminating the objections, demonstrating adequate cause for why the applicant was unable to remove the objections within seven days. If the NCLT is pleased with the cause, the application can be considered; otherwise, it must be denied.

The part of the impugned judgment of NCLAT was set aside which makes it as mandatory to remove the defects within seven days

CONCLUSION

As we all know IBC is just a 5 year old provision and from time to time various amendments and judgments giving it a shape. The present judgment discussed is an important judgment as it discussed the crucial provision of IBC.

The statutory system establishing time restrictions provides a clear message that time is the core of the Code, as NCLAT has correctly said. As a result, the Code has established stringent deadlines, making it one of the most meticulous laws in the country and reflecting the legislature’s goal of making India a more efficient judicial forum.

It should be well noted that someone cannot be denied justice only because it has not performed its obligation within time frame.

REFERENCES

AUTHOR –  RISHI SARAF, 1ST YEAR STUDENT AT NATIONAL LAW UNIVERSITY ODISHA, BALLB HONS.

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