2017 (9) TMI 1566 - SC - Insolvency and Bankruptcy

Time limit for initiation of insolvency resolution process - Insolvency Bankruptcy Code, 2016 - Application for initiation of corporate insolvency resolution process by operational creditor - whether time of fourteen days given to the adjudicating authority for ascertaining the existence of default and admitting or rejecting the application is mandatory or directory? - Held that - 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. We are not able to decipher any valid reason given while coming to the conclusion that the period mentioned in proviso is mandatory. The order of the NCLAT, thereafter, proceeds to take note of the provisions of Section 12 of the Code and points out the time limit for completion of insolvency resolution process is 180 days, which period can be extended by another 90 days. It is to be borne in mind that limit of 180 days mentioned in Section 12 also starts from the date of admission of the application. Period prior thereto which is consumed, after the filing of the application under Section 9 (or for that matter under Section 7 or Section 10), whether by the Registry of the adjudicating authority in scrutinising the application or by the applicant in removing the defects or by the adjudicating authority in admitting the application is not to be taken into account. In fact, till the objections are removed it is not to be treated as application validly filed inasmuch as only after the application is complete in every respect it is required to be entertained. In this scenario, making the period of seven days contained in the proviso as mandatory does not commend to us. No purpose is going to be served by treating this period as mandatory. In a given case there may be weighty, valid and justifiable reasons for not able to remove the defects within seven days. 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. 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. In fine, these appeals are allowed and that part of the impugned judgment of NCLAT which holds proviso to sub-section (5) of Section 7 or proviso to sub-section (5) of Section 9 or proviso to sub-section (4) of Section 10 to remove the defects within seven days as mandatory and on failure applications to be rejected, is set aside.

Summary

Issues Involved:
1. Whether the time limit prescribed in the Insolvency and Bankruptcy Code, 2016 for admitting or rejecting a petition or initiation of insolvency resolution process is mandatory.
2. Whether the period of seven days for rectifying defects in the application under Section 9 of the Insolvency and Bankruptcy Code, 2016 is mandatory or directory.

Detailed Analysis:

Issue 1: Time Limit for Adjudicating Authority
The National Company Law Appellate Tribunal (NCLAT) held that the fourteen-day period prescribed for the adjudicating authority to pass an order under sub-section (5) of Section 9 for admitting or rejecting the application is directory in nature. The rationale provided includes:

- Statutory Function: The NCLAT referred to the principle that where a statutory functionary is asked to perform a statutory duty within a prescribed time, it is generally considered directory and not mandatory.
- Case Law: The NCLAT cited Supreme Court judgments, such as P.T. Rajan v. T.P.M. Sahir and Ors. (2003) and Kailash v. Nanhku (2005), which support the view that procedural provisions, even when worded with "shall," can be interpreted as directory if no prejudice is caused.
- Procedural Nature: The NCLAT emphasized that the fourteen-day period is procedural and aims to expedite justice rather than scuttle it. Therefore, the adjudicating authority can admit or reject the application beyond the prescribed period if justified.

Issue 2: Seven-Day Period for Rectifying Defects
The NCLAT held that the seven-day period for rectifying defects in the application under Section 9 is mandatory. However, the Supreme Court disagreed with this conclusion, providing a detailed analysis:

- Pre-Adjudication Stage: The Supreme Court noted that the seven-day period pertains to a pre-adjudication stage, where the application is scrutinized for completeness. This stage does not impact the insolvency resolution process directly.
- Purpose of the Provision: The Court emphasized that the purpose of the seven-day period is to ensure applications are complete before being entertained. Making this period mandatory would serve no practical purpose and could lead to unjust rejections without merit-based consideration.
- Administrative vs. Merits: The Court questioned whether rejection for not rectifying defects within seven days should be treated as an administrative order or a decision on merits. It concluded that treating it as mandatory would unjustly bar applicants from re-filing, even if their case has merit.
- Balanced Approach: The Court proposed a balanced approach, allowing applicants to show sufficient cause for delays in rectifying defects. The adjudicating authority can then decide whether to entertain the application based on the reasons provided.

Conclusion:
The Supreme Court held that the fourteen-day period for the adjudicating authority to pass an order under Section 9 is directory, not mandatory. Similarly, the seven-day period for rectifying defects in the application is also directory. However, applicants must show sufficient cause for delays in rectifying defects, and the adjudicating authority has the discretion to accept or reject the application based on the reasons provided.

Judgment:
The appeals were allowed, and the NCLAT's decision that the seven-day period for rectifying defects is mandatory was set aside. No costs were awarded.