Provisions of IBC Law:

IBC stipulates time limits for taking certain actions by either the operational creditor or adjudicating authority. As per section 9(1), application can be filed after the expiry of 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 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 a notice to the applicant to rectify the defect in his application within 7 days of receipt of such notice.

Case Laws:

In P.T. Rajan Vs. T.P.M. Sahir and Ors(2003) 8 SCC 498, the Hon’ble SC observed that where Adjudicating Authority has to perform a statutory function like admitting or rejecting an application within a time period prescribed, the time period would have to held to be directory and not mandatory. In the said case, Hon’ble Apex Court observed:

“48. It is well-settled principle of law that where a statutory functionary is asked to perform a statutory duty within the time prescribed therefore, the same would be directory and not mandatory.

49. Furthermore, a provision in a statute which is procedural in nature although employs the word “shall” may not be held to be mandatory if thereby no prejudice is caused.”

 

In Smt. Rani Kusum v. Smt. Kanchan Devi (2005) 6 SCC 705, the Hon’ble SC concurring with the ratio laid down in Kailash v. Nanhku and Ors (2005) 4 SCC 480 held-

“10. All the rules of procedure are the handmaid of justice. The language employed by the draftsman of processual law may be liberal or stringent, but the fact remains that the object of prescribing procedure is to advance the cause of justice. In an adversarial system, no party should ordinarily be denied the opportunity of participating in the process of justice dispensation. Unless compelled by express and specific language of the statute, the provisions of CPC or any other procedural enactment ought not to be construed in a manner which would leave the court helpless to meet extraordinary situations in the ends of justice

13. 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.”

Facts of the case:

In the present case, the Appellant (Operational creditor) filed an application under Section 8 of the IBC against the Respondent (Corporate debtor) 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 IBC. Thereafter, the Appellant was given a seven-day additional period to rectify the defect in the application in accordance to Section 9(5) of IBC which they failed to do within the requisite time and claimed that the time period under Section 9(5) is not mandatory.

Issue before NCLAT:

(i) Whether time of 14 days given to NCLT for admitting or rejecting an application is mandatory or directory?

(ii) Whether the period of 7 days given to the applicant for rectifying the defects is mandatory or directory?

 

NCLAT Verdict:

The NCLAT held that period of 14 days prescribed for NCLT to pass such an order is directory in nature, whereas period of seven days given to the applicant for rectifying the defects is mandatory in nature. NCLAT was of the view that the time period of 14 days given to NCLT for accepting or rejecting an application is procedural in nature and cannot be treated to be a mandate of law. NCLAT further held that 14 days time period is to be counted not from the date of filing an application but 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. However, NCLAT concluded that the time period of 7 days for rectifying the defect is mandatory and no specific rationale had been given for this conclusion. The appeal to the Supreme Court was filed against this conclusion of NCLAT that 7 days time period is mandatory.

 

Issue before Supreme Court:

SC was concerned with the correctness of the order passed by the NCLAT whereby it was held that the time of 7 days prescribed in proviso to section 9(5) of IBC for admitting or rejecting a petition or initiation of insolvency resolution process, is mandatory in nature.

 

Supreme Court’s Verdict:

The Supreme Court held that it couldn’t find any valid rationale in the conclusion of NCLAT that 7 days time period is mandatory. It further observed that the time period of 180 days given in IBC for completion of the resolution process cannot be a valid ground to justify the conclusion of NCLAT because the period of 180 days commence from the date of admission of application. Period prior to that, such as time consumed for scrutinising the application, rectifying defects in the application or NCLT admitting the application etc cannot be taken into account. Till the objections are removed, it is not to be treated as application validly filed. Only after the application is complete in every respect, the same is required to be entertained. It observed that in a given case there might be weighty, valid and justifiable reasons for not able to remove the defects within seven days. Accordingly, the Court held that provision of removing the defects within 7 days is directory and not mandatory in nature.

To avoid misuse, the Court directed that a balance approach need to be taken while considering any request for extension of time. If the objections are not removed within 7 days, the applicant while refilling the application after removing the objections, file an application in writing showing sufficient cause as to why the applicant could not remove the objections within seven days. Once the NCLT is satisfied with the cause it can entertain the application; otherwise, the application needs to be rejected.

 

Acelegal Analysis :

• · The timelines under Section 7(5), 9(5) and 10(4) to remove the defects in the insolvency application within seven days is discretionary and not mandatory in nature, in cases where an application in writing shows sufficient case as to why the applicant could not remove the objections within 7 days, the court may extend the time period instead of directly rejecting the application under IBC.

  · In order to calculate the 7 day period under Section 7, 9 and 10, to remove the defects in the insolvency application the holidays such as Saturday, Sunday and other holidays to be excluded.

  · The timeline of 14 days to ascertain the existence of a default from the records of an information utility under IBC whereby, the adjudicating authority has to admit or reject the application, are directory in nature and the same is to be calculated from the date of receipt of application by the court and not from the acceptance of application.

  · The term of the interim resolution professional, for managing the affairs of the company until the appointment of resolution professional, shall not exceed 30 days as provided in Section16(5) of IBC.

  · The limit of 180 days, which is extendable further in certain cases up to 90 days, for the completion of insolvency resolution process starts from the admission of the application for the resolution process