Case: M/s. Surendra Trading Company Vs. M/s. Juggilal Kamlapat Jute Mills Company Limited &amp; Others

1.Permission to file the appeal is granted and delay condoned in Diary No. 22835 of 2017.2. Though this case has a past history as well, in the instant appeal, we are concerned with the correctness of the order dated May 01, 2017 passed by the National Company Law Appellate Tribunal (hereinafter referred to as, the `NCLAT) whereby it is held that the time of seven days prescribed in proviso to(5) of Section 9 of the Insolvency and Bankruptcy Code, 2016 (for short, the `Code) is mandatory in nature and if the defects contained in the application filed by the `operational creditor for initiating corporate insolvency resolution against a corporate debtor are not removed within seven days of the receipt of notice given by the adjudicating authority for removal of such objections, then such an application filed under Section 9 of the Code is liable to be rejected. The precise question of law which was framed by the NCLAT for its decision is to the followingthe time limit prescribed in Insolvency & Bankruptcy Code, 2016 (hereinafter referred to as Code 2016) for admitting or rejecting a petition or initiation of insolvency resolution process isBefore the enactment of the Code, the relevant legislation dealing with such subject matters was the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as `SICA). Under this Act, an industrial undertaking, on becoming sick (i.e. where its net worth got eroded), could file a reference under Section 15(1) of SICA, before the Board for Industrial and Financial Reconstruction (for short, `BIFR) constituted under SICA. BIFR, on admitting such a reference, was supposed to undertake the exercise whether such a sick company can be revived or not. For this purpose, BIFR would appoint an Operating Agency (OA) which was supposed to explore the possibility of revival plan in consultation with the other stakeholders, particularly the creditors. If such reconstruction/revival scheme prepared by the OA was found to be feasible by the BIFR, after ascertaining the views/objections of the concerned parties, BIFR would sanction such a scheme. If that was not possible, BIFR would recommend winding up of sick company by making reference in this behalf to the jurisdictional High Court. There was a provision of appeal before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR). This scheme is stated in brief for the purposes of clarity of the matter though we are not concerned with any of the provisions of SICA. Another aspect which needs to be mentioned is that on admitting the reference, all other legal proceedings by creditors or other persons initiated against the said sick industrial company had to be put on hold by virtue of the protection granted under Section 22(1) of SICA.11. Respondent No.1 herein, namely, Juggilal Kamlapat Jute Mills Company Limited, became a sick industrial company in the year 1994 and because of this reason it filed its reference under Section 15(1) of SICA. It was declared as a sick industrial company by the BIFR on December 16, 1994 as a result whereof it came under the protective umbrella of Section 22(1) of SICA. According to the appellant (who is the operational creditor in this case), which is a jute trader, it had supplied raw jute to respondent No.1 (the corporate debtor) in the years 2001, 2002 and 2003 in respect of which the corporate debtor owned a sum ofRs. 17,06,766.95 p. Further, according to the operational creditor, the corporate debtor had issued Certificate dated October 24, 2004 acknowledging the aforesaid debt. However, it was not in a position to recover this debt because of the pendency of proceedings which resulted in stay of proceedings in view of Section 22(1) of SICA. In the year 2007, one Kolkata based company, known as Rainey Park Suppliers Private Limited (hereinafter referred to as `Rainey Park), invested in corporate debtor and took over its management from its erstwhile promoters, i.e. J.K. Singhania Group. The operational creditor had sent notices to Rainey Park to pay the aforesaid amount. However, it was not paid. Legal notices were also sent and applications were also filed before the BIFR in this behalf. It led to various events which are not required to be mentioned for the sake of brevity. Fact remains that the aforesaid debt was not honoured or liquidated by the corporate debtor or Rainey Park. While the matter was pending with BIFR, Sick Industrial Companies Repeal Act was passed on the enactment of the Code with effect from May 28, 2016. Resultantly, all proceedings before BIFR and AAIFR stood abated. With this embargo, Section 22(1) of SICA also vanished.12. In these changed circumstances, the operational creditor served another demand notice dated January 06, 2017, in the statutory format prescribed under the Code, upon the corporate debtor calling up it to pay the outstanding dues. As it was not paid, the operational creditor filed application for initiation of corporate insolvency resolution process under Section 9 o the Act. The chronology of events which took place from the date of filing of the said application till the passing of the impugned order by the NCLAT are mentioned hereinappellant filed the application under Section 9(2) of the Code, being CP No. 10/ALD/2017, before the adjudicating authority under the Code.14.02.2017The registry of the adjudicating authority pointed out some procedural defects on the basis of the check list prepared for scrutiny of the petition/application/ appeal/reply as per Order No. 25/2/2016NCLT dated 28.07.2016 and listed the application for hearing before the adjudicating authority on 16.02.2017.16.02.2017The adjudicating authority granted time to the appellant for removal of the said procedural defects on 28.02.2017 and also wanted to know about the stage of the proceedings before BIFR when the proceedings stood abated.28.02.2017The appellant removed the procedural defects. As inquired by the adjudicating authority, the appellants counsel sought for some more time for filing formal memo by providing/furnishing the latest order passed by BIFR before the Code came into force.03.03.2017The appellant filed its formal memo/additional documents/orders arising in/out of the pending BIFRs proceedings which stood abated. On 03.03.2017, the respondent No. 1 debtor appeared before the Adjudicating Authority and sought liberty to raise its objections qua the maintainability of the application.09.03.2017The Corporate debtor/respondent No.1 company filed its written objections before the Adjudicating Authority disputing the maintainability of the application filed on various grounds like time barred debt; the defective demand notice; civil suit filed against the appellant being Civil Suit No. 225 of 2017 before the District Court and embargo created by Section 252 of the IB Code, 2016 the proceedings cannot be initiated for a period of six months after abatement of SICA.One JK Jute Mill Mazdoor Morcha, Kanpur i.e. respondent No. 2 herein moved an application seeking intervention in the mater and brought on record various orders including the judgment dated 13.11.2014 passed by this Court in the matter of Ghanshyam Sarda v. Shiv Shankar Trading Company & Ors., reported in 2015(2) S.C.T. 24 : (2015) 1 SCC 298 wherein this Court has found that the sale of assets without BIFRs permission as questionable before the BIFR and also an order dated 18.11.2016 passed by this Court in the case of Ghanshyam Sarda v. Sashikant Jha, 2017(1) R.C.R.(Civil) 1 : 2016(4) R.C.R.(Criminal) 895 : 2016(6) Recent Apex Judgments (R.A.J.) 552 : (i.e. contempt petition (civil) No. 338 of 2014), wherein the Director(s) of the corporate debtor i.e. respondent No. 1 have been held guilty of contempt. It is also said that the corporate debtor i.e. respondent No. 1 also failed to clear the legitimate dues of the workmen of jute mill which are worth more than 100 crores in rupees.09.03.2017In light of the foregoing scenario, the Adjudicating Authority for providing substantial justice inter alia directed the respondent No. 1/Corporate Debtor to maintain status quo in respect of its immovable property until further orders.21.03.2017The interim order passed by the Adjudicating Authority, Allahabad Bench on 09.03.2017 was challenged by the respondent No. 1/Corporate Debtor under Section 61 of the IB Code, 2016 before the National Company Law Appellate Tribunal (NCLAT) being Company Appeal No. 9 of 2017. The NCLAT on 21.03.2017 issued notice in the said appeal inter alia observing that question of law is involved in this case and directing the Adjudicating Authority not to admit the application filed under the IB Code, 2016 by the appellant.01.05.2017The NCLAT has allowed the AT No. 09/2017 on the ground that the application and Section 9 petition filed by appellant herein was incomplete, defected and was fit to be rejected. Hence, the NCLAT was pleased to direct NCLT to reject and close the application filed by the appellant under Section 9 of the IB Code, 2016 passed in the impugned order inter alia rejecting the application filed by the appellant under Section 9 of the IB Code, 2016 read with IB (Application to Adjudicating Authority) Rules, 2016 being CP No. (IB)10/ALD/

Reasoning: 4. A reading of the aforesaid provision would reflect that time limits for taking certain actions by either the operational creditor or adjudicating authority are mentioned therein. As per(1) of Section 9, application can be filed after the expiry of period of ten days from the delivery of notice or invoice demanding payment, which is in tune with the provisions contained in Section 8 that gives ten days time to the corporate debtor to take any of the steps mentioned in(2) of Section 8. As per(2) of Section 9, the operational creditor is supposed to file an application in the prescribed form and manner which needs to be accompanied by requisite/prescribed fee as well.(3) puts an obligation on the part of the operational creditor to furnish the information stipulated therein.As mentioned above, insofar as prescription of fourteen days within which the adjudicating authority has to pass an order under(5) of Section 9 for admitting or rejecting the application is concerned, the NCLAT has held that the same cannot be treated as mandatory. Though this view is not under challenge (and rightly so), discussion in the impugned order on this aspect has definite bearing on the other question, with which this Court is concerned. Therefore, we deem it apposite to discuss the rationale which is provided by the NCLAT itself in arriving at the aforesaid conclusion insofar as first aspect isis a slight difference in these provisions insofar as criteria for admission or rejection of the applications filed under respective provisions is concerned. However, it is pertinent to note that after the admission of the insolvency resolution process, the procedure to deal with these applications, whether filed by the financial creditor or operational creditor or corporate applicant, is the same. It would be relevant to glance through this procedure.The aforesaid statutory scheme laying down time limits sends a clear message, as rightly held by the NCLAT also, that time is the essence of the Code. Notwithstanding this salutary theme and spirit behind the Code, the NCLAT has concluded that as far as fourteen days time provided to the adjudicating authority for admitting or rejecting the application for initiation of insolvency resolution process is concerned, this period is notthe Registry is required to find out whether the application is in proper form and accompanied with such fee as may be prescribed, it will take some time in examining the application and, therefore, fourteen days period granted to the adjudicating authority under the aforesaid provisions would be 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.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. However, that can hardly provide any justification to construe the provisions of proviso to(5) of Section 9 in the manner in which it is done. It is to be borne in mind that limit of 180 days mentioned in Section 12 also starts from the date of admission of thefact, 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. Notwithstanding the same, the effect would be to reject the application.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(5) of Section 7, Section 9 or(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.24. 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.25. We are also conscious of the fact that sometimes applicants or their counsel may show laxity by not removing the objections within the time given and make take it for granted that they would be given unlimited time for such a purpose. There may also be cases where such applications are frivolous in nature which would be filed for some oblique motives and the applicants may want those applications to remain pending and, therefore, would not remove the defects. In order to take care of such cases, a balanced approach is needed. Thus, while interpreting the provisions to be directory in nature, at the same time, it can be laid down that if the objections are not removed within seven days, the applicant while refilling the application after removing the objections, file an application in writing showing sufficient case as to why the applicant could not remove the objections within seven days. When such an application comes up for admission/order before the adjudicating authority, it would be for the adjudicating authority to decide as to whether sufficient cause is shown in not removing the defects beyond the period of seven days. Once the adjudicating authority is satisfied that such a case is shown, only then it would entertain the application on merits, otherwise it will have right to dismiss the application.