Supreme Court Rules that the Timelines for Adjudication under the Bankruptcy Code are Directory

[Guest post by Aayush Mitruka, a lawyer based in Delhi.]

Last month, the Supreme Court delivered a significant judgment under the Insolvency and Bankruptcy Code, 2016 (the “Code”) in M/s Surendra Trading Co. v. JK Jute Mills Co. Ltd & others and settled some vexed issues which were of considerable importance. The facts of the case do not merit a mention for the purposes of the present discussion and therefore, for the sake of brevity, omitted. 

Two important questions were considered by the court, viz., whether the time limit prescribed in the Code for admitting / rejecting an insolvency application is mandatory or directory, and similarly whether the 7 days’ timeframe as provided for curing the defect is mandatory or directory. The court extensively examined this question of timeliness and provided authoritative answers.

Notably, the corporate insolvency resolution process can be initiated by a financial creditor under section 7, by the operational creditor under section 9, and by a corporate applicant under section 10 of the Code. The Code prescribes a time limit of 14 days for admission / rejection of the application. However, before rejecting an application, the Adjudicating Authority (i.e., the National Company Law Tribunal) is required to provide the applicant 7 days’ time to rectify any defects in her application. Besides, the Code provides for other time lines for appointment of the interim resolution professional (the “IRP”), her tenure, completion of insolvency resolution process, etc.

Prior to discussing the Supreme Court decision, it will be valuable to have a quick recap of the impugned order of the National Company Law Appellate Tribunal (the “Appellate Tribunal”) in the abovementioned case. The Appellate Tribunal, after considering the relevant provisions of the Code, concluded that time was of the essence of the Code. (Pertinently, the Supreme Court in the decision of Innoventive Industries Ltd. v. ICICI Bank Ltd. also highlighted that time was of the essence of the Code and must be adhered to.) It held that the 14 day-period was directory since the provisions were procedural in nature. The Appellate Tribunal placed heavy reliance on judicial precedents pertaining to procedural timelines under the Civil Procedure Code. Additionally, it was clarified that the 14 days’ time-period is to be reckoned from the date when the application is presented before the Adjudicating Authority and not from the ‘date of receipt of the application.’ On the other hand, the 7 days’ time provided for rectifying the defect was held to be mandatory. The reason for such a distinction, however, is not very discernible from the decision. The Appellate tribunal, while arriving at its conclusion, observed the following:

43. Thus, in view of the aforementioned unambiguous position of law laid down by the Hon’ble Apex Court and discussion as made above, we hold that the mandate of sub-section (5) of section 7 or sub-section (5) of section 9 or sub-section (4) of section 10 is procedural in nature, a tool of aid in expeditious dispensation of justice and is directory.

44. However, the 7 days’ period of rectification of defects as stipulated under proviso to the relevant provisions as noticed above is required to be complied with the corporate debtor whose application, otherwise, being incomplete is fit to be rejected. In this background we hold that the 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 defect within 7 days are mandatory, and on failure applications are fit to be rejected.

[Emphasis supplied]

From the aforesaid, it appears that the Appellate Tribunal brought out a distinction without any discussion and cogent reasoning. The order of the Appellate Tribunal was assailed before the Supreme Court on the sole aspect of whether the Appellate Tribunal was correct in finding that the seven days’ cure period was mandatory. Incidentally, the Court also delved into the question pertaining to 14 days’ time period and concurred with the Appellate Tribunal’s view.

The Supreme Court set aside the finding of the Appellate Tribunal on the 7-day requirement for primarily two reasons. Firstly, rejecting an application on that ground alone will not debar the applicant from filing a fresh application, and therefore it will not serve any ostensible purpose in holding the provision mandatory. Secondly, the Court opined that it is only in the interest of the applicant to remove the defect and therefore the applicant has no reason to cause any undue delay. However, the court was quick to note the following: 

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.

One of the hallmarks of the Code was its strict timeliness; it can be reasonably assumed that this decision is bound to significantly impact the swift working of the Code. It will not be surprising if considerable time is already lost before even the interim IRP is appointed. While the correctness of the decision remains debatable, the intention of the court was laudable while clarifying and settling another vital aspect of the Code. The Court interpreted the provisions keeping in view the practical difficulties; however, it remains to be seen how this works in practice. Understandably, the Code prescribes for timelines for rendering decisions; however, one must take into account the fact that inflexible time periods may cause more harm and lead to unintended consequences. Therefore, it is ideally desirable to have a flexible approach with much emphasis on quick decision making.

It can only be yearned that the Adjudicating Authorities make decisions in a timely manner for smooth working of the Code and work towards furthering the object of this path breaking Code.

– Aayush Mitruka

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