India: NCLAT Rules On Timelines Under The Bankruptcy Code

Last Updated: 24 May 2017
Article by Trilegal .

The NCLAT has recently passed a significant ruling which impacts the timelines for insolvency resolution under the new Insolvency & Bankruptcy Code.

Background

One of the key objectives of the Insolvency & Bankruptcy Code (IBC) is to provide a time bound process for insolvency resolution. In the recent case of J.K. Jute Mills Co. Ltd. v/s Surendra Trading Co. , the National Company Law Appellate Tribunal (NCLAT) examined whether the time limits prescribed under the IBC, including those for the admission or rejection of an insolvency application by the National Company Law Tribunal (NCLT), are mandatory or directory.

Facts & Contentions

Sections 7, 9 and 10 of the IBC provide a period of 14 days for the NCLT to admit or reject an application for initiating insolvency proceedings. Before rejecting an application, the NCLT is required to provide the applicant 7 days to rectify any defects in his application.

In the J.K. Jute Mills case, an application was filed by a trade creditor, Surendra Trading Co., on 10 February 2017 with the Allahabad bench of the NCLT for initiating an insolvency resolution process against J.K. Jute Mills, a corporate debtor. On 16 February 2017, the NCLT directed the applicant to rectify certain technical defects in its application. Thereafter, by an order dated 9 March 2017, the NCLT passed interim directions against the sale or alienation of the debtor's assets.

J.K. Jute Mills filed an appeal against the NCLT's interim order before the NCLAT. It argued that once the NCLT fails to pass an order admitting or rejecting an application within 14 days of its submission under section 9 of the IBC, it can no longer decide the matter and therefore has no power to grant a stay on the sale of assets. J.K. Jute Mills also contended that since no prayer was made for the grant of such a stay, the NCLT did not have the power to pass an interim order of status quo.

On the other hand, the applicant creditor argued that the timeline of 14 days under section 9 of the IBC is merely directory and not mandatory.

NCLAT's Ruling

Relying on judicial precedents on the interpretation of procedural timelines under the Civil Procedure Code, the NCLAT held that the time limit of 14-days is directory rather than mandatory, and that the NCLT has inherent powers to extend the 14-day period on a case-to-case basis in the interest of fairness and justice.

Further, the NCLAT observed that the NCLT performs both judicial and administrative roles. Under its administrative function, the NCLT's registry verifies whether an application is complete and in proper form. Since this is a time-consuming process, the appellate tribunal observed that the 14-day time period granted to the NCLT to reject or admit an application cannot be counted from the 'date of filing of the application' but has to be counted from the date when such application is 'listed for admission/order'.

That said, the NCLAT observed that time is of the essence under the IBC, which requires that the NCLT and all stakeholders perform within the time limits prescribed except in exceptional circumstances.

Significantly, the NCLAT ruled that the 7-day period provided to applicants to rectify defective applications was mandatory, and no concession can be granted in this regard. Therefore, the application in this case was ordered to be dismissed as the applicant had exceeded the prescribed time for rectifying defects in its application.

Although this issue was not relevant for the present case, the NCLAT went on to observe that the 270-day period prescribed under the IBC, for completing the insolvency resolution process, is mandatory in nature and all stakeholders would be bound by it.

Key Takeaways

The NCLAT ruling could be seen to have the effect of reading down the provisions of the IBC, that require the NCLT to adhere to a 14-day period for admission or rejection of an application. This could potentially stretch the timelines in the insolvency resolution process, particularly during the stage of preliminary admission.

However, the NCLAT has, at the same time, clearly recognized that speedy resolution is the essence of the IBC and observed that extensions should be considered only in exceptional circumstances. It remains to be seen whether this ruling will set a precedent allowing parties to use arguments of procedural fairness as a tactic for delaying insolvency proceedings under the IBC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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