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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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