India: Insolvency And Bankruptcy Code, 2016: A Time-Period Puzzle

The Insolvency and Bankruptcy Code, 2016 aims to consolidate and amend the laws relating to insolvency resolution of companies and limited liability entities, partnerships and individuals, which are contained in various enactments, into a single legislation. The focus of this legislation is to provide e resurrection and resolution for maximization of value of debtor's assets. The Code has put forth an overarching framework to aid sick companies to either wind up their business or engineer a revival plan, and for investors to exit. Notably, the Code has also empowered the operational creditors (workmen, suppliers etc.) to initiate the insolvency resolution process if default occurs.

Another important feature of this Code is the time bound resolution process, which tries to make sure that the process of resolution and liquidation does not suffer the trauma of never ending litigations. However, the time-line provided does not always give a coherent mechanism and therefore, calls for following considerations.

Initiation of Corporate Insolvency Resolution Process:

Section 7 of the Code enshrines the initiation of the Corporate Insolvency Resolution Process. Therefore, for greater understanding, it is imperative to produce the relevant part of the provision here.

"7. Inter alia,

(4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3).

(5) Where the Adjudicating Authority is satisfied that—

(a) a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; or

(b) default has not occurred or the application under sub-section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application:

Provided that the Adjudicating Authority shall, before rejecting the application under clause (b) of subsection (5), give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5).

(7) The Adjudicating Authority shall communi cate—

(a) the order under clause (a) of sub-section (5) to the financial creditor and the corporate debtor;

(b) the order under clause (b) of sub-sec tion (5) to the financial creditor,

within seven days of admission or rejection of such application, as the case may be."

Under section 7(4), the Adjudicatory Authority shall ascertain the existence of a default within 14 days of the receipt of the application. Proviso of section 7(5) provides that if the submitted application has any defect, such defect can be rectified within 7 days of receipt of such notice of rectification from the Adjudicating Authority. The difficulty lies in ascertaining whether the 14-days period will be inclusive of the 7-days period of rectification or not?

Moreover, in Bank of India v. Tirupati Infraprojects Pvt. Ltd1, the NCLT Principal Bench Delhi has stated that the interim order2 giving stipulated period of 7 days to rectify the defect cannot be regarded as notice within the meaning of proviso to Section 7(5) of the Code. In consequence, extending the total period by 7 days, that excludes 14 days period of admission or rejection of the application and 7-days notice period for rectification of defects.

Further in J.K Jute Mills Company Limited v. Surendra Trading Company Case3, the NCLAT has ruled,

"50. Inter alia,

The time is the essence of the Code and all the stakeholders, including the Adjudicating Authority are required to perform its job within the time prescribed under the Code except in exceptional circumstances if the Adjudicating Authority for one or other good reason fails to do so. In the case in hand we find that the Adjudicating Authority has unnecessarily adjourned the case from time to time which is against the essence of the Code.

51. Further, we find that the application was defective, and for the said reason the application was not admitted within the specified time. Even if it is presumed that 7 additional days' time was to be granted to the operational creditor, the defects having pointed out on 16th February 2017 and having not taken care within time, we hold that the petition under section 9 filed by respondent/ operational creditor being incomplete was fit to be rejected."

The above paragraphs of the case clearly lay down that the object behind the time period prescribed under the Code is to prevent the delay in hearing the disposal of the cases and 7 days' period for rectification of any defect is mandatory and on failure, such applications are fit to be rejected. Whether the same reasoning of the above-mentioned case can be considered under section 7(4) and can it be said that if the Adjudicatory Authority does not ascertain the existence of a default within 14 days, then such application is fit to be rejected.

Further, if in case the Adjudicatory Authority decides to accept the application, then what will be the date of admission of application, the original date or the date on which the rectified application is filed? By reason, the date of admission should be the date on which the rectified application is filed as the Adjudicatory Authority will pass the order of initiating the resolution process only when application under section 7 is rectified.

Public Announcement:

Under section 12 of the Code, the time-limit for the completion of the Corporate Insolvency Resolution Process (CIRP) is given to be 180 days with the extension of 90 days, if instructed through a resolution passed at a meeting of the committee of creditors by a vote of 75% of the voting shares. Under section 13, the Adjudicatory Authority, through order, cause a public announcement of the initiation of CIRP immediately4 after appointment of Interim Resolution Professional. Section 15 of the Code, gives the details of the public announcement including the closing date of CIRP, i.e. 180 days from the admission of the application.

Now, the question arises that if the Resolution Professional (RP) takes an extension period of 90 days after the public announcement then the closing date of the CIRP will also be shifted beyond 180 days. In such scenario, the question arises whether the RP has to make another public announcement of such extension or the process continues without the announcement.

Appeal:

Under Section 61 of the Code, any person aggrieved by the order of the Adjudicatory Authority can file an appeal to NCLAT. Sub-section (2) says, "Every appeal shall be filed within thirty days before the NCLAT". However, the section does not mention about the initiation of 30 days. Whether the period of 30-days starts from passing of order by the Adjudicatory Authority or starts from the day of communication of the order to the concerned parties, which has to be done under section 7(7) by the Adjudicatory Authority. If the day of communication of the order is considered as date of initiation of 30 days appeal period, then the appeal period gets extended by 7 days.

Conclusion :

The Insolvency and Bankruptcy Code, 2016 clearly highlights the intention of the legislature for speedy disposal for the cases. But looking at the above discussion, the intention is not clearly outlined in the Act. As the Code is still at a nascent stage, it does need the help of Adjudicatory Authority to unfold the answers to above referred questions on time-line.

Footnotes

1 Order dated 30.05.2017 in C.P No. (IB)-104(PB)/2017.

2 Order dated 03.07.2017 in C.P No. (IB)-104(PB)/2017.

3 Company Appeals (AT) (Ins) No. 9 of 2017

4 Immediately meaning not later than 3 days from the date of appointment of Interim Resolution Professional. (Regulation 6 of the IRPCP, 2016)

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