NCLAT clarifies the law regarding extension of Corporate Insolvency Resolution Process

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‘Speedy’ is the gist for effective, efficacious functioning of the Insolvency Bankruptcy Code (IBC). To ensure quick and efficient completion of the Corporate Insolvency resolution process (CIRP), Section 12 of the IBC, provides for the completion of the entire process in 180 days. Keeping in mind certain externalities affecting the smooth functioning of the process, Section 12(3) provides for an extension of 90 days to be granted by the adjudicating authorities in completing the process. However, as provided under the proviso to Section 12(3), the process of Insolvency Resolution has to be completed in a period of maximum 330 days.

Even after the existence of such clear law regarding the time-bound completion of CIRP, certain situations demand an extension in completion of the process, beyond the maximum period granted under the IBC. Such a situation arose in the case of Ashish Chaturvedi
Ex-Director, A to Z Barter Pvt. Ltd. V. Inox Leisure Ltd.

Background

On December 2018, the National Company Law Tribunal (NCLT) Delhi bench, passed an order to initiate the CIRP against A to Z Barter Pvt. Ltd (Corporate Debtor). This order, however, was communicated to neither the Corporate Debtor (CD) nor the Resolution professional (RP). Non-communication of the order to initiate CIRP led to the lapse of maximum time provided under the IBC to complete the entire process in a stipulated period.

A petition for extending period of the CIRP was made by the (RP), on the ground that the order to initiate CIRP against the (CD) was not communicated to him. The NCLT Delhi bench, while emphasizing on the importance of communication of an order to a CD and an RP, allowed the petition, and passed an order to exclude 330 days, which is the period from the issuance of the 2018 order to the date of the current order, from the maximum period of 180 days (with the permitted extension of maximum 90 days) prescribed under the IBC.

Facts of the Case 

Against the order passed by the NCLT, the director of the CD, filed an appeal before the National Company Law Appellate Tribunal (NCLAT), on the ground that the order passed by the NCLT was made while overlooking essential facts of the case and wrongly allowing the application filed by the ‘Insolvency Resolution Professional’ for the exclusion of time.

Issues before the NCLAT

CD’s duty to inform the RP

The Appellant claimed that after the Adjudicating Authority fails to inform the RP about his/her appointment, the CD must make that communication to the RP, within the period of limitation. Further, a point was made before the NCLAT that, any such failure on the part of CD should not be treated a valid ground of extending the period of completing the CIRP within the timeline prescribed under the IBC.

No extension beyond the maximum period of 330 days

The Appellants contended before the NCLAT that the order passed by the NCLT, extending the period of the CIRP for the CD, was not in adherence to the conditions established by the precedents.

The Hon’ble Supreme Court’s (SC) decision of Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta & Ors. (Civil Appeal No. 8766-67/2019), was cited by the Appellant, wherein it laid down two conditions to extend the period of CIRP for a particular CD. The conditions mentioned by the SC were, a)  If it is advised by the Committee of Creditors (COC) by passing a resolution with the requisite majority provided under the IBC, and b) In cases which are ‘exceptional’.

Another SC’s judgment in Quinn Logistics India Pvt. Ltd v. Mack Soft-Tech Pvt. Ltd and ors were cited by the appellant. This case established that to prevent unnecessary delays in the completion of the CIRP, Section 12(3) of the IBC provided for an extension of the CIRP only when the ‘subject matter of a case’ gives a fair justification to the adjudicating authority. Meaning of this was enunciated by the court as a ground that the extension of the period of CIRP could happen, only when the COC or the RP justify their performance over 180 days.

Subsequently, another judgment rendered by the Hon’ble SC named Macquarie Bank Limited Vs. Shilpi Cable Technologies Ltd. In this case, the SC discussed the circumstances where the extension could be granted in situations where the certain orders passed by adjudicating authorities hindered the smooth completion of the CIRP process. Following were the circumstances covered:

  1. If a CIRP is stayed by an order passed by an adjudicating authority,
  2. If no RP is functioning during the period, or the RP appointed is subsequently removed for certain reasons
  3. If there is a period gap between the order initiating CIRP and the actual date on which the RP takes charge
  4. If the process was set aside by an adjudicating authority and is restored by any subsequent orders of the appellate authority.

Every situation, falling within the criteria aforementioned, would be sufficient reason for any adjudicating authority to extend the period of CIRP, for 90 days, up to the upper limit of 330 days prescribed under the IBC.

Hence, relying on these judgments, the appellant submitted that it is an established rule, enshrined under the IBC, and furthered by the precedents, that any request for extension of CIRP period, after the completion of the prescribed 180 days is impermissible. It was further contended that even permitting an extension beyond 180 days, cannot cross the gap of 330 days, set under Section 12 of the IBC. Thus, the NCLT’s order, directing the extension beyond 330 days should be declared invalid.

Only RPs permitted to file applications

It was contended by the appellant that, in perusal to Section 12 (3) of the IBC, only the individuals, officially appointed as RPs by passing a resolution with Committee of Creditors cannot are permitted to apply to extend the CIRP process up to 90 days, under the IBC. Since the applicant before the NCLT was not officially appointed as an RP by the COC, such application should not be considered to be in adherence to the provisions of the IBC.

NCLAT’s Judgment

The NCLAT while rejecting the appeal filed before it, ordered for the continuation of CIRP process for the CD, provided with a caveat regarding its completion within 180 days from the issuance of the order. The reasoning provided by the court can be divided into the following facets:

Extension of  CIRP process in ‘extraordinary situations’

The NCLAT mentioned that compliance with Section 12(3), and Regulation 40A of IBC (CIRP for Corporate Persons) Regulations 2016 is to be done in ordinary circumstances. However, in certain ‘extraordinary situations’ where externalities hinder the smooth completion of the CIRP, extension, even beyond the 330 days maximum cap, can be granted by adjudicating authority.

Power of the Adjudicating Authorities to determine a question of ‘fact’ or ‘law’

The NCLAT mentioned that the in pertinence to Section 60 (5) of the IBC, the adjudicating authorities are empowered to determine the question of law or facts arising out of or concerning the insolvency resolution based on the issue involved in a given case.

The situation owing to an inadvertent omission on the part of the ‘Registry’ of the ‘Adjudicating Authority’, where its order to initiate CIRP could not be communicated to the IRP or the CD, points to a legit ambiguity in the law regarding the effect of such orders on the completion of the CIRP. This, according to the NCLAT, while applying the maxim of Actus Curiae Neminem Gravabit i.e. ‘Act of the Court shall harm no Home-Sapien’, becomes an obligation on part of the NCLAT to clear such ambiguity to dispense orders accordingly.

Analysis

The judgment propounded by the NCLAT sets the law clear on the ambiguity regarding the extension of the CIRP timeline beyond the maximum cap of 330 days. This judgment also reinstates the importance of Section 60(5), by emphasising the vast powers granted to the adjudicating authorities under the IBC, to correct the wrongs and to further the objectives of the IBC.


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