Mr. Vikash Gautamchand Jain vs Kritish Patel

“An Act further to amend the Insolvency and Bankruptcy Code, 2016. Be it enacted by Parliament in the Seventy-second Year of the Republic of India as follows:-

Statement of Objects and Reasons. – The

Insolvency and Bankruptcy Code, 2016, was enacted to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms, individuals and to achieve the desired objectives under it. The Code was amended in the past to deal with the emerging market realities and to achieve certainty to the various processes under the law.

2.

COVID-19 pandemic has impacted businesses, financial markets and economies all over the world, including India. The Government has been taking several measures to mitigate the distress caused by the pandemic, inter alia, increasing the minimum amount of default to one crore rupees for initiation of corporate insolvency resolution process and suspension of filing of corporate insolvency resolution applications in respect of the defaults arising during the period of one year between 25^th March, 2020 and 24^th March, 2021. The Micro, Small and Medium Enterprises sector is critical to the economy considering their significant contribution to our gross domestic product and generation of employment to a sizeable population. It has, therefore, been considered necessary to urgently address the specific requirements of the sector by providing an efficient and alternative framework under the Code for quicker, cost-effective insolvency resolution process that is least disruptive the business, ensuring, among other objectives, job preservation.

3.

In the aforesaid circumstances, it has become necessary to amend the Code to provide for pre-packaged insolvency resolution process. However, as the Parliament was not is session and immediate action was required to be taken, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, was promulgated by the President on the 4^th day of April, 2021.

4.

The Insolvency and Bankruptcy Code (Amendment) Bill, 2021, that seeks to replace the Ordinance, inter alia, provides for –

(a)

specifying a minimum threshold of not more than one crore rupees for initiating pre-packaged insolvency resolution process;

(b)

disposal of simultaneous applications for initiation of corporate insolvency resolution process and pre-packaged insolvency resolution process, pending against the same corporate debtor;

(c)

inserting a new Chapter III-A containing sections 54-A to 54-P to facilitate pre-packaged insolvency resolution process for corporate persons that are Micro, Small and Medium Enterprises;

(d)

penalty for fraudulent or malicious initiation of pre-packaged insolvency resolution process or with intent to defraud persons;

(e)

penalty for fraudulent management of corporate debtor during pre-packaged insolvency resolution process;

(f)

punishment for offences related to pre-packaged insolvency resolution process; and

(g)

certain amendments to the relevant provisions, which are consequential in nature.

5.

The Bill seeks to achieve the above objectives.”

“54D. Time-limit for completion of pre-packaged insolvency resolution process.–

(1)

The prepackaged insolvency resolution process shall be completed within a period of one hundred and twenty days from the pre-packaged insolvency commencement date.

(2)

Without prejudice to sub-section (1), the resolution professional shall submit the resolution plan, as approved by the committee of creditors, to the Adjudicating Authority under sub-section (4) or sub-section (12), as the case may be, of section 54K, within a period of ninety days from the prepackaged insolvency commencement date.

(3)

Where no resolution plan is approved by the committee of creditors within the time period referred to in sub-section (2), the resolution professional shall, on the day after the expiry of such time period, file an application with the Adjudicating Authority for termination of the pre-packaged insolvency resolution process in such form and manner as may be specified.”

“54N. Termination of prepackaged insolvency resolution process.–

(1)

Where the resolution professional files an application with the Adjudicating Authority,-

(a)

under the proviso to sub-section (12) of section 54K; or

(b)

under sub-section (3) of section 54D, the Adjudicating Authority shall, within thirty days of the date of such application, by an order,-

(i)

terminate the pre-packaged insolvency resolution process; and

(ii)

provide for the manner of continuation of proceedings initiated for avoidance of transactions under Chapter III or proceedings initiated under section 66 and section 67A, if any.

(2)

Where the resolution professional, at any time after the pre-packaged insolvency commencement date, but before the approval of resolution plan under sub-section (4) or sub-section (12), as the case may be of section 54K, intimates the Adjudicating Authority of the decision of the committee of creditors, approved by a vote of not less than sixty-six per cent. of the voting shares, to terminate the pre-packaged insolvency resolution process, the Adjudicating Authority shall pass an order under sub-section (1).

(3)

Where the Adjudicating Authority passes an order under sub-section (1), the corporate debtor shall bear the pre-packaged insolvency resolution process costs, if any.

(4)

Notwithstanding anything to the contrary contained in this section, where the Adjudicating Authority has passed an order under sub-section (2) of section 54J and the pre-packaged insolvency resolution process is required to be terminated under sub-section (1), the Adjudicating Authority shall pass an order-

(a)

of liquidation in respect of the corporate debtor as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1) of section 33; and

(b)

declare that the pre-packaged insolvency resolution process costs, if any, shall be included as part of the liquidation costs for the purposes of liquidation of the corporate debtor.”

“5.

It is stated that the RP called 3rd meeting of CoC on 30.04.2024. The members of CoC stated that revised base resolution plan submitted by the Corporate Debtor is under consideration. In the said meeting, the CoC noted that the period of PPIRP comes to an end on expiry of 120 days from the date of admission of PPIRP. The CoC further noted that period of PPIRP was expired on 03.05.2024 and the CoC requested the RP to file an application seeking extension of PPRIP period of 60 days. The resolution for seeking extension of PPIRP period was passed with 91.75% voting on 02.05.2024 by E-voting. A copy of 3rd CoC meeting and copy of e-voting is annexed as Annexure- C and Annexure D respectively.

6.

In view of the above, the Applicant has filed this application seeking extension of time of PPIRP period by 60 days after the date of completion of PPIRP (120 days) i.e., on 03.05.2024.”

“24.

Further, we are of the view that the judgments cited by Nclat and the principle contained therein applied while deciding that period of fourteen days within which the adjudicating authority has to pass the order is not mandatory but directory in nature would equally apply while interpreting the proviso to sub-section (5) of Section 7, Section 9 or sub-section (4) of Section 10 as well. After all, the applicant does not gain anything by not removing the objections inasmuch as till the objections are removed, such an application would not be entertained. Therefore, it is in the interest of the applicant to remove the defects as early as possible.

25.

Thus, we hold that the aforesaid provision of removing the defects within seven days is directory and not mandatory in nature. However, we would like to enter a caveat.”

“….Provided further that the corporate insolvency resolution process shall mandatorily be completed within a period of three hundred and thirty days from the insolvency commencement date, including any extension of the period of corporate insolvency resolution process granted under this section and the time taken in legal proceedings in relation to such resolution process of the corporate debtor….”

“127.

…..Thus, while leaving the provision otherwise intact, we strike down the word “mandatorily” as being manifestly arbitrary under Article 14 of the Constitution of India and as being an excessive and unreasonable restriction on the litigant's right to carry on business under Article 19(1)(g) of the Constitution. The effect of this declaration is that ordinarily the time taken in relation to the corporate resolution process of the corporate debtor must be completed within the outer limit of 330 days from the insolvency commencement date, including extensions and the time taken in legal proceedings. However, on the facts of a given case, if it can be shown to the Adjudicating Authority and/or Appellate Tribunal under the Code that only a short period is left for completion of the insolvency resolution process beyond 330 days, and that it would be in the interest of all stakeholders that the corporate debtor be put back on its feet instead of being sent into liquidation and that the time taken in legal proceedings is largely due to factors owing to which the fault cannot be ascribed to the litigants before the Adjudicating Authority and/or Appellate Tribunal, the delay or a large part thereof being attributable to the tardy process of the Adjudicating Authority and/or the Appellate Tribunal itself, it may be open in such cases for the Adjudicating Authority and/or Appellate Tribunal to extend time beyond 330 days. Likewise, even under the newly added proviso to Section 12, if by reason of all the aforesaid factors the grace period of 90 days from the date of commencement of the Amending Act of 2019 is exceeded, there again a discretion can be exercised by the Adjudicating Authority and/or Appellate Tribunal to further extend time keeping the aforesaid parameters in mind. It is only in such exceptional cases that time can be extended, the general rule being that 330 days is the outer limit within which resolution of the stressed assets of the corporate debtor must take place beyond which the corporate debtor is to be driven into liquidation.”

“35A. Preferential and other transactions. - (2) Where the resolution professional is of the opinion that the corporate debtor has been subjected to any transactions covered under sections 43, 45, 50 or 66, he shall make a determination on or before the one hundred and fifteenth day of the insolvency commencement date,

(3)

Where the resolution professional makes a determination under sub-regulation 2, he shall apply to the Adjudicating Authority for appropriate relief on or before the one hundred and thirty-fifth day of the insolvency commencement date.”

“…Hence, the use of the word ‘shall’ in a statute, though generally taken in a mandatory sense, does not necessarily mean that in every case it shall have that effect, that is to say, that unless the words of the statute are punctiliously followed, the proceeding, or the outcome of the proceeding, would be invalid. On the other hand, it is not always correct to say that where the word “may” has been used, the statute is only permissive or directory in the sense that noncompliance with those provision will not render the proceeding invalid. In that connection, the following quotation from Crawford on ‘Statutory Construction’.art.261 at p. 516, is pertinent:

“The question as to whether a statute is mandatory or directory depends upon the intent of the legislature and not upon the language in which intent is clothed. The meaning and intention of the legislature must govern, and these are to be ascertained, not only from the phraseology of the provisions but also by considering its nature, its design, and the consequences which would follow from construing it the one way or the other……”

Going further, this Tribunal in the same judgment also relied on the observations of the Hon’ble Apex Court in (2016) 11 SCC 31 in “Lalaram Vs. Jaipur Development Authority” as below:

“106.

As noticed hereinabove, it is affirmatively acknowledged as well that where provisions of a statute relate to the performance of a public duty and where the invalidation of acts done in neglect of these have the potential of resulting in serious general inconvenience or injustice to persons who have no control over those entrusted with duty and at the same time would not promote the main object of the legislature, such prescriptions are generally understood as mere instructions of the guidance of those on which the duty is imposed and are regarded as directory. It has been the practice to hold such provisions to be directory only, neglect of those, though punishable, should not, however, affect the validity of the acts done. At the same time where however, a power or authority is conferred with a direction that certain regulation or formality shall be complied with, it would neither be unjust nor incorrect to exact a rigorous observance of it as essential to the acquisition of the right of authority.”

The Tribunal has therefore held that timeline prescribed in Regulation 35- A of CIRP is directory and not mandatory and has held as follows: -

“11.

viii …….. One of the objective of the Code is to maximize the assets of the Corporate Debtor. In event the actions taken by the Resolution Professional after the timeline prescribed in Regulation 35A of the CIRP regulations are to be annulled, the undervalued and fraudulent transactions will go out of the reach of the Resolution Process, reach of the Court and shall cause great inconvenience and injustice to Corporate Debtor. Hence, we are of the view that timeline prescribed in Regulation 35A of the CIRP Regulations is only directory and any action taken by the Resolution Professional beyond the time prescribed under Regulation 35A of the CIRP Regulations cannot be held to be non-est or void only on the ground that it is beyond the period prescribed under Regulation 35A of the CIRP Regulations. There may be genuine and valid reasons for Resolution Professional not to file application for avoiding the transactions within time prescribed which are question relating to each case and has to be examined on case to case basis and if there are reasons due to which Resolution Professional could not file the Application within time the same has to be examined on merit.”

“21.

The ultimate rule in construing auxiliary verbs like “may” and “shall” is to discover the legislative intent; and the use of the words “may” and “shall” is not decisive of its discretion or mandates. The use of the words “may” and “shall” may help the courts in ascertaining the legislative intent without giving to either a controlling or a determinating effect. The courts have further to consider the subject-matter, the purpose of the provisions, the object intended to be secured by the statute which is of prime importance, as also the actual words employed.

22.

“9. … Obviously where the legislature uses two words ‘may’ and ‘shall’ in two different parts of the same provision prima facie it would appear that the legislature manifested its intention to make one part directory and another mandatory. But that by itself is not decisive.” [Ed. : Quoting from Ganesh Prasad Sah Kesari v. Lakshmi Narayan Gupta, (1985) 3 SCC 53, p. 59, para 9.]

The power of court to find out whether the provision is directory or mandatory remains unimpaired.”

“47.

The construction of a statute will depend on the purport and object for which the same had been used. In the instant case the 1960 Rules do not fix any time for publication of the electoral rolls. On the other hand Section 23(3) of the 1950 Act categorically mandates that direction can be issued for revision in the electoral roll by way of amendment in inclusion and deletion from the electoral roll till the date specified for filing nomination. The electoral roll as revised by reason of such directions can therefore be amended only thereafter. On the basis of direction issued by the competent authority in relation to an application filed for inclusion of a voter's name, a nomination can be filed. The person concerned, therefore, would not be inconvenienced or in any way be prejudiced only because the revised electoral roll in Form 16 is published a few hours later. The result of filing of such nomination would become known to the parties concerned also after 3.00 p.m.

48.

Furthermore, even if the statute specifies a time for publication of the electoral roll, the same by itself could not have been held to be mandatory. Such a provision would be directory in nature. It is a well-settled principle of law that where a statutory functionary is asked to perform a statutory duty within the time prescribed therefor, the same would be directory and not mandatory. (See Shiveshwar Prasad Sinha v. District Magistrate of Monghyr [AIR 1966 Pat 144 : ILR 45 Pat 436 (FB)] , Nomita Chowdhury v. State of W.B. [(1999) 2 Cal LJ 21] and Garbari Union Coop. Agricultural Credit Society Ltd. v. Swapan Kumar Jana [(1997) 1 CHN 189] .)

49.

Furthermore, a provision in a statute which is procedural in nature although employs the word “shall” may not be held to be mandatory if thereby no prejudice is caused. (See Raza Buland Sugar Co. Ltd. v. Municipal Board, Rampur [AIR 1965 SC 895 : (1965) 1 SCR 970] , State Bank of Patiala v. S.K. Sharma [(1996) 3 SCC 364 : 1996 SCC (L&S) 717] , Venkataswamappa v. Special Dy. Commr. (Revenue) [(1997) 9 SCC 128] and Rai Vimal Krishna v. State of Bihar [(2003) 6 SCC 401] .)”