Failure To Provide Time To Cure Defect In Section 9 Application Violates Procedural Mandate: NCLAT

Facts

The case involves an appeal by the operational creditor (Shiv Glitz Hotels and Resorts LLP) challenging the order dated January 2, 2024, passed by the National Company Law Tribunal (NCLT), Ahmedabad, Special Bench. The NCLT had rejected the appellant's application under Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016, as defective which was later challenged by the Appellant (Operational creditor) stating that the report was dismissed without merits.

On October 7, 2017, the appellant and respondent executed a Merchant Agreement, where a fixed revenue of Rs. 40 lakhs per month was agreed upon. The appellant provided services including boarding, lodging, social events, and food & beverages (F&B) services to the respondent through the OYO platform. Various invoices were raised for these services. On March 29, 2023, the appellant issued a demand notice under Form-3, claiming the amount. The respondent denied the claim resulting the appellant filing an application under Section 9 of the IBC on December 10, 2023, seeking initiation of the corporate insolvency resolution process.

During the first hearing on January 2, 2024, the NCLT dismissed the application, citing a lack of explanation regarding the invoice date, date of default, limitation period, and the fact that the invoices were issued to two different entities without segregation. The NCLT considered the application defective and did not provide the appellant an opportunity to rectify the defect as per Section 9(5)(ii)(a) of the IBC, which mandates a seven-day rectification period. As a result, the operational creditor filed an appeal before NCLAT Delhi.

NCLAT Judgement

The National Company Law Appellate Tribunal (NCLAT) set aside the order passed by the National Company Law Tribunal (NCLT), Ahmedabad, which had rejected the appellant's Section 9 application as defective. The NCLAT ruled that the NCLT was required to provide the appellant with an opportunity to rectify the defects in the application within seven days, as mandated by the proviso to Section 9(5)(ii)(a) of the Insolvency and Bankruptcy Code (IBC).

“When the Adjudicating Authority has proceeded to dismiss the Application as defective, it was obligatory as per Proviso to Section 9, sub-section (ii) to give a notice to the Applicant to rectify the defect in the Application within seven days from the date of receipt of such notice. The Adjudicating Authority having not issued a notice under Proviso, the order impugned is unsustainable on this ground alone.”

Case: Shiv Glitz Hotels and Resorts LLP v. Oravel Stays Ltd.,

Tribunal: NCLAT, Delhi

Bench: ASHOK BHUSHAN, J

Date: 9^th September, 2024

For Appellant: Mr. Manish Kumar Shekhari, Ms. Anisha Mahajan, Mr. Ashish Khatri and Ms. Sanjana Shrivastava, Advocates.

For Respondent: Mr. Amit Sibal along with Ms. Adrija Mishra, Mr. Ankit and Mr. Harsh Kaushik, Advocates.