Time Period Under Regulation 35A Is Directory And Not Mandatory: NCLAT, Delhi

Resolution Professional of M/s Sri Balaji Forest Products Private limited (Balaji Forest) filed the appeal under Section 61 of the Insolvency & Bankruptcy Code, 2016 (IBC/Code) against the order dated 26.02.2021 of NCLT, Kolkata wherein NCLT rejected the application by RP under Section 43, 45 read with Section 49 & 66 of IBC by holding that the same is hit by Regulation 35A of the CIRP Regulations.

Relevant Law

Regulations 35A of the CIRP Regulations states as follows;

"35A. Preferential and other transactions. – (1) On or before the seventy fifth day of the insolvency commencement date, the resolution professional shall form an opinion whether the corporate debtor has been subjected to any transaction covered under Sections 43,45,50 or 66.

(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."

Brief Facts

Corporate Insolvency Resolution Process (CIRP) of Balaji Forest was initiated by NCLT Kolkata vide its order dated 18.10.2019. The ex-directors of Balaji Forest were not extending any cooperation to the RP and therefore an application under Section 19(2) was filed by RP against suspended directors and an order dated 09.12.2019 was passed in 19(2) applications by NCLT wherein NCLT directed the suspended directors to cooperate with RP but still numerous hindrances were created in CIRP by suspended directors.

Thereafter, audited balance sheet of Balaji Forest was finalized and accordingly RP filed an application under Section 43, 45 read with Section 49 & 66 of IBC which was dismissed by NCLT.

Contentions Of RP

It was contended by RP that regulation 35A of CIRP Regulations is directory is nature and not mandatory and NCLT cannot dismiss the application filed by RP merely on the ground of non-compliance with the timeline mentioned under Regulation 35A of the CIRP regulations.

Contentions Of Suspended Directors

It was contended by the suspended directors that the Resolution Professional has failed to comply with the requirement of Regulation 35A of the CIRP Regulations and therefore, the application filed by the Resolution Professional was rightly rejected by the NCLT.

Decision/Analysis By NCLAT

After hearing the parties, NCLAT along with other issues framed two specific issues which are as follows;

I. Whether an Application by the Resolution Professional relating to a Transaction covered under Section 43, 45, 49 and 66 is mandatory to be filed within the period of 135th Day of the Insolvency Commencement Date and in event the Application is filed beyond such period, the same is liable to be rejected due to non-compliance of Regulation 35A of CIRP Regulations, 2016?

II. Whether time period prescribed under Regulation 35A of the CIRP Regulations, 2016 is mandatory or directory?

NCLAT observed that the expression used in Regulation 35A "shall form an opinion" "shall make a determination" and he "shall apply to the Adjudicating Authority" and it has to be ascertained what the is the intend and purpose of using the expression "shall" in regulation 35A.

NCLAT further observed that rules of statutory interpretation for finding out the true nature of statutory provision and whether it is mandatory or directory is well settled and quoted the law laid down in the case of Montreal Street Railway vs. Normandin, AIR 1917 PC 142 and Lalaram v. Jaipur Development Authority, (2016) 11 SCC 31.

Thereafter, NCLAT held that;

"11(viii). Regulation 35A of the CIRP Regulations imposes a duty on the Resolution Professional to take measure within the timeline as prescribed. In performance of such duty the public in general has no control including the Corporate Debtor. In event it is held that any action taken by Resolution Professional beyond the time prescribed in Regulation 35A of the CIRP Regulations is prohibited, it shall cause serious general inconvenience or injustice to the Corporate Debtor. One of the objectives 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 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."

NCLAT further relied upon the case of the Supreme Court in the case of Surendra Trading Company Vs. Juggilal Kamlapat Jute Mills Company Limited and Ors, (2017) 16 SCC 143 wherein it held that period of fourteen days provided under Section 7 of the code for admitting or rejecting an application for initiation of insolvency resolution process is not mandatory and directory in nature.

Therefore, the NCLAT held that;

"11 (xiii). The Law laid down by the Hon'ble Supreme Court in the above judgment which deals with the interpretation of provisions of the Code itself are applicable to interpretation of Regulation 35A of CIRP Regulations and following the above judgment we hold that timeline prescribed in Regulation 35A of CIRP Regulations is directory and not mandatory."

Case Title: Aditya Kumar Tibrewal v. Om Prakash Pandey

Counsel for Appellant: Mr. Abhijeet Sinha, Mr. Sidhartha Sharma, Mr. Arjun Asthana

Counsel for Respondents: Mr. Subhasish Bhowmick, Ms. Debaleena Ganguly

Counsel for Intervenor: Mr. Jishnu Saha, Sr. Adv with Mr. J Patnaik

Click Here To Read/Download Order