The time period under Regulation 35A is a directory and is not mandatory: NCLAT, Delhi

National Company Law Appeals Tribunal (NCLAT) main bench consisting of Judge Ashok Bhushan, Dr Alok Srivastava, Ms Shreesha Merla in the case of Aditya Kumar Tibrewal vs Om Prakash Pandey held that the period of time prescribed under Rule 35A of the IBBI Rules (CIRP) (CIRP Regulation) is directory in nature and is not required.

Professional resolution of M/s Sri Balaji Forest Products Private limited (Balaji Forest) appealed under Section 61 of the Insolvency and Bankruptcy Code 2016 (IBC/Code) against the order of 26.02.2021 of NCLT, Kolkata, in which NCLT rejected the request of RP under section 43, 45 read with section 49 and 66 of the IBC finding that the same is affected by regulation 35A of the CIRP regulation.

Applicable law

CIRP Regulation 35A states the following;

“35A. Preferential and Other Transactions. – (1) No later than the seventy-fifth day from the date of commencement of insolvency, the resolution practitioner shall form an opinion whether the debtor company has been subject to of an operation covered by Articles 43, 45, 50 or 66.

(2) When the resolution professional is of the opinion that the debtor company has been subject to operations referred to in Articles 43, 45, 50 or 66, he must take a decision no later than the one hundred and fifteenth day from the beginning of the resolution. insolvency Date,

(3) Where the resolution professional makes a decision under sub-regulation 2, he must seek appropriate relief from the contracting authority no later than the one hundred and thirty-fifth day from the date of commencement of insolvency .”

Quick facts

Corporate insolvency resolution process (CIRP) of Balaji Forest was initiated by NCLT Kolkata under its order dated 18.10.2019. The former administrators of Balaji Forest were not extending any cooperation to the RP and therefore a claim under Article 19(2) was filed by the RP against the suspended administrators and an order dated 09.12.2019 was adopted in 19 (2) requests by NCLT in which NCLT ordered the suspended administrators to cooperate with RP, but many obstacles were still created at CIRP by the suspended administrators.

Subsequently, Balaji Forest’s audited balance sheet was finalized and as a result, RP filed an application under Sections 43, 45 read with Sections 49 and 66 of the IBC, which was denied by NCLT.

PR conflicts

RP submitted that Rule 35A of the CIRP Rules is directive and not mandatory in nature and that NCLT cannot reject RP’s filing simply on the basis of failure to meet the time limit referred to in Rule 35A of the CIRP Rules.

Disputes of Suspended Admins

The suspended directors argued that the resolution professional failed to comply with the requirement of Rule 35A of the CIRP Rules and, therefore, the application filed by the resolution professional was properly denied by the NCLT.

Decision/analysis by NCLAT

After hearing from the parties, the NCLAT along with other questions have formulated two specific questions which are as follows;

I. If a request from the resolution professional relating to a transaction covered by Articles 43, 45, 49 and 66 must be filed within the period of the 135th day from the date of the beginning of the insolvency and in the event that the application is filed beyond this period, the same is likely to be rejected due to non-compliance with Regulation 35A of the CIRP Regulations, 2016?

II. Is the time limit prescribed under Rule 35A of the 2016 CIRP Rules mandatory or directive?

NCLAT observed that the phrase used in Rule 35A “must form an opinion” “will make a decision” and he “will contact the supervisory authority“and it must be determined what is the intent and purpose of the use of the expression”to have to” in Rule 35A.

The NCLAT further observed that the rules of statutory interpretation for determining the true nature of a legislative provision and whether it is mandatory or directive are well established and cited established law in the case of Montreal Street Railway versus NormandinAIR 1917 PC 142 and Lalaram v. Jaipur Development Authority(2016) 11 SCC 31.

Subsequently, NCLAT held that;

“11(viii). Regulation 35A of the CIRP Regulation imposes on the resolution professional the duty to take measures within the prescribed deadlines. In exercising this duty, the general public has no control, including the debtor company. that any action taken by the resolution professional beyond the time prescribed by Rule 35A of the CIRP Rules is prohibited, it will cause serious general inconvenience or injustice to the debtor firm. One of the objectives of the code is to maximize the assets of the debtor company In the event that the measures taken by the resolution professional after the period prescribed in Regulation 35A of the CIRP Regulation must be reversed, the undervalued transactions and fraudulent will be beyond the reach of the resolution process, the reach of the Court and will cause great inconvenience and injustice to the corporate debtor. Therefore, we are of the opinion that the time prescribed in Rule 35A of the CIRP Rules is only indicative and that any action taken by the resolution professional beyond the time prescribed under Rule 35A of the CIRP Rules cannot be considered invalid or void. on the grounds that it is beyond the period prescribed by Rule 35A of the CIRP Rules. There may be real and valid reasons for Resolution Professional not filing a timely request to reverse transactions which are matters of each case and should be considered on a case-by-case basis and whether there are such reasons for which Resolution Professional was unable to file the claim in time, the claim must be examined on the merits.”

The NCLAT further relied on the Supreme Court’s decision in the case Surendra Trading Company Vs. Juggilal Kamlapat Jute Mills Company Limited and Ors(2017) 16 SCC 143 where it held that the fourteen-day period provided for in article 7 of the code for admitting or rejecting a request to open an insolvency resolution process is not mandatory and of a nature guideline.

Therefore, the NCLAT concluded that;

“11 (xiii). The law established by the Honorable Supreme Court in the above judgment which deals with the interpretation of the provisions of the Code itself is applicable to the interpretation of Regulation 35A of the CIRP Rules and following the judgment herein above, we believe that the period prescribed in Regulation 35A of the CIRP Regulation is indicative and not mandatory.”

Case title: Aditya Kumar Tibrewal vs Om Prakash Pandey

Appellant’s lawyer: Mr. Abhijeet Sinha, Mr. Sidhartha Sharma, Mr. Arjun Asthana

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

Solicitor for the intervener: Mr. Jishnu Saha, Sr. Adv with Mr. J Patnaik

Click here to read/download the order

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