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The Mumbai Bench of the NCLT, recently passed an order which underlined what constitutes a ‘curable defect’ under the proviso to Section 9(5) of the Insolvency and Bankruptcy Code, 2016 (Code).
In this (possibly) first of its kind case, a petition was filed under Section 9 of the Code by Mrs. Seema Gupta, represented by Zain Mookhi, against Supreme Infrastructure India Ltd. & Ors. (Debtor Company), represented by Farhan Dubash.
While the Debtor Company had agreed to construct a farm house for Seema Gupta, the Debtor Company failed to do so. Thereafter, amount to the extent of only ₹1.14 crore were refunded of the total ₹5 crores, leaving an unpaid debt of ₹3.86 crore, plus interest.
In furtherance of the unpaid debt, a statutory notice was issued u/s 434 of the Companies Act, 1956 (Old Act) on 6th October, 2016 by Seema Gupta to the Debtor Company. This notice serves as a prerequisite for initiation of winding-up proceedings, which if remains unanswered for three weeks, is grounds for winding up of a debtor.
However, on the 4th of January of 2017, nearly three months after the notice was served, Seema Gupta (mistakenly) filed a winding up petition u/s 271(1) read along with section 272 of the Companies Act, 2013 (New Act) for winding up of the Debtor Company, and thereafter soon on 21st February 2017, filed an application u/s 9 of the Code for initiation of insolvency resolution process against the the Debtor Company, in continuation of the winding up petition already filed.
The mistake made here was that, by the time this winding up petition was filed under Sections 271 and 272 of the New Act, the Code had come into force and amended Section 272 of the New Act, converting winding up proceedings into bankruptcy proceedings. Therefore, the winding up petition was not a valid one to begin with.
Secondly, a suit under Section 9 requires a prior notice served u/s 8 of the Code which wasn’t served in this case.
It was argued on behalf of Seema Gupta that,
1. Non-issuance of notice u/s 8 for filing a petition u/s 9 is a curable defect in contemplation of the proviso to Section 9(5) of the Code, given that the Code allows 7 days to cure any defect in the petition.
2. Notice issued on 6th October 2016 u/s 434(1) of the Old Act will be construed as continuation of the cause of action, as things done for filing a petition u/s 9 of the Code. Since, ‘all the legal consequences that flow from the above notice will remain in force’ even after repeal of Old Act or after amendments to section 271 and 272 of New Act. The case of Universal Imports Agency v/s. Controller Imports & Exports was also referred to strengthen this argument. This is relevant in light of the repeals and savings section u/s 465 of the the New Act and Section 6 of the General Clauses Act, 1897.
3. Filing a case under wrong provisions of law will not make case invalid if the substance of the case reveals that the facts can be taken in to cognizance under new provision of law. The case of Balasaheb Anantrao Bahirat v/s Rohidas Bapusaheb Tupe was relied to strengthen this argument
The NCLT, however, was not convinced with the arguments advanced and said that,
1. Issuing notice under Old Act could be considered only when the proceedings were initiated within the limitation period. In this case, not only were the winding up proceeding u/s 271 and 272 of the New Act invalid to begin with, but the requirements under the Code are also different from the Old Act.
2. Neither was the remedy of filing a winding up petition sought after three weeks from the issuance of notice u/s 434 of the Old Act, nor was a bankruptcy petition filed afterwards;
3. Not only is it barred by limitation, but lacks cause of action since cause of action flows from the notice which is served u/s 8 of the Code. Therefore without this cause of action, ‘it cannot be labeled as a curable defect to take time to give notice after filing u/s9 of the Code’-
The NCLT further observed that,
“This time of 7 days can be given only in a case when application is not filed in the form and manner and not accompanied with fee prescribed, not in respect to other aspects mentioned in Section 9(5)(ii) (b-e) of the Code. Therefore, the defect falling under section 9(5)(ii)(a) is the only curable defect; the time given for such curation cannot be extended to other situations”
“issuance of notice u/s 8 of the Code is an act that has to be done before filing the Petition u/s.9, therefore, non-filing of a notice will not come within the sub-section (5) of section 9..”
And therefore, the petition was held not maintainable.
If not for this procedural defect, this case could have been admitted if the Debtor Company hasn’t initiated any ‘prior legal action’.
(Read the Order)