IBC / Insolvency : Supreme Court Explains Procedural Issues in Filing Petitions under IBC, 2016

IBC / Insolvency : Supreme Court Explains Procedural Issues in Filing Petitions under IBC, 2016

In a recent judgment, Supreme Court has explained that Rule 4(1) of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 requires a financial creditor, either by itself or jointly, to make the application for initiating the corporate insolvency resolution process against a corporate debtor under Section 7 of the IBC in Form 1, accompanied with documents and records required therein and as specified in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. 

Significantly, neither Rule 4(1) nor Form 1 requires the said application to be supported by an affidavit. It is Rule 34(4) of the National Company Law Tribunal Rules, 2016 , that prescribes that every petition or application made before the National Company Law Tribunal shall be verified by an affidavit in Form No. NCLT. It would be apposite, at this stage, to note the scheme of the NCLT Rules to the extent relevant for our purposes. Part-III of the NCLT Rules is titled ‘Institution of proceedings, petition, appeals etc.’ Rule 20 to Rule 27 therein set out the procedural norms to be followed in every appeal or petition or application, amongst others, to be filed before the National Company Law Tribunal. 

Rule 28 therein pertains to the scrutiny of the petition or appeal or document. Rule 28(1) states to the effect that the person in charge of the filing counter shall assign a diary number upon receipt of the petition or appeal or application; enter the particulars of what has been filed in the Register and, thereafter, cause it to be sent for scrutiny. Rule 28(2) provides that, if the appeal or petition or application is found to be defective on such scrutiny, the same shall, after notice to the party, be returned for compliance and if there is a failure to comply within seven days from the date of return, the same shall be placed before the Registrar who may pass appropriate orders. Rule 28(3) states that the Registrar may, for sufficient cause, return the said document for rectification to the party filing the same and, for this purpose, he may allow such party such reasonable time as he may consider necessary or extend the time for compliance. Rule 28(4) states that if the party fails to take steps for the removal of the defect within the time fixed for the same, the Registrar may, for reasons to be recorded in writing, decline to register the pleading or document. Part-IV of the NCLT Rules is titled ‘General procedure’ and comprises Rules 34 to 59.

Notably, Section 7(5)(b) of the IBC, 2016 also provides that if an application for initiation of corporate insolvency resolution process by a financial creditor made under Section 7(2) thereof is found to be incomplete, the National Company Law Tribunal may, by order, reject such application. However, the proviso thereto states that the National Company Law Tribunal shall, before rejecting the application under Section 7(5)(b), give a notice to the applicant to rectify the defect in his application within seven days of the receipt of such notice.

Rule 63 of NCLT Rules provides that any person aggrieved by the decision of the Registrar in the context of the scrutiny of the petition/application, as provided in Part-III and elsewhere in the Rules, may file an appeal against such order to the President of the Principal Bench and at other places, to a Member of the Bench designated by the President and the decision on the said appeal shall be final. 

Pertinently, the proviso to Section 7(5)(b) of the IBC requires the notice thereunder to be given to the applicant itself to rectify the defect in the application within seven days of the receipt of such notice. In this regard, Rule 38 of the NCLT Rules, titled ‘Service of notices and processes’ assumes significance as Rule 38(5) therein provides that notice or process may also be served on an authorised representative of the applicant or the respondent, as the case may be, in any proceeding or on any person authorised to accept a notice or a process, and such service on the authorised representative shall be deemed to be proper service. Rule 38(5), thus, permits service of notice on the authorized representative of the applicant or the respondent, as the case may be.

Issuance of a notice to an authorized representative of the respondent-bank was held to be not enough to satisfy the mandate of the proviso to Section 7(5)(b) of the IBC. The IBC, being the substantive legislation relating to the application filed by the respondent-bank under Section 7 thereof, the notice to cure the defects therein necessarily had to be given under the said provision and compliance with the Rules, independently framed for the National Company Law Tribunal, was not sufficient.

Further, Court was not persuaded to accept the argument that the defective affidavit filed in support of the respondent-bank’s application under Section 7 of the IBC was sufficient to hold the application itself liable to be rejected on the ground of being non est.

Mere filing of a ‘defective’ affidavit in support of an application would, however, not render the very application non est and liable to be rejected on that ground as it is neither an incurable nor a fundamental defect.

Non-compliance with any procedural requirement relating to an application for relief should not entail automatic dismissal or rejection, unless the relevant statute or rule so mandates, and procedural defects and irregularities which are curable should not be allowed to defeat substantive rights or to cause injustice. It was further pointed out that procedure, a handmaiden to justice, should never be made a tool to deny justice or perpetuate injustice, by any oppressive or punitive use.

Case Reference is Livein Aqua Solutions Private Limited v HDFC Bank Ltd [2025] GCtR 1724 (SC).