The National Company Law Appellate Tribunal (“NCLAT”) in the case of, Shiv Glitz Hotels and Resorts Limited Liability Partnership v. Oravel Stays Limited, [Company Appeal (AT) (Insolvency) 577/2024], held that an application rejected under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) for being defective must only be rejected upon completion of the statutory 7 (seven) day notice period, given to the applicant to rectify the defects in the application as mandated under the proviso to Section 9(5) of the IBC.

Brief Facts:

Shiv Glitz Hotels and Resorts Limited Liability Partnership (“Appellant”) executed a merchant agreement with Oravel Stays Limited (“Respondent”) under which the Respondent agreed to a fixed revenue of Rs. 40,00,000 (Rupees forty lac) for the provision of boarding and lodging, food and beverage and other services related to conducting social events on the OYO platform.

The Appellant raised invoices for the services, and on March 29, 2023, a demand notice was issued by the Appellant, the operational creditor, on the Respondent, the corporate debtor, in Form-3 for a principal sum of Rs. 1,12,23,598 (Rupees one crore twelve lac twenty three thousand five hundred ninety eight), with an additional Rs. 85,86,150 (Rupees eighty five lac eighty six thousand one hundred fifty) as interest. The Respondent denied the claim on April 13, 2023. In response, the Appellant filed a Section 9 application under the IBC (“Application”) for the initiation of corporate insolvency resolution process by the operation creditor.

However, the National Company Law Tribunal, Ahmedabad (“NCLT”) through an order dated January 2, 2024, rejected the Application on the grounds of it being defective. In response to which, the present appeal has been filed by the Appellant before the NCLAT.

Issue:

The NCLAT framed 1 (one) issue for consideration:

1.  Whether the NCLT erred in rejecting the Application under Section 9 of the IBC for being defective without providing the Appellant with an opportunity to rectify their defect?

Appellant’s submissions:

The Appellant challenged the NCLT`s order on the grounds that the Appellant was never given an opportunity to rectify the defect in his Application in accordance with the proviso to Section 9(5) of the IBC given the Application was dismissed on the first day of hearing. The Appellant drew reference to Tek Travels Private Limited v. Altius Travels Private Limited, [Company Appeal (AT) (Ins.) No. 172 of 2020], (“Tek Travels”), where it was recognized that on rejection of an application for a defect, the adjudicating authority must provide an opportunity to rectify the defect within 7 (seven) days.

Respondent’s submissions:

The Respondent contended that the Application submitted was rightly dismissed as it had no explanation on the date of invoice, date of default or date it was due (rendering it impossible to calculate the period of limitation) and the invoices had been raised against two different entities.

Additionally, the Respondent contended that it was not just the Application that was defective, but also the demand notice itself. Further, the Respondent had submitted a notice of dispute to the Appellant, and as there was a pre-existing dispute, the Application was liable to be rejected under Section 9(5)(ii)(d) of the IBC, which empowers the NCLT to reject applications where a notice of dispute has been received by the operational creditor, or there is a record of dispute in the information utility.

The Respondent placed reliance on Ramco Systems Limited v. Spicejet Limited, Company Appeal, [(AT) (Insolvency) no. 31 of 2018], (“Ramco”) to contend that an application under Section 9 of the IBC must be denied where there is a lack of strict proof of debt and default.

Consideration of submissions by the Tribunal:

The NCLAT noted that the NCLT had rejected the petition on the grounds that it was raised on two different entities and no explanation was provided concerning the date of the invoice, default or the applicable period of limitation. However, referring to the proviso to Section 9(5) of the IBC, the NCLAT noted that a notice must be given to an applicant prior to the rejection of their application, providing a chance to rectify the defect in the application. It is only after the expiry of 7 (seven) days from the date of receipt of such a notice that an application under Section 9 of the IBC can be rejected for a defect. Such an opportunity to rectify defects in the application was not provided to the Appellant in the present case. While the NCLAT acknowledged the contention of the Respondent concerning the existence of a pre-existing dispute, the NCLAT noted that the dismissal of the Application by the NCLT did not take this into account, and as such, the NCLAT refrained from examining the issue further. Similarly, the Respondent had also contended that the demand notice itself was defective, but as the NCLT did not examine whether the demand notice was defective, the NCLAT saw no reason to examine the issue.

With respect to the Respondent’s reliance on Ramco, the NCLAT differentiated the decision as the NCLT in Ramco had rejected the application after an examination of the evidence of the debt submitted, which is part of the merits of the proceeding. However, no examination on merits has been undertaken in the present case as the Application was rejected prior to any findings on merits.

The NCLAT also differentiated the reliance placed by the Respondent on Dheeraj Wadhawan v. Yes Bank Limited, [Comp. App. (AT) (Ins.) No. 953 of 2021], and Swiss Ribbons Private Limited v. Union of India, [Writ Petition (Civil) No. 99 of 2018], on similar grounds, as the dismissal of the Application in the instant case was on the basis of defective applications alone, as opposed to other substantive reasons that arose in the aforesaid cases.

The NCLAT accepted the reliance placed by the Appellant on Tek Travels, noting that the decision fully supports the Appellant’s submissions i.e., they should have received an opportunity to rectify the defect in their application prior to its rejection.

Decision of the Tribunal:

Notwithstanding the contentions of the Respondent on the merits, the NCLAT noted that the application was rejected as being defective without an opportunity being given to the Appellant to rectify any defects in its Application.

The NCLAT refused to decide any issues or merits concerning the Application filed, and stated it was the responsibility of the NCLT to consider all relevant issues and take an appropriate decision in accordance with law, but only once the chance to rectify the defects in the Application was provided to the Appellant in accordance with Section 9(5) of the IBC.

Conclusion:

The order of the NCLT dismissing the application of the Appellant was set aside and the application was revived by the NCLAT. The NCLT may give notice to the Appellant to rectify the defect, and then proceed with considering the application. This highlights the strict compliance on the letter of the law and the procedure set out in the IBC, which was insisted on by the NCLAT. Whether an application can be sustained on merits is a matter for the NCLT to decide, but only after the due process in terms of filing an application (including rectification of defects therein) has been followed.

Please find attached a copy of the judgement. 

This update has been contributed by Aayush Kumar (Partner) and Rohan Lodge (Associate).

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