Giving Notice to the Creditor at Pre- admission Stage is a matter of Case-By-Case Discretion under Section 10 of IBC 2016- Go Airlines (India) Ltd. case- By Khushi Laddha

Giving Notice to the Creditor at Pre- admission Stage is a matter of Case-By-Case Discretion under Section 10 of IBC 2016- Go Airlines (India) Ltd. case

Khushi Laddha

The principal bench of the National Company Law Tribunal (“NCLT”) of New Delhi, comprising of Justice Ramalingam Sudhakar (President) and Shri L.N. Gupta (Technical Member), has ruled that there is no mandatory obligation to issue notice to creditors at the pre-admission stage under Section 10 of the Insolvency and Bankruptcy Code 2016 (“IBC 2016”). Rather, giving notice to creditors is a matter of discretion that must be exercised on a case-by-case basis on valid grounds. The bench made this decision while hearing a petition by Go Airlines (India) Limited[i] for the initiation of Corporate Insolvency Resolution Process under Section 10 of IBC 2016.

Issue raised by Objectors:

The issue before the bench was regarding the issuance of notice to the Creditors:-

“Whether there is any mandatory requirement of issuing notice to the Creditors before admitting an Application filed under Section 10 of IBC 2016.”

Contentions made by Lessors/Objectors/Creditors:

1. The Counsel representing the Lessors/Objectors/Creditors contented that it is necessary to issue notice to creditors to give them an opportunity to object to the application filed under Section 10 of IBC 2016 and placed reliance on the case of Krrish Realtech Pvt. Ltd. (2021) ibclaw.in 620 NCLAT[ii].

2. The Counsel representing the Lessors/Objectors/Creditors contended that as per Section 424 of the Companies Act 2013, the Adjudicating Authority is to be guided by the Principles of Natural Justice (“PNJ”) and therefore, is bound to afford an opportunity of being heard to the Creditors.

Observations by NCLT:

The Counsel representing the Lessors/Objectors/Creditors argued that it is necessary to issue notice to creditors to give them an opportunity to object to the application filed under Section 10 of IBC 2016.

  • “No express provision in the law, which necessitates the issue of notice or service of a copy of the Section 10 Application to the Creditor(s)”

In order to examine whether issuance of notice is a matter of right to those Creditors under the Section 10 Application, the bench referred to Judgement of Hon’ble NCLAT in the matter of M/s. Unigreen Global Pvt. Ltd. [2017] ibclaw.in 05 NCLAT[iii], and made observation that it does not specifically deal with the issue of whether there is as a condition precedent of issuing prior notice to the Creditors under a Section 10 Application. 

The bench noted that Rule 7 of the Application to Adjudicating Authority Rules, 2016 does not stipulate that a copy of the Section 10 application is required to be served to the Creditor(s), and that there are no respondents under Section 10. In contrast, Rule 4 of the Application to Adjudicating Authority Rules, 2016 requires an application filed under Section 7 by a financial creditor to be served to the corporate debtor. Similarly, Rule 6 mandates that an application filed by an operational creditor under Section 9 of IBC, 2016 be served to the corporate debtor. This is because applications under Section 7 and 9 are initiated by a creditor against a specific corporate debtor.

  • “Proceedings under Sections 7 and 9 of the IBC 2016, cannot be compared with proceedings under Section 10”

The bench also differentiated between three sections of the IBC 2016 – Section 7, Section 9, and Section 10. It elaborated that in cases filed under Section 7 or Section 9, which are preferred by a creditor against a specific corporate debtor, there are no other respondents other than the corporate debtor. The bench stated that Section 7 and Section 9 of the IBC 2016 are in personam, i.e., a litigation between two parties, where notice to the respondent/corporate debtor is a matter of right since there are no other respondents other than the corporate debtor. The bench placed reference to the judgments in the matter of Vekas Kumar Garg vs. DMI Finance Pvt. Ltd. & Anr. (2021) ibclaw.in 78 NCLAT[iv] and SREI Infrastructure Finance Limited Vs M/s. Alstrong Enterprises India Private Limited[v], wherein the Hon’ble NCLAT and the Adjudicating Authority prohibited the intervention of other parties/creditors in Section 7 or Section 9 applications on the ground that they are not necessary parties to the application. Therefore, notice to the respondent or corporate debtor is a matter of right since they are the only necessary party to the application. On the other hand, in cases filed under Section 10, the corporate applicant/debtor itself approaches the Adjudicating Authority for initiating its own Corporate Insolvency Resolution Process (“CIRP”). The default in such cases may or may not be limited to just one creditor, as there are multiple creditors of the corporate applicant, and the default to whom is running into thousands of crores.

Consequently, the bench emphasized that proceedings under Sections 7 and 9 of the IBC 2016, where only two parties are involved, cannot be compared with proceedings under Section 10. In the latter case, a corporate debtor has multiple creditors, and each of them will plead for a hearing. The bench argued that this is because the timelines specified in the IBC 2016 must be adhered to. Nevertheless, the creditors do not lose their rights, which they will eventually have in the course of proceedings.

  • “Application of Principles of Natural Justice: No Straight Jacket Formula required to Creditor for Opportunity of Being Heard under Section 10 of IBC 2016”

The Counsel representing the Lessors/Objectors/Creditors contended that as per Section 424 of the Companies Act 2013, the Adjudicating Authority is to be guided by the Principles of Natural Justice (“PNJ”) and therefore, is bound to afford an opportunity of being heard to the Creditors. However, the bench was of the opinion that there is no straight-jacket formula for applying the Principles of Natural Justice. The bench relied on the Judgement of the Hon’ble Supreme Court dated 19.09.2005 in the matter of Ajit Kumar Nag Vs G.M (P.J) India Oil, Civil Appeal No. 4544 of 2005[vi] wherein it was held that “principles of natural justice are not rigid or immutable and hence they cannot be imprisoned in a straight-jacket. They must yield to and change with exigencies of situations. They must be confined within their limits and cannot be allowed to run wild” and the further relied on the judgment of Hon’ble NCLAT in Krrish Realtech Private Limited in Company Appeal (AT) (Insolvency) No. 1008 of 2021 where it was held that “We are cautious that proceeding under the ‘I&B Code’ are time bound procedure where unnecessary delay has to be avoided by the Adjudicating Authority and giving time to objections which are meritless and giving time to objectors and interveners has to be exercised on sound discretion on valid grounds.”

The bench cautioned that hearing each and every Creditor, under Section 10 of IBC 2016, can cause an inordinate delay in the conclusion of the proceeding, which may result in the erosion of the value of the assets and defeat the very purpose of value maximization and ultimately, the revival of the Corporate Applicant, which is not the objective of the IBC.

Conclusion:

In light of the above observations, the bench concluded that giving notice to the creditors is a matter of discretion to be exercised on a case-by-case basis on valid grounds and is not mandatory. However, the issuance of notice at the pre-admission stage cannot be claimed as a matter of right wherever there is a clear apprehension of deterioration of the Corporate Applicant’s assets and where larger public interest is involved, indicating that in such cases, the Adjudicating Authority may exercise its discretion to issue notice to the creditors at the pre-admission stage.

Reference

[i] Go Airlines (India) Limited, (2023) ibclaw.in 199 NCLT  

[ii] Krrish Realtech Private Limited (2021) ibclaw.in 620 NCLAT

[iii] M/s. Unigreen Global Private Limited vs. Punjab National Bank & Ors. [2017] ibclaw.in 05 NCLAT

[iv] Vekas Kumar Garg vs. DMI Finance Pvt. Ltd. & Anr. (2021) ibclaw.in 78 NCLAT

[v] SREI Infrastructure Finance Limited Vs M/s. Alstrong Enterprises India Private Limited in IA-1615/2021

[vi] Ajit Kumar Nag Vs G.M (P.J) India Oil, Civil Appeal No. 4544 of 2005 

Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws (http://www.ibclaw.in). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws (http://www.ibclaw.in) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.