Natural Justice before NCLT- Sree Metaliks Limited and Anr. (Corporate Debtor) Vs. Union of India & Anr.- High Court of Calcutta

Case Reference:

Case Name : Sree Metaliks Limited and another Vs. Union of India and Anr.
Writ No. : W.P. 7144 (W) OF 2017
Petitioner : Sree Metaliks Limited and another
Respondent : Union of India and Anr.
Date of Judgment : 07-Apr-17
Court : High Court of Calcutta

Brief about decision:

A person cannot be condemned unheard. Where a statute is silent on the right of hearing and it does not in express terms, oust the principles of natural justice, the same can and should be read into in. When the NCLT receives an application under Section 7 of the Code of 2016, therefore, it must afford a reasonable opportunity of hearing to the corporate debtor as Section 424 of the Companies Act, 2013 mandates it to ascertain the existence of default as claimed by the financial creditor in the application.
The proceedings before the NCLT are adversarial in nature. Both the sides are, therefore, entitled to a reasonable opportunity of hearing.

Analysis of Case:

Section 7 read with section 61 of the Insolvency and Bankruptcy Code, 2016 read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudication Authority) Rules, 2016 and Section 424 of the Companies Act, 2013 – Initiation of Corporate Insolvency Resolution Process by Financial Creditor

Facts of the Case:

An application under section 7 of the Code of 2016 was filed against the first petitioner (Corporate Debtor) before the NCLT Kolkata Bench. According to the first petitioner it had received a notice from a firm of practicing company Secretaries with regard to the filing of the Company Petition, however the notice does not contain any information as to the date of hearing of the company petition. The Corporate Debtor further contended that NCLT had proceeded to admit the company petition without affording any opportunity of hearing to it and therefore NCLT had acted in breach of the principles of natural justice in doing so. The order of NCLT was assailed by the Corporate Debtor before the NCLAT. The Corporate Debtor submitted that it had no objection to the admission of the Insolvency petition but objected to the appointment of the IRP. However, it did not press the point of breach of the principles of natural justice before NCLAT. The NCLAT disposed the appeal and only replaced the IRP appointed by the NCLT.

A writ petition was filed before the Calcutta High Court by the corporate debtor on the ground that Section 7 of the Insolvency and Bankruptcy Code, 2016 (Code of 2016) and the relevant Rules under the Insolvency and Bankruptcy (Application to the Adjudicating Authority) Rules, 2016 are vires as it does not afford any opportunity of hearing to a corporate debtor in a petition filed under Section 7 of the Code of 2016.

Verdict:

In the scheme of the Code of 2016, an application under Section 7 of the Code of 2016 is to be first made before the NCLT. An appeal of the order of NCLT will lie before the NCLAT. NCLT and NCLAT are constituted under the provisions of the Companies Act, 2013 (Act, 2013). The procedure before the NCLT and the NCLAT is guided by Section 424 of the Companies Act, 2013.
Section 424 of the Companies Act, 2013 requires the NCLT and NCLAT to adhere to the principles of the natural justice above anything else. It also allows the NCLT and NCLAT the power to regulate their own procedure. Fretters of the Code of Civil Procedure, 1908 does not bind it. However, it is required to apply its principles. Principles of natural justice require an authority to hear the other party. In an application under Section 7 of the Code of 2016, the financial creditor is the applicant while the corporate debtor is the respondent. A proceeding for declaration of insolvency of a company has drastic consequences for a company. Such proceeding may end up in its liquidation. A person cannot be condemned unheard. Where a statute is silent on the right of hearing and it does not in express terms, oust the principles of natural justice, the same can and should be read into in. When the NCLT receives an application under Section 7 of the Code of 2016, therefore, it must afford a reasonable opportunity of hearing to the corporate debtor as Section 424 of the Companies Act, 2013 mandates it to ascertain the existence of default as claimed by the financial creditor in the application. The NCLT is, therefore, obliged to afford a reasonable opportunity to the financial debtor to contest such claim of default by filing a written objection or any other written document as the NCLT may direct and provide a reasonable opportunity of hearing to the corporate debtor prior to admitting the petition filed under Section 7 of the Code of 2016. Section 7(4) of the Code of 2016 requires the NCLT to ascertain the default of the corporate debtor. Such ascertainment of default must necessarily involve the consideration of the documentary claim of the financial creditor. This statutory requirement of ascertainment of default brings within its wake the extension of a reasonable opportunity to the corporate debtor to substantiate by document or otherwise, that there does not exist a default as claimed against it. The proceedings before the NCLT are adversarial in nature. Both the sides are, therefore, entitled to a reasonable opportunity of hearing.

Case Reference: High Court of Calcutta,  Sree Metaliks Limited and Anr. Vs. Union of India & Anr., Date of Order: 07-04-2017.

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