Expeditious Resolution Under IBC Cannot Override Natural Justice: NCLAT

The National Company Law Appellate Tribunal (NCLAT) in Delhi has held that the objective of speedy insolvency resolution under the Insolvency and Bankruptcy Code cannot come at the cost of fairness, setting aside an order that had closed a corporate debtor's right to file its reply in a pending insolvency case.

A bench of Judicial Member Justice N. Seshasayee and Technical Member Indevar Pandey observed:

“The objective of the Code is undoubtedly expeditious resolution. However, such expeditious resolution cannot be at the cost of fairness and natural justice. Speed of adjudication and observance of natural justice are complementary and not conflicting objectives. The principles of natural justice require that before serious civil consequences ensue, a party should ordinarily be afforded a meaningful opportunity to present its defence as the doctrine of audi alteram partem remains embedded in insolvency jurisprudence.”

The tribunal set aside an order of the National Company Law Tribunal (NCLT), New Delhi, which had closed Hannu Steels Pvt. Ltd.'s right to file a reply after it failed to do so within the time granted by the adjudicating authority. It directed that the company be given one final opportunity to file its reply before the adjudicating authority within a time-bound schedule.

The dispute arose from a Section 9 application filed by Rathi Powertech Global Pvt. Ltd., which sought initiation of the corporate insolvency resolution process against Hannu Steels Pvt. Ltd. over alleged non-payment of licence fees under a Licence User Agreement permitting the latter to use the "POWERTECH" trademark.

Hannu Steels contended that its manufacturing unit was shut pursuant to an order of the Commission for Air Quality Management and that it terminated the agreement in accordance with the contractual notice clause. The company maintained that no royalty remained payable after the expiry of the notice period. It also contended that it had furnished all necessary documents and instructions to its previous counsel, but the reply was not filed because of the counsel's negligence.

The appellate tribunal first condoned a seven-day delay in filing the appeal. It accepted the company's explanation that its former counsel had not informed it about the impugned order and that it became aware of the order only after independently checking the NCLT website.

Referring to the Supreme Court's ruling in Ramchandra Dallaram Choudhary v. Adani Infrastructure & Developers Pvt. Ltd., the tribunal held that the expression "sufficient cause" should receive a justice-oriented interpretation where delay is attributable to lapses on the part of legal representatives rather than the deliberate conduct of the litigant.

Turning to the procedural issue, the tribunal observed that although regulation of proceedings ordinarily falls within the NCLT's procedural discretion, that discretion must remain consistent with the principles of natural justice.

It further observed that courts must balance procedural discipline with the need to ensure that substantive justice is not defeated merely because of procedural lapses where no irreparable prejudice is caused to the opposite party.

The tribunal relied on the Supreme Court's decision in Rafiq & Anr. v. Munshilal & Anr., which observed that a litigant who has done everything expected of him should not be penalised for the default of his advocate.

It observed, "Vigilance expected from a litigant cannot be elevated into a standard of continuous supervision of every procedural step taken by counsel. The doctrine of diligence cannot be stretched to such an extent that substantive rights are defeated despite the existence of bona fide explanations.”

The tribunal also noted that Hannu Steels had not remained absent from the proceedings altogether. Its new counsel had appeared before the NCLT seeking an opportunity to place the company's defence on record, indicating that it intended to contest the proceedings rather than abandon them.

The tribunal further held that the defence sought to be raised could not, at least prima facie, be characterised as sham or frivolous, while clarifying that it was expressing no opinion on the merits of those contentions.