Can procedural defects and absence of a statutory notice under the proviso to Section 7(5)(b) of the IBC justify threshold rejection of a Section 7 application?

Summary

Practical Impact

What’s New / What Lawyers Should Note

• The proviso to Section 7(5)(b) IBC requires an individual notice to the applicant to cure defects before rejection—consolidated notices under NCLT Rules are insufficient.
• Defective affidavits in Section 7 applications are neither fundamental nor incurable; courts must allow an opportunity to cure.
• Procedural non-compliance in an IBC petition does not automatically render it non est if the defect can be remedied.
• NCLAT and NCLT must adhere to the statutory notice mandate in Section 7(5)(b) IBC.
• Cite this ruling to counter objections seeking outright rejection of Section 7 petitions on procedural grounds.

Summary of Legal Reasoning

1. Scope of Rule 4(1) & Form 1 IBC: No affidavit support is mandated by IBC’s application rules; affidavits are required only by Rule 34(4) NCLT Rules.
2. Scrutiny under Rule 28 NCLT Rules: Defects must be communicated and cure-able; Registrar may refuse registration only after notice and expiry of seven days.
3. Section 7(5)(b) proviso: Mandates personal notice to the applicant before rejection for incomplete application; notice on an authorized representative or via consolidated notice is insufficient.
4. Precedent on cure of defects: Dena Bank (2021) 10 SCC 330 and Vidyawati Gupta (2006) 2 SCC 777 hold procedural rules must advance justice; defects that are curable should not defeat substantive rights.
5. Remedy: The Supreme Court directs the petitioning Bank to cure all defects, including the affidavit, within seven days, and remands to the NCLT for hearing on merits.

Arguments by the Parties

Petitioner (Company)

• The Section 7 petition was non est as it was not supported by a proper verification affidavit per Rule 34(4).
• Consolidated notice under Rule 28 did not satisfy the proviso to Section 7(5)(b) IBC.
• Failure to cure within seven days justified threshold rejection.

Respondent (Bank)

• Defective affidavit is a curable defect; application remains valid.
• Proviso to Section 7(5)(b) IBC was not complied with, so rejection was unsustainable without a personal notice.
• Reliance on Dena Bank to argue for cure rather than rejection.

Factual Background

The Bank extended a ₹5.5 crore loan to the Company, classified as a non-performing asset in August 2019. It filed a Section 7 IBC petition in July 2023 supported by an affidavit dated earlier the same month. The NCLT refused registration after consolidated defect notices, and subsequently rejected the petition. The NCLAT restored and remanded it, holding defects curable. The Supreme Court affirmed the need for personal notice under Section 7(5)(b) proviso and directed the Bank to cure defects.

Statutory Analysis

• Section 7(5)(b) IBC: Empowers NCLT to reject incomplete petitions but mandates notice to the applicant to cure defects within seven days.
• Rule 34(4), NCLT Rules, 2016: Every petition must be verified by affidavit in prescribed Form NCLT.6.
• Rule 28, NCLT Rules: Details scrutiny, return for defects, cure periods, and refusal to register.
• Rule 38(5), NCLT Rules: Permits service of notices on authorized representatives but does not override the statutory Section 7(5)(b) notice requirement.

Procedural Innovations

• Clarifies the interplay between IBC’s statutory notice mandate and NCLT’s procedural rules—requiring personal notice before rejection under Section 7(5)(b).
• Reinforces the principle that curable procedural defects in insolvency petitions must be remedied, not result in outright dismissal.

Alert Indicators

• ✔ Precedent Followed – Affirms Dena Bank v. C. Shivakumar Reddy
• 🔄 Conflicting Decisions – Resolves conflict between consolidated NCLT notices and statutory notice requirement under Section 7(5)(b)