Bankrupt Can File Application For Discharge After One Year, If Bankruptcy Trustee Fails To Do So: NCLAT New Delhi

The National Company Law Appellate Tribunal, Delhi held that when the Bankruptcy Trustee does not fulfil its statutory obligation under Section 138(1)(a) of the Insolvency and Bankruptcy Code, 2016, which requires the Trustee to apply for a discharge order after expiry of one year from the bankruptcy commencement date, the Bankrupt who is directly affected by continuance of the bankruptcy proceedings, can't be denied the right to approach the Adjudicating Authority and seek discharge. Justice Ashok Bhushan (Chairperson), Barun Mitra ( Technical Member) & Arun Baroka (Technical Member): “The Bankrupt, who is directly affected by continuance of the bankruptcy proceedings in a case where Bankruptcy Trustee does not perform its statutory obligation of filing an application after expiry of one year, cannot be said to be a person, who has no locus to even inform the Adjudicating Authority that application has not been filed by the Bankruptcy Trustee and to pray that Bankrupt be discharged.” Background Facts: Mr. Anil Syal, the appellant, filed an application under Section 94 of the Code for the initiation of the Personal Insolvency Resolution Process. As no repayment plan was approved, the Appellant filed an application for the initiation of the Bankruptcy Process under Section 122 of the Code. Subsequently, Union Bank of India, submitted its claim for Rs 71.90 crores, relinquishing its security interest over the asset of the appellant as 50% share in a residential flat. The Bankruptcy Trustee made a public announcement for the e-auction of 50% rights of the Appellant in the Flat. The auction got completed successfully and Mr. Akshat Gupta was declared as successful bidder. Later, Union Bank of India challenged this auction and it was set aside by the adjudicating authority, holding that only 15 days' notice for the auction was given instead of 30. The Adjudicating Authority directed the Bankruptcy Trustee and the Union Bank of India to conduct a fresh valuation for the same property. Thereafter, the appellant filed an appeal in the NCLAT challenging the order to conduct fresh proceedings. The NCLAT did not interfere with the order directing for revaluation of the property, but gave liberty to the appellant to file an application before the Adjudicating Authority to raise the issue of discharge. In the 5th CoC meeting, the Bankruptcy Trustee informed the CoC that since one year had elapsed, a discharge application under Section 138(1)(a) needed to be filed. However, Union Bank of India asked the Trustee to defer this agenda, so that they may obtain legal advice on the same, which was never provided. Later, the Appellant filed an application, seeking discharge in terms of Section 138(1)(a) of the Code, arguing that since more than a year had elapsed since commencement, discharge was mandatory. However, both the Bankruptcy Trustee and Union Bank of India opposed the application, stating that the appellant had no locus to file for a discharge application and only the Bankruptcy Trustee could file for discharge. The Adjudicating Authority accepted the submission of the Union Bank of India and stated that it was unnecessary to addressthe application filed by the Appellant as it does not align with the spirit of the code and the application has been filed by the Applicant with the intention of disrupting and derailing the Bankruptcy Process. Aggrieved by the order rejecting the application, the Appellant filed an application before the NCLAT. Findings: The NCLAT noted that as per “Section 138(1) of the Code 'The bankruptcy trustee shall apply to Adjudicating Authority for a discharge order'. Thus, the above provision cast an obligation on the Bankruptcy Trustee to apply for discharge on the expiry of one year from the bankruptcy commencement date. The Tribunal noted that the Trustee could not defer this duty on the ground that the Committee of Creditors or the Union Bank of India had not given legal advice. The obligation was statutory and independent of the instructions of the Committee of Creditors. The NCLAT rejected Union Bank of India's argument that the bankrupt himself had no locus standi to file an application for discharge. It stated that where the Bankruptcy Trustee does not perform its statutory obligation of filing an application after expiry of one year, the bankrupt can file an application as he is directly affected by the continuation of the proceedings. Thus, the NCLAT remarked that the NCLT's observation that the discharge application filed by the Appellant does not align with the spirit of the code was without any substance. It held that the objective of the Code is to adhere to strict timelines and must be strictly followed by all stakeholders. Thus, the NCLAT concluded that the order of NCLT was unsustainable as it did not take note of the strict timelines mandated in the code. ...

Bankrupt Can File Application For Discharge After One Year, If Bankruptcy Trustee Fails To Do So: NCLAT New Delhi

Mehak Aggarwal

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