Not Mandatory To Issue Notice To The Creditors At Pre-Admission Stage Of Section 10 Application: NCLAT Delhi

Background Facts

M/s Go Airlines (India) Limited (“Corporate Applicant/Corporate Debtor”) is engaged in the business of Airlines and is the third largest airline operator in India.

Pratt & Whitney (“P&W”) had supplied defective engines to the Corporate Debtor due to which the latter’s several aircrafts were grounded and could not take off. P &W declined to provide any repair or replacement to the Corporate Debtor. The matter was referred to an emergency arbitration but the Award passed by the Arbitral Tribunal was not complied with by P&W.

For this reason, the Corporate Debtor was constrained to cancel 4,118 flights with 77,500 passengers in a month’s duration and could not pay the dues of its creditors. The Corporate Debtor filed an application under Section 10 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), voluntarily seeking initiation of the Corporate Insolvency Resolution Process (“CIRP”) against itself. No notice was served upon the creditors of the Corporate Debtor/Corporate Applicant.

When the application under Section 10 of IBC was being heard, the creditors raised an issue that a notice must be issued to them before admitting the said application, to enable them to raise objections.

Proceedings before NCLT

The first issue before the NCLT was “Whether there is any mandatory requirement of issuing notice to the Creditors before admitting an Application filed under Section 10 of IBC 2016?”

It was held that under Section 10 of IBC there is no mandatory requirement of issuing notice to the Creditor(s) at the pre-admission stage, rather giving notice to the Creditor(s) is a matter of discretion to be exercised on a case-to-case basis on valid grounds.

The NCLT Bench admitted the application under Section 10 of IBC and initiated CIRP against the Corporate Debtor.

SMBC Aviation Capital Ltd, GY Aviation and SFV Aircraft Holdings (“Lessors”) had leased out aircrafts to the Corporate Debtor and their dues were also outstanding. The Lessors filed an appeal before the NCLAT challenging the NCLT order dated 10.05.2023.

Issue

Whether in a Section 10 Application filed by a Corporate Applicant, it is necessary to issue notice to the creditors to grant them an opportunity of being heard before admission of the said Application?

NCLAT Verdict

The Bench observed that the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“NCLT Rules”) contains the procedure of filing an Application by a Financial Creditor, Operational Creditor as well as Corporate Applicant. Earlier Rule 7 of NCLT Rules mandated the Corporate Applicant to serve the Corporate Debtor with a copy of the application. In 2020, an amendment was introduced to Rule 7 whereby the Corporate Applicant was now obligated to serve a copy of the Application to the Insolvency and Bankruptcy Board (IBBI) before filing the same with the NCLT.

“The Applicant under sub-rule (1) shall dispatch forthwith a copy of the Application filed with the Adjudicating Authority, by registered post or speed post to the registered office of the Corporate Debtor. Now, after amendment, the Application is required to be sent to the Board. The Rule 7, does not contemplate giving the Application to the creditors of the Corporate Applicant. Thus under the statutory Scheme, Section 10 Application can be filed and Adjudicating Authority within a period of 14 days is required to either admit the Application or reject the Application”, the Bench observed.”

The Bench placed reliance on the judgment in Krrish Realtech Pvt. Ltd., Company Appeal (AT)(INS) No.1008, 1009 & 1010 of 2021, and opined that the NCLT has to decide on case to case basis whether time is to be granted to any objector/intervenor in a proceeding or not. No objector/intervenor can claim an opportunity to file objections as a matter of right.

The Bench held that IBC does not contain any provision for issuing notice to the creditors of the Corporate Applicant or hearing an objector first and then passing an order on the Section 10 application. There is no violation of principles of natural justice. The proceedings cannot be vitiated on the ground that no notice was served upon the creditors of the Corporate Applicant. It has been held as under:

“….since the statutory Scheme does not contain any obligation of issuing notice to the creditors by the Corporate Applicant, any objector appearing at the time of hearing has to be heard and the objection may be noted by the Adjudicating Authority and thereafter the appropriate decision can be taken. We, thus, conclude that the mere fact that no notice was issued to the creditors or any opportunity was given to the objectors before proceeding to hear, the Corporate Applicant, cannot be held to vitiate any procedure or violating the principles of natural justice, more so when objectors were heard by the Adjudicating Authority.”

The NCLAT upheld the NCLT order initiating CIRP against the Corporate Debtor.

The appeal has been disposed of.

Case Title: SMBC Aviation Capital Ltd. Vs. Interim Resolution Professional of Go Airlines (India) Ltd.

Case No.: Comp. App. (AT) (Ins) No. 593 of 2023

Counsel for Appellants: Mr. Arun Kathpalia, Mr. Krishnendu Datta & Mr. Sathvik Varma, Sr. Advocates, Mr. Abhijeet Sinha, Mr. Pranaya Goyal, Ms. Marylou Bilawala, Ms. Sharleen Lobo, Mr. Dhruv Khanna, Mr. Chiranjivi Sharma, Ms. Apoorva Kaushik, Ms. Neetika Sharma, Mr. Girish Shankar, Mr. Kshitij Wadhwa, Mr. Aditya dhupar, Mr. Palash Singhvi, Mr. Ankit Garg, Mr. R. Taneja, Advocates. Mr. Rajshekhar Rao, Sr. Advocate with Mr. Anandh Venkataramani, Mr. Saket Satapathy, Mr. Anubhav Dutta, Mr. Zashank Mehta, Mr. J. Shivam Kumar and Mr. Siddhant Kumar Singh, Advocates

Counsel for Respondents: Mr. Ramji Srinivasan & Mr. Ritin Rai, Sr. Advocates with Ms. Shruti Pandey, Ms. Namrata Saraogi, Mr. Ramakant Rai, Mr. Siddharth Ranate, Mr. Varun Kr. Tikmani, Mr. Somesh Srivastava, Ms. Dhristi Kaushik, Mr. Ravin Kapur, Advocates for IRP. Mr. Maninder Singh & Mr. P. Nagesh, Sr. Advocates, Mr. Diwakar Maheshwari, Mr. Pranjal Kishore, Mr. Shreyas Edupuganti, Mr. Shouryaditya, Mr. Suhas Puthige, Ms. Pratiksha Mishra, Advocates for suspended BOD.

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