Pranav B Prem

The Kochi Bench of the National Company Law Tribunal (NCLT), comprising Vinay Goel (Member-Judicial) and Madhu Sinha (Member-Technical), has held that the three-month period for filing bankruptcy applications against personal guarantors under Section 121(2) of the Insolvency and Bankruptcy Code, 2016, is directory and not mandatory.

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The decision came while considering two applications filed by the Kerala Financial Corporation (KFC) under Section 123 of the Code, seeking initiation of bankruptcy proceedings against Dr. Bharath Chandran and Dr. Ashalatha Nair, who had extended personal guarantees for the debt of Trivandrum International Health Services Limited. Both applications were filed after a delay of 266 days beyond the statutory three-month window prescribed under Section 121(2).

Applicant’s Submissions

The applicant contended that the delay occurred due to ongoing asset sales of the corporate debtor and the need to obtain requisite administrative approvals. It was further submitted that the corporation awaited the completion of the liquidation process and distribution of sale proceeds to ascertain the outstanding balance before initiating bankruptcy proceedings.It was also stated that a moratorium under Section 94 was in effect following the filing of earlier applications by Dhanlaxmi Bank, which were later withdrawn. The applicant argued that this moratorium period prevented them from initiating the present proceedings earlier. KFC maintained that the delay was neither intentional nor deliberate, and that the Adjudicating Authority possessed the jurisdiction to condone such delay under the Limitation Act, 1963.

Respondents’ Contentions

The respondents opposed the plea for condonation, asserting that Section 121(2) explicitly mandates that bankruptcy applications must be filed within three months of the order permitting such action. They argued that the provision does not provide for condonation of delay and that any application filed beyond the prescribed period is not maintainable.It was contended that the order permitting the filing of bankruptcy applications was passed on 21.12.2023, and hence, the three-month period expired on 20.03.2024, whereas the present applications were filed only on 04.03.2025, resulting in a delay far exceeding the permissible limit.

The respondents also relied on several Supreme Court decisions, including B.K. Educational Services Pvt. Ltd. v. Parag Gupta & Associates, Sagar Sharma v. Phoenix ARC Pvt. Ltd., and Jignesh Shah v. Union of India, to argue that applications under the IBC must be filed within the limitation period and that the Code does not allow extensions unless expressly stated.

Tribunal’s Observations

The tribunal first clarified that in cases involving personal guarantors, the applicable moratorium is governed by Sections 96 and 101, and not by Section 94. The moratorium, it noted, remains effective only for 180 days from the date of admission or until an order is passed on the repayment plan under Section 114, whichever occurs earlier. Thus, the reliance placed by the applicant on Section 94 to justify the delay was found to be misplaced.

The bench observed that while Section 121(2) of the Code uses the word “shall,” the provision is silent on any consequence or penalty for non-compliance with the timeline. Referring to State of U.P. v. Babu Ram Upadhya (AIR 1961 SC 751), the bench reiterated that the mere use of the word “shall” does not automatically render a statutory provision mandatory. Citing Topline Shoes Ltd. v. Corporation Bank (2002 3 SCR 1167), the tribunal explained that procedural time limits are intended to ensure expeditious proceedings, but when rigid adherence defeats substantive justice or causes undue hardship, such timelines may be construed as directory rather than mandatory.

The bench further relied on B.K. Educational Services Pvt. Ltd. v. Parag Gupta & Associates (Civil Appeal No. 23988 of 2017) to note that the Limitation Act applies to proceedings under the IBC, empowering the adjudicating authority to invoke Section 5 of the Limitation Act for condoning delay. Quoting from the order, the tribunal observed: “If rigid adherence to the prescribed timeline frustrates the object of the statute or results in undue hardship, a more flexible interpretation may be warranted.” It concluded that the purpose of prescribing a three-month period is to ensure prompt action, not to bar proceedings where justified delay exists. Hence, the provision should be construed as directory, particularly when no prejudice is caused to the opposing party and no penal consequence is prescribed for delay.

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While acknowledging that Kerala Financial Corporation, as a statutory institution, ought to have acted more diligently, the bench observed that the delay, though significant, did not appear deliberate or mala fide. Accordingly, the tribunal condoned the delay in filing the bankruptcy applications under Section 123 of the IBC. Both applications, IA(IBC)/117/KOB/2025 and IA(IBC)/121/KOB/2025, were allowed and disposed of, subject to the applicant depositing Rs. 25,000 each with the National Defence Fund within one week and filing proof of such compliance before the tribunal.

Appearance

For Applicant: Mr. Vinod P. V., Advocate

For Respondent: Mr. Liju V. Steephen, Advocate, Mr. M. Sreekumar, Advocate

Casue Title: Kerala Financial Corporation v. Dr. Bharath Chandran & Dr. Ashalatha Nair

Case No: IA(IBC)/117/KOB/2025 & IA(IBC)/121/KOB/2025 in CP(IBC)/24/KOB/2022 & CP(IBC)/23/KOB/2022

Coram: Shri Vinay Goel (Member-Judicial), Smt. Madhu Sinha (Member-Technical)