Existence of Financial Debt and Corresponding Default is a Sine Qua Non for Initiating Proceedings u/s 7 of IBC: NCLAT [Read Order]

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, upheld the adjudicating authority's ruling and dismissed a Section 7 petition under the Insolvency Bankruptcy Code (IBC), 2016, finding that the petition was submitted maliciously.

Santoshi Finlease Private Limited, the appellant, filed a Section 7 application under the IBC Code, 2016 against Mothers Prode Dairy India Pt. Ltd., the corporate debtor, for failing to repay a loan of Rs 4 crores.  After interest and payment delays, the corporate debtor's total overdue balance was Rs. 9 crores.  After being formed in 2014, the Corporate Debtor obtained a Rs 26.67 crore term loan from SBI in 2015.  The promoters eventually quit, and new investors took over control. These investors held positions for two months in 2019.  The board reportedly approved a credit agreement during that time that permitted the Appellant to give money to the Corporate.

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On 05.08.2022, the NCLAT overturned the corporate debtor's prior admission into CIRP, which had been granted in response to a petition submitted by one of the directors.  SBI took custody of the corporate debtor's plant after classifying the loan account as a non-performing asset (NPA) and starting an investigation under the SARFAESI Act.

 The State Bank of India objected to the start of the Corporate Insolvency Resolution Process (CIRP) after the Appellant filed a Section 7 application, claiming that the Appellant had malicious and fraudulent purpose.  The Appellant's Section 7 application, according to SBI, was a coordinated effort to delay recovery and retake control of the corporate debtor.

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The corporate debtor received Rs 92 lakhs in direct payment, with the remaining amount being distributed to its vendors in accordance with directives.  According to the appellant, the debt and default were sufficiently proven under Section 7 of the Insolvency and Bankruptcy Code, necessitating the start of the CIRP.  The appellant further claimed that the adjudicating body had not realized that it had no choice but to deny the application under Section 7 once the default was established.

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Further, the appellant argued that the adjudicating authority had not acknowledged that the loan agreement between the appellant and respondent met all of the requirements for "default" under Section 3(12) of the IBC.  According to SBI, the appellant's Section 7 application was a deceptive attempt to force the corporate debtor into CIRP and seize management of the company.  It maintained that the financing arrangement between the appellant and the corporate debtor was an investment made by the Mittal family to gain authority over the corporate debtor's operations rather than a debt.  According to SBI, the loan deal was a self-serving transaction because the same people controlled both the appellant and the corporate debtor at the time.

The tribunal considered the reasons made by each party and maintained the Adjudicating Authority's ruling that the Appellant's Section 7 petition was malicious and fraudulent.  The Tribunal initially examined whether a legitimate default under the 2016 Insolvency and Bankruptcy Code existed, as well as if there was genuine intent when submitting a Section 7 petition.  It was a self-serving transaction, the tribunal said, because the same people controlled the corporate debtor and the appellant at the time of the loan agreement.

The bench comprising of Justice Ashok Bhushan (Chairperson) and Arun Baroka (Member (Technical) concluded that the entire Section 7 application was a strategic attempt to take control over the Corporate Debtor. The tribunal also relied on the judgement of Wave Megacity Centre Private Limited vs Rakesh Taneja & Ors. stating that the principles highlighted in the case for Section 10 application shall also be extended to Section 7 application under the code.

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The tribunal considered the reasons made by each party and maintained the Adjudicating Authority's ruling that the Appellant's Section 7 petition was malicious and fraudulent. The Tribunal initially examined whether a legitimate default under the 2016 Insolvency and Bankruptcy Code existed, as well as if there was genuine intent when submitting a Section 7 petition. It was a self-serving transaction, the tribunal said, because the same people controlled the corporate debtor and the appellant at the time of the loan agreement.

To Read the full text of the Order CLICK HERE

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