No Application u/s 7 of IBC Can be Admit In Absence of Debt and Default: NCLAT [Read Order]

In a recent case, the New Delhi bench of the National Company Law Appellate Tribunal ( NCLAT ) held that application under section 7 of the IBC cannot be admitted in absence of any debt and consequent default on the part of the corporate debtor. It was viewed that the corporate debtor had discharged the liability arising under the agreement.

The  appeal has been filed by Atul Nathalal Patel , a suspended director of the corporate debtor against an order passed by the National Company Law Tribunal ( NCLT ) by which an application under section 7 of the IBC was admitted.

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An MOU was executed between the owners and the corporate debtor for the redevelopment of of a piece of land located at Malabar and Cumbula Hill Division Mumbai. An Article of Understanding ( AoU ) was also signed between the developers and the vendors who offered to join the corporate debtor in redeveloping the project and they agreed to develop their respective shares.

Since the vendors did not have required amount to be invested in the project, they entered into an Article of Agreement ( AoA ) with the investors, the respondents herein, by which they were promised to invest the amount of Rs. 3 crores on behalf of the vendors. 3 crores rupees out of this amount had already been given to the developers by the investors but rest of the amount could not be given as the project could not be started.

As per the agreement, in case the developers failed to owner terms and conditions of the agreement or failed to enter into a development agreement with the owner within 6 months, the investors will be entitled to cancel the agreement and the developers will be liable to return the amount along with interest.

Thereafter, the project development could not be started due to some unforeseen circumstances therefore the developers returned the amount of Rs. 1.3 crores to the investors and sent rest of the amount to the vendors who were directed to pay the amount to the investors. But the amount to be given to the investors had not been given by the vendors for which they sent notice to the corporate debtor seeking repayment of the amount.

An application under section 7 of the IBC was filed by the investors against the corporate debtor which came to be admitted by the NCLT. The appellant submitted that the AoA was entered between Thakkars, and the Investors in which document Corporate Debtor was only Confirming Parties. The financial facilities were obtained by Vendors from the Investors and there was no financial transaction between Developers and Investors. Developers were only a Confirming Party to the AoA.

That at no point of time, the Investors made any demand from the Corporate Debtor of any balance amount. Payments having already been received by Thakkars of the balance amount for payment to the Investors, there was no debt or default on the part of the Developers

That application is time barred as cause of action arose to the Investors after 7 months and they having admitted payment of ₹1.3 Crores in their letter by 15.10.2011. The cause of action arose to in 2011 itself when according to the Financial Creditor balance amount was not paid. The filing of the Application Section 7 Application in the year 2022 is nothing but abuse of process of Court and has been mala fidely and fraudulently initiated for purposes other than resolution of Corporate Debtor.

Per contra, the respondents submitted that the Investors have received back only 1.3 Crores which is also acknowledged by the Financial Creditor on 15.10.2011. No payments thereafter have been received by the Financial Creditor and the Appellant's case that 1.7 Crores was paid to the Vendors i.e., Thakkars on behalf of the Investors is incorrect.

That under the AoA, there was option with the Investor to terminate the Agreement and demand the payment with 18% interest which option was exercised by Investor on 30.07.2019, hence the cause of action to take proceeding against the Developers arose only on 30.07.2019 and a Section 7 Application which was filed on 11.08.2022 was well within time.

The first question was whether the claim was barred by limitation and proceeded to notice the relevant clauses of the agreements executed by the parties particularly clause 6 of Articles of Agreement which was entered into between the vendors and the investors.

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This clause states that in event Developers failed to comply with its obligation or failed to enter into Development Agreement with the Owners within 6 months, then a grace period of 1 month shall be provided to the Developers, and in event the Developers failed to entered into Development Agreement, Investors shall have an option to terminate the Agreement and Developer shall return ₹3 Crores with interest of 18%. Further clause 12 of the same agreement provided that developers and Vendors shall be equally and jointly and severely liable to the Investors towards the sum of ₹6 Crores.

The tribunal further noted that admittedly, building plans were never approved within 6 months as was contemplated in the MoU. No further steps were taken under the MoU or AoU and AoA after 16.05.2010, thus it is undisputed that Project never commenced. Whether the cause of action will not arise for Financial Creditor to claim back their amount till they exercise their option under Clause 6 is question to be answered.

The tribunal was not convinced by the submissions of the financial creditor that cause of action arose only when the agreement was terminated.

The two member bench of bench of Justice Ashok Bhushan ( Judicial Member ) and Mr. Barun Mitra ( Technical Member ) observed that the cause of action which accrued to Financial Creditor under Clause 8 is independent from exercise of any option under Clause 6. Under Clause 8, the cause of action arose to the Investor when project did not commence without the Agreement been terminated by the Financial Creditor under Clause 6. Thus, cause of action and running on the limitation under Clause 8 cannot be arrested or controlled by exercise of option by Financial Creditor in Clause 6.

It was noted that the period of 7 months came to an end on 16.12.2010 itself after expiry of 7 months from execution of the Agreement dated 16.05.2010. Thus, cause of action for filing the Application claiming refund of the investment arose to the Financial Creditor after 16.12.2010 and the same cannot remain suspended as contended by Counsel for the Financial Creditor till 30.07.2019.

The tribunal perused the bank statement of the vendors in which amount of Rs. 1.95 crores was received from the financial creditor. The amount of Rs. 1.7 crores out this amount had to be paid to the financial creditor towards refunding the investment of rs. 3 crores made by the financial creditor.

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It was found that “Corporate Debtor had refunded the amount of ₹1.7 Crore to Thakkars and their Company, which was meant for refund to the Investors towards their amount of ₹3 Crores.Silence of Financial Creditor for long 8 years of not writing even letter to Corporate Debtor or Vendors/Thakkars clearly indicates that refund of ₹3 Crores was satisfied.”

Since there was averment to the effect that there were collusions between the vendors and the financial creditor to cheat the corporate debtor , the bench of Justice Ashok Bhushan (Judicial Member) and Mr. Barun Mitra (Technical Member) has held that the ingredients of section 65 of the code were not satisfied in the present case for which parties were discharged.

The Tribunal was satisfied that the Section 7 Application filed by the Financial Creditor was hopelessly barred by time and was nothing but abuse of process of the Court by the Financial Creditor.

While allowing the appeal the tribunal set aside the Order passed by the Adjudicating Authority admitting Section 7 Application and dismissed Section 7 Application filed by the Financial Creditor.

To Read the full text of the Order CLICK HERE

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