NCLAT Rejects Suspended Director’s Challenge to CIRP, Asserts Timely Resolution over Procedural Technicalities [Read Order]

The National Company Law Appellate Tribunal (NCLAT) recently dismissed an appeal filed by a suspended director who challenged the initiation of the Corporate Insolvency Resolution Process (CIRP) on grounds of procedural impropriety and alleged suppression of facts.

The appeal was filed by Sushil Jejani, a suspended director of Nova Steels (India) Ltd., challenging the order dated 03.01.2024 passed by the National Company Law Tribunal (NCLT), Kolkata Bench, which admitted a Section 7 application filed by Prateek Gupta, the Financial Creditor.

The CIRP against Nova Steels (India) Ltd. was triggered on the basis of a loan transaction involving a sum of ₹4 crores disbursed by the Financial Creditor. This transaction, made in May 2019, was purportedly for the company’s business operations and was routed through various bank accounts including those of the Corporate Debtor and its associate entities.

The Financial Creditor alleged default in repayment and initiated proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016. The NCLT found merit in the claim and admitted the petition. The appellant, suspended director, contested this, claiming that the application was based on manipulated records and suppressed material facts.

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Before the NCLAT, the main contention was that the Section 7 application had not disclosed critical details, including the fact that part of the disbursed amount was actually transferred to accounts unrelated to the Corporate Debtor. He argued that this suggested a non-bonafide transaction and that there was no legally enforceable debt. He further alleged that the transactions were personal in nature, or at best related to group entities, and should not have formed the basis for insolvency proceedings against Nova Steels.

Jejani also raised objections regarding the maintainability of the petition, arguing that proper notice was not served and that the Financial Creditor had failed to prove the debt with sufficient documentation.

The NCLAT Bench comprising Justice Ashok Bhushan (Chairperson), Justice N. Seshasayee (Judicial Member), and Arun Baroka (Technical Member) found no merit in the appeal.

The Tribunal observed that the Financial Creditor had clearly established disbursement of funds, which were routed through the Corporate Debtor's bank account, and that entries in the books of accounts confirmed the receipt. It held that mere intercompany transactions or subsequent use of funds does not erase the liability or alter the legal character of the debt.

The Bench asserted that the IBC is not a forum to delve deep into complex money trails or test the purity of the transaction when the existence of a default is undisputed and documentation is sufficient.

The NCLAT also rejected the argument on non-service of notice, pointing out that the Corporate Debtor had adequate opportunity to respond and had, in fact, participated in the proceedings before the NCLT.

The NCLAT held that raising belated objections on procedural grounds was a tactic to derail the CIRP and was not permissible.

The tribunal observed that the entire purpose of the Code would be defeated if proceedings were set aside based on such hyper-technical objections.

As a result the NCLAT dismissed the appeal and upheld the initiation of CIRP by the NCLT Kolkata Bench.

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