NCLAT Upholds Rejection of Section 7 Application as Default Amount was Below ₹1 Crore, Sets Aside Penalty u/s 65 [Read Order]

The National Company Law Appellate Tribunal (NCLAT) upheld the order of the Indore Bench of the National Company Law Tribunal (NCLT) rejecting a Section 7 application filed, after observing that the alleged default amount was below the statutory threshold of Rs. 1 crore under the Insolvency and Bankruptcy Code, 2016. The appellate tribunal set aside the penalty imposed under Section 65 of the Code.

Tanay Securities & Services Pvt. Ltd., the financial creditor, had filed an application under Section 7 of the Code before the NCLT, claiming a financial debt of Rs. 4.08 crore and alleging default by the corporate debtor.

The NCLT, after hearing both sides, observed that the corporate debtor had substantially repaid the amount claimed, leaving only a disputed balance of Rs. 19.19 lakh. Since the remaining sum fell below the Rs. 1 crore threshold required for initiating insolvency proceedings under Section 4(1) of the Code, the NCLT rejected the application and also imposed a penalty under Section 65, stating that the petition was not maintainable.

Before the NCLAT, the appellants argued that the adjudicating authority itself had acknowledged the existence of debt and repayment, and in such circumstances, there was no justification for invoking Section 65 or imposing a penalty. They argued that the application was filed in good faith and was not intended to misuse the insolvency process.

The respondent argued that the entire claim had been repaid and that the appellants, being shareholders and co-promoters of the corporate debtor, had filed the application for purposes unrelated to insolvency. They argued that the penalty was rightly imposed as the application lacked merit.

The bench comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) observed that the NCLT had already recorded a finding that the corporate debtor had substantially repaid the claimed amount and that the remaining default was below Rs. 1 crore.

The appellate tribunal explained that under such circumstances, the NCLT was correct in rejecting the Section 7 application as the mandatory conditions of “debt” and “default” exceeding the statutory threshold were not met.

It was pointed out that there was no finding of any fraudulent or malicious intent on the part of the appellants to justify the imposition of a penalty under Section 65. On this basis, the NCLAT upheld the NCLT’s order rejecting the Section 7 application but set aside the direction imposing a penalty. The appeal was accordingly partly allowed.

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