Petition u/s 7 of IBC is not barred by Institution of Criminal Proceedings against Officials of Financial Creditor: NCLT allows Application of Canara Bank [Read Order]
Petition u/s 7 of IBC is not barred by Institution of Criminal Proceedings against Officials of Financial Creditor: NCLT allows Application of Canara Bank
In a recent case, while admitting the application filed by Canara Bank, the Cuttack bench of the National Company Law Tribunal (NCLT) has held that institution of criminal proceedings against the concerned official of the Financial Creditor cannot be a ground to reject the application under Section 7 of IBC, 2016, unlike in a Section 9 application, a pre-existing dispute cannot be a bar for admission of an application under Section 7 of the IBC, 2016.
The present application was filed by Canara Bank ('Petitioner/ Financial Creditor') under Section 7 of the Insolvency and Bankruptcy Code, 2016 ('the Code') read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for initiation of Corporate Insolvency Resolution process ('CIRP') against S.S. Aluminium Private Limited ('Respondent/ Corporate Debtor') for default amount of Rs.15,883,394.26/- (Fifteen Crores Eighty-Dight Lakhs Thirty-Three Thousand Three Hundred and Ninety Four Rupees and Twenty Six Paise).
The Financial Creditor sanctioned credit facilities, including a Cash Credit of and a Term Loan in favour of the respondent for the modernisation and expansion of the existing aluminium plant at Haldiapada, as the respondent was in the process of starting a project for an aluminium extrusion manufacturing unit. The objective was to produce aluminium solid and hollow extrusion profiles used in commercial, automobile, and industrial products.
The respondent sought an additional loan from the financial creditor to finance modernisation and expansion of the existing plant, which required higher capital expenditures. As a result, the Financial Creditor approved a further credit of Rs. 88,64,000/- vide its sanction letter dated 11.07.2025, as Term Loan , to support the expansion of the plant at Haldiapada.
The respondent failed to pay the instalments and also defaulted in payment of the interest. The Financial Creditor called upon the respondent to settle the arrears. Upon continued default, the loan accounts were classified as "Non-Performing Asset" on 11.05.2021 in accordance with the Reserve Bank of India's Prudential Accounting Norms.
The Financial Creditor, in the meantime, initiated proceedings under Section 13(2) of the SARFAESI Act, 2002 and after that the Respondent sought One Time Settlement (OTS). The Financial Creditor issued a notice under Section 13(4) of the SARFAESI Act, followed by a Sale/ Auction Notice of the mortgaged properties, which failed due to a lack of bidders, Subsequently, a second notice under Section 13(2) was issued on 26004.2022, and a second notice under Section 13(4) was issued on 16.072022.
Thereafter, the Financial Creditor issued a newspaper advertisement in the Business Standard on 20.07.2022 for the sale of the secured assets and filed petition before the High Court of Orissa seeking a direction for registration of the Sale Certificate by the Additional District Magistrate-cum-Registrar, Registration, Balasore, and the Sub-Registrar, Balasoree The said writ petition was disposed of by a final order dated 23.02.2024, directing registration of the Sale Certificate.
The applicant further argued that, according to the Framework for Revival and Rehabilitation of MSMEs, it is the respondent's responsibility to provide authenticated and verifiable documents proving its status as an MSME under the MSMED Act, 2006, at the time of classifying the account as NPA.
In this case, the respondent failed to disclose or prove its MSME status when its account was classified as NPAo The claim of being an MSME, raised belatedly in these proceedings, is therefore unfounded and appears to be an attempt to hinder the process under the Insolvency and Bankruptcy Code, 2016.
The total amount of loans defaulted by the respondent, exceeding Rs 1 Crore after the time limit specified in Section IOA of the Code, meets the minimum requirement for initiating proceedings under Section 7 of the Code. Additionally, although the initial defaults in the remaining loan accounts occurred within the Section IOA period of the IBC, 2016, this is irrelevant since the defaults continued beyond that Section 10 A period.
A review of Section 5(8) of IBC, 2016, shows that a financial debt includes borrowed money plus any interest, reflecting the consideration for the time value of money, It covers funds borrowed with interest payments. In this case, the Financial Creditor approved loans to the respondent through various loan agreements, and interest was charged on the sanctioned amount. This interest was detailed in the loan account statements submitted by the Financial Creditor with their application, but the respondent did not dispute the loan account statement during the argument of the present matter.
The bench of Deep Chourasia (Judicial Member) and Babulal Meena (Technical Member) observed that the FIR was registered by the respondent against the concerned official of the Financial Creditor cannot be a ground to reject the application under Section 7 of IBC, 2016, unlike in a Section 9 application, a pre-existing dispute cannot be a bar for admission of an application under Section 7 of the IBC, 2016.
It is conclusively established that the Respondent has in fact defaulted in payment of a debt amount i.e. beyond Rs, 1 Crore as evident from the Form-C and Form-D of the NeSL certificate, from the loan account statement of the respondent maintained by the Financial Creditor and from the acknowledgement of debt instrument executed by the respondent dated 13.07.2021 and the present application has been filed within the period of limitation as per Section 18 of the Limitation Act, 1963.
The tribunal admitted the application under Section 7 of the Code read with Rule 4(1) of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for initiating CIRP of S.S. Aluminium Private Limited, Corporate Debtor.
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