Application U/S 7 Of IBC Cannot Be Admitted In Absence Of Debt And Default: NCLAT New Delhi

The NCLAT New Delhi bench of Justice Ashok Bhushan (Judicial Member) and Mr. Barun Mitra (Technical Member) has 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. In this case, the corporate debtor had discharged the liability arising under the agreement despite this an application under section 7 was admitted. Brief Facts This appeal has been filed by a suspended director of the corporate debtor against an order passed by the NCLT by which an application under section 7 of the IBC was admitted. 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. This agreement stipulated that 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. Contentions 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. NCLAT's Analysis The tribunal firstly addressed 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. 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...

Application U/S 7 Of IBC Cannot Be Admitted In Absence Of Debt And Default: NCLAT New Delhi

Mohd Malik Chauhan

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