For Initiating Proceedings U/S 7 Of IBC, Existence Of Financial Debt And Corresponding Default Is A Sine Qua Non: NCLAT

Brief Facts

The Appellant (M/s Santoshi Finlease Private Limited) filed a Section 7 application under the IBC Code, 2016 against the Corporate Debtor (M/s Mothers Prode Dairy India Pt. Ltd.) for non-payment of a loan amounting to Rs 4 Crores. The total outstanding amount of the corporate debtor after interest and delay in payment amounted to Rs. 9 crores. The Corporate Debtor was incorporated in the year of 2014, securing a term loan amounting to Rs 26.67 crores from SBI in 2015. Over time, the promoters resigned and ownership was transferred to new investors who held positions for a period of two month in the year 2019. During the said period, the board sanctioned loan agreement allegedly authorising the disbursement of funds from the Appellant to the Corporate Debtor.

The corporate debtor had been previously been admitted into CIRP based on a petition filed by one of the directors, but the same was set aside by the NCLAT on 05.08.2022. SBI classified the Corporate Debtor's loan account as Non-Performing Asset (NPA) and subsequently initiated an inquiry under the SARFAESI Act, taking possession of the Corporate Debtor's plant.

After the filing of Section 7 application by the Appellant, the State Bank of India opposed the initiation of the Corporate Insolvency Resolution Process (CIRP) alleging fraudulent and malicious intent on the part of the Appellant. SBI argued that the Appellant's Section 7 application was a collusive attempt to stall recovery and regain control over the corporate debtor.

Submissions of the Appellant

The Appellant stated that the corporate debtor defaulted in the repayment of the loan. It stated that Rs 92 lakhs were directly paid to the corporate debtor while the remainder was disbursed to its vendors as per instructions. The Appellant stated that the debt and default were adequately established in accordance to Section 7 of the Insolvency and Bankruptcy Code, making the initiation of the CIRP mandatory. The Appellant also stated that the adjudicating authority had failed to understand that once the default was proven, the authority had no discretion to reject the application under Section 7 in accordance to the judgement of the supreme court in Innoventive Industries Ltd vs ICICI Bank.

The Appellant also contended that the adjudicating authority had failed to recognise all the essential elements of 'default' under Section 3(12) of the IBC were met concerning the loan agreement between the Appellant and Respondent. The Authority should have followed the legal principles set forth by the Supreme Court in M. Suresh Kumar Reddy vs Canara Bank' (Civil Appeal No. 7121 of 2022, dated 11/05/2023).

Submission of the Respondent

SBI stated that the appellants Section 7 application was a fraudulent attempt to push the Corporate Debtor into CIRP and take control of its management. It argued that the loan agreement between the appellant and the corporate debtor was not a debt but an investment made by the Mittal family to acquire control over the affairs of the corporate debtor. SBI stated that the same individuals controlled both the appellant and the corporate debtor at the time loan agreement making it a self-serving transaction.

SBI also pointed out the previous CIRP initiated in 2019 had been dismissed by the NCLAT due to irregularities. SBI stated that the appellants real motive behind the invocation of the CIPR process was to surpass the SARFAESI proceedings and regain control over the Corporate Debtor. SBI stated that multiple CIRP applications had been filed against the corporate debtor making it an abuse of process.

NCLAT Judgement

The tribunal examined the arguments submitted by both the parties and upheld the decision of the Adjudicating Authority stating that the Section 7 petition filed by the Appellant was fraudulent and malicious. The Tribunal first considered whether there was a valid default under the Insolvency and Bankruptcy Code, 2016 and there was a presence of bona fide intent while filing a Section 7 petition. The tribunal stated that the same individuals controlled both the appellant and the corporate debtor at the time loan agreement making it a self-serving transaction.

The tribunal further stated that the corporate debtor's previous CIRP had been set aside by the NCLAT due to irregularities. The appellant had actively participated in the previous CIRP through its sister concern, Santoshi Hyvolt Electricals Pvt. Ltd which had submitted the resolution plan. The tribunal stated that for a transaction to qualify as a financial debt under Section 5(8) of the IBC, it must be disbursement against time value of money, which was absent in this case.

The Tribunal also concluded that the entire Section 7 application was a strategic attempt to take control over the Corporate Debtor. The tribunal also relied on the judgement of Wave Megacity Centre Private Limited vs Rakesh Taneja & Ors. (Company Appeal (AT) (Insolvency) No. 918 of 2022), stating that the principles highlighted in the present case for Section 10 application shall also be extended to Section 7 application under the code.

In conclusion, the tribunal dismissed stating that the appeal filed by the appellant and upheld the order of the Adjudicating Authority. It ruled that Section 7 petition had been filed with an ulterior motive and that the repeated attempts to file for CIRP against the corporate debtor amounted to an abuse of process. The tribunal concluded that SBI acted within its rights as a secured creditor in pursuing recovery under the SARFAESI Act and the Appellant's actions were intended to derail legitimate legal proceedings.

The Appeal was dismissed accordingly.

Case Title: M/s Santoshi Finlease Private Limited V. State Bank of India

Case Number: Company Appeal (AT) (Insolvency) No. 974 of 2023

Tribunal: National Company Law Appellate Tribunal, Principal Bench, New Delhi

Judge: Justice Ashok Bhushan] Chairperson and Arun Baroka (Member (Technical)

For Appellant: Mr. Saurabh Balwani, Mr. Anand Prakash and Mr. Chirag Rathor, Advocates.

For Respondent: Mr. Harshit Khare and Mr. Prafful Saini, Advocates for SBI

Date of Judgement: 05.05.2025

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