Viability Of Corporate Debtor Can't Be Considered While Deciding Petition U/S 7 Of IBC Once Debt & Default Are Established: NCLAT

The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Ashok Bhushan (Judicial Member) and Mr. Arun Baroka (Technical Member) has held that an application under section 7 of the Insolvency and Bankruptcy Code, 2016 cannot be rejected solely on the ground that the corporate debtor is a viable entity and that initiating insolvency proceedings would adversely affect the stakeholders.The Adjudicating Authority has no discretion to consider whether the Application should be admitted or not once the debt and default are established. Brief Facts: This Appeal has been filed by Edelweiss Asset Reconstruction Company Ltd (EARCL/Appellant) challenging the Order dated 06.11.2024 passed by the National Company Law Tribunal, Ahmedabad Bench (“Adjudicating Authority/NCLT”) by which an application filed by the Appellant under section 7 of the Code seeking initiation of Corporate Insolvency Resolution Process (CIRP) against Takshashila Heights Pvt Ltd (Corporate Debtor) was dismissed. The Corporate Debtor committed default in respect of two loan facilities sanctioned in 2018, amounting to Rs 70 crores (Rs 40 crores and Rs 30 crores respectively), originally extended by ECL Finance Ltd and subsequently assigned to the Appellant on 09.05.2022. The petition under section 7 of the Code was filed on 31.01.2024 claiming an outstanding sum of Rs 93.54 crores.This was supported by evidence of debt and default. However, the Adjudicating Authority dismissed the Petition holding that the proceedings were aimed at recovery rather than resolution, thus constituting a misuse of IBC provisions, and that initiating CIRP would prejudice the interests of stakeholders, given the Corporate Debtor's status as a going concern. Against the above, the present appeal has been filed. The Appellant submitted that the Corporate Debtor has committed defaults in repayment of the outstanding dues despite repeated requests and reminders given by the Financial Creditor. It was further submitted that despite the recall notice of the Financial Creditor and in view of the Corporate Debtor's inability to repay its debts, which include the outstanding dues due to the Financial Creditor, the initiation of CIRP in respect of the Corporate Debtor will be in the public interest and will benefit all creditors of the Corporate Debtor. It was further submitted that there were no material facts on record that conclusively established or proved any "malicious" or "fraudulent" intent on the part of the Appellant to initiate CIRP against the Corporate Debtor within a malicious intent, which would stop the admission of the Petition in view of Section 65 of the Code. Per contra, the Respondent submitted that the sequence of actions by the Applicant clearly indicate its mala fide intent and ulterior motive to recover its outstanding debts through pressure tactics and not resolution being the primary intent and object of the Code. Moreover, the said conduct is nothing but forum shopping through misuse of the provisions of the laws, i.e, IBC, SARFAESI Act and Negotiable Instruments Act under the guise of exercise of rights/remedies available under the said laws. It was further submitted that the Applicant has not approached this Adjudicating Authority with clean hands and has preferred the present Application as a tool to recover of the monies and that the same is reflecting the fraudulent and mala fide intention to misuse and abuse the provisions of the Code and that the said approach of the Applicant is against the intent and object of the Code. Observations: The Tribunal noted that a restructuring agreement was entered into between the parties. Although, the Respondent paid 1st instalment but defaulted in making the second installment. This triggered a default under clauses 8 and 9 of the Restructuring Agreement. Despite giving sufficient opportunities and after the expiration of a 15 days window period to cure the default, the Respondent failed to discharge the outstanding liabilities. Consequently, the agreement was revoked as per clause 8 of the Agreement via letter dated 29.12.2023. It further added that the said agreement was revoked not due to the Mala fide intent rather on account of default committed by the Respondent in clearing the outstanding liability of Rs. 2.24 crores due on 30.09.2023 which was also confirmed by the Respondent through its own e-mails. It held that therefore, under such circumstances, the Appellant was under no obligation to reopen the scheme and the Appellant rightfully exercised its right to file an application under section 7 of the Code. Since the scheme was revoked, the Appellant was not obligated to issue an NOC. This was communicated via e-mail sent on September 26, 2023. It further observed that e-mails dated March 15, 28 and 29, 2024 make it clear that the Respondent acknowledged its liability,...

Viability Of Corporate Debtor Can't Be Considered While Deciding Petition U/S 7 Of IBC Once Debt & Default Are Established: NCLAT

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Viability Of Corporate Debtor Can't Be Considered While Deciding Petition U/S 7 Of IBC Once Debt & Default Are Established: NCLAT

Mohd Malik Chauhan

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