An insolvency application filed by an Operational Creditor U/s 9 of the Insolvency and Bankruptcy Code, 2016 (I&B Code) can be resisted on the ground that there is an ‘existing dispute‘, the I&B Code does not provide for such a defence for resisting an insolvency application filed in respect of a financial debt U/s 7 of the I&B Code.

In case of an application filed by a financial creditor, the Tribunal is only required to:

(i) satisfy itself of the occurrence of default;

(ii)  ensure that the application is otherwise complete; and

(iii) ascertain whether any disciplinary proceeding is pending against the proposed resolution professional.

In such a case, the debtor can resist an application only by highlighting that there is no debt, or the debt is not due either in law or in fact. The I&B Code is to be triggered as long as a default of an amount exceeding INR 1,00,000/- (now, INR 1,00,00,000/-) is made out by a financial creditor and in such a case, the Tribunal is not required to consider any other fact or even determine the exact amount of the default.

The NCLAT has reiterated this principle very recently in the decision of Allahabad Bank Vs. Poonam Resort Ltd. and Allahabad Bank Vs. Link House Industries Limited, wherein the corporate debtor tried to defer and resist the admission of an insolvency application even though it had admitted to a default of financial debt exceeding INR 1,00,000/- on the ground that application contained certain false statements and that the application was filed with a fraudulent/malicious intent.

FACTS:

On 16.10.2019, the National Company Law Tribunal, Mumbai Bench passed an order appointing a forensic auditor at the pre-admission stage to examine the correct position of the loan account and to test the corporate debtor’s allegation that the financial creditor had furnished false information in its insolvency application. Such allegations were raised by the corporate debtor by filing an application under Section 75 of the I&B Code which penalizes a financial creditor for knowingly providing materially false information in its application under Section 7 and contemplates a fine of at least INR 1,00,000/- extending up to INR 1,00,00,000/-

Interestingly, on the one hand, the NCLT, Mumbai Bench records that “as per the statement of accounts a sum of Rs. 25 Crores was found to be physical disbursed”, and, on the other hand, NCLT, Mumbai Bench directed a forensic investigation, considering an application under Section 75 of the I&B Code moved by Corporate Debtor.

Not surprisingly, thereafter, the NCLT, Mumbai Bench order was assailed by the Corporate Debtor before the NCLAT primarily on the ground that the Adjudicating Authority ordered a forensic investigation even though the application was otherwise complete and deserved to be admitted in terms of Section 7 of the I&B Code. Further, it was also contended that the applications have been pending consideration since September 2019.

NCLAT Findings:

On 22.05.2020, the NCLAT set aside the order of the Adjudicating Authority. The NCLAT reasoned that the Adjudicating Authority ignored the 14-day timeframe provided under the Code for admitting and rejecting insolvency application filed by the creditors. Amongst others, NCLAT relied on the Hon’ble Supreme Court’s decision in the case of Innoventive Industries Limited Vs. ICICI Bank and Anr((2018) 1 SCC 407), wherein the Apex Court has opined that, in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is “due” i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date.

In the view of the above, the NCLAT held, that the Adjudicating Authority cannot direct a forensic audit and engage in a long-drawn pre-admission exercise which will have the effect of defeating the object of the I&B Code. NCLAT further observed that if the financial creditor failed to prove the occurrence of a default by presenting appropriate evidence, the Adjudicating Authority may reject the application, alternatively, the Adjudicating Authority may return the application if it is found to be incomplete.

While emphasizing on the importance of speedy adjudication and strict adherence to the timelines provided under the I& B Code, the NCLAT held that the Code does not envisage a pre-admission enquiry into the proof of default by an independent forensic audit as that may defeat the object of the I&B Code. It held that the corporate debtor cannot be allowed to thwart the insolvency application by resorting to section 75 of the Code “unless in a given case forgery or falsification of documents is patent and prima facie established.

Considering that in the facts of the case, the corporate debtor had, in fact, admitted liability and default for an amount exceeding INR 1,00,000, the NCLAT refused to entertain the objections of the corporate debtor under Section 75 of the I&B Code.

Conclusion:

Understandably, provisions such as Section 75 have been inserted in the I&B Code to deter the creditors from wrongly invoking the I&B Code and protecting the corporate debtor from being dragged into insolvency process for extraneous purposes. A creditor who approaches the Adjudicating Authority with unclean hands and for no bona fide reasons should not be allowed to trigger the I&B Code which is intended for a holistic collective healing process. However, at the same time, the debtors apprehending an imminent corporate insolvency process cannot be allowed to invoke such provisions in a routine manner. It would be important for the debtor to prima facie satisfy the Adjudicating Authority that the creditor filed an application dishonestly which contains material misstatements before the insolvency proceedings can be stalled.

The insolvency proceedings are summary in nature and expected to be decided within 14 days from the date when the application is presented before the Adjudicating Authority and therefore, the Adjudicating Authority cannot, in such a summary proceeding, be allowed to be get into disputed questions of fact and deal with every faint allegation raised by a corporate debtor. The NCLAT very rightly held that the Adjudicating Authority cannot be permitted to delve into long drawn enquiry into every allegation raised under sections 65 and 75 of the Code to find out a potential violation at a pre-admission stage unless the corporate debtor meets the initial threshold and satisfies the Adjudicating Authority of a material wrongdoing and that the creditor failed to disclose the true state of affairs.

DISCLAIMER: The Entire Contents of this document have been prepared on the basis of relevant provisions and information available at that time and prepared with due accuracy and reliability. But in no event, I will be liable for any damages caused in connection with the use of this information.

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One Comment

  1. Vivek Mhaskar says:

    Sir, as per the latest advisory, the limit to invoke IBC Rs 1 crore default in amount has been specified ( earlier 1 lac provision ). Can an individual having an amount more than 1 crore can invoke the IBC proceedings against a Builder in Mumbai. Are there any restriction on the number of applicant in case of a Home Buyer as Financial creditor ? Pls evaluate and clarify. Thanks.

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