In the year 2016, the Indian Parliament completely overhauled the then existing framework governing insolvency and bankruptcy in India. The novel Insolvency and Bankruptcy Code, 2016 (Code) sets out a comprehensive and consolidated set of provisions, which seeks to provide a new trajectory to the sick industry regime in India. With a dire need for a systematic and organised framework preceding 2016, this change was warmly welcomed. Till date, the provisions of the legislation has stood the test of the times but concomitantly, it is to be understood that while the Code still remains in its nascent state, the Adjudicating Authority strictly aligns itself with the provisions, simultaneously the objectives and the intentions of the framers.

Recently, a three judge Bench of the National Company Law Appellate Tribunal (NCLAT) in the case of Allahabad Bank v. Poonam Resorts Limited combined with Allahabad Bank v. Link House Industries Limited overruled the orders passed by NCLT, Mumbai wherein the Tribunal had directed a pre-admission enquiry by a forensic auditor against the Appellant’s application initiating the corporate insolvency resolution process (CIRP) under Section 7 of the Code.

The Appellant, Allahabad Bank being a financial creditor of the Respondents had moved an application against defaults for initiation of the CIRP under Section 7. Simultaneously, the Corporate Debtors moved an application under Section 75 of the Code contending that the Appellant initiated the CIRP “fraudulently and with a malicious intent to drag a solvent corporate who was willing to pay amounts that were actually due and legally payable”. Following this, the NCLT appointed a forensic auditor to examine the allegations and directed it to submit an independent report for the same.

Rectifying the wrongs of the NCLT:

The NCLAT noted that the NCLT had evidently erred in disregarding the time frame stipulated under the Code and engaging in a long-drawn pre-admission exercise. It heavily placed reliance on the plain language of Section 7(4) to hold that the Adjudicating Authority is mandated to ascertain the existence of a default within a period of 14 days of the receipt of the application. Referring to the dictum laid down in Innoventive Industries Limited v. ICICI Bank & Anr, NCLAT emphasised that the Adjudicating Authority is simply required to check the records of the information utility or any other evidence adduced by the financial creditor to satisfy itself of the occurrence of a default. It also proceeded to declare that the Adjudicating Authority cannot traverse beyond the letter of the law and the decision of the Supreme Court. Specifically, it was recorded that the Adjudicating Authority is not at liberty to direct a forensic audit and embark on a pre-admission inquiry which would have the effect of frustrating the object of the Code. The bench reasoned that if a financial creditor fails to produce evidence as required, the Adjudicating Authority is empowered to take an appropriate decision. In cases where the application is incomplete, the Adjudicating Authority may return the same for rectification within 7 days of the receipt of notice.

The NCLAT ruled that a pre-admission enquiry with regards to the applications filed under Section 7 is not envisaged under the Code. Accordingly, it stated that the Section 75 application filed by the Corporate Debtors cannot be allowed to thwart the provisions of the Code when the matter is at the threshold stage of admission. Holding that Section 75 is a penal provision, the NLCAT observed that it cannot be permitted to defeat the corporate insolvency resolution process unless forgery or falsification of documents is prima facie established.

Noting that the Corporate Debtors had clearly admitted their liability to an extent, the NCLAT ruled that it was futile to claim that the Section 7 applications must fulfil Section 65 requirements at the pre-admission stage. In consequence, the NCLAT found that the impugned orders were unsustainable and liable to be quashed.

Critical Comment:

It is notable that this is the first judgment of an Indian tribunal addressing a pre-admission enquiry in regard to proof of default by directing a forensic audit. This case assumes significance in light of the impugned orders passed by NCLT, Mumbai. In arriving at its decision, NCLAT carried out a detailed analysis of the Hon’ble Supreme Court’s decision in Innoventive Industries Limited. The judgment has reiterated the cardinal principle of a time-bound resolution process and this decision will undoubtedly lend much needed clarity in prospective cases. It remains to be seen whether this approach adopted by the Tribunal is strictly followed in subsequent judgments. 

NCLAT’s move is warmly welcomed. The provisions of the Code were drafted keeping three major objectives in mind, which are conspicuously placed in the Report of the Bankruptcy Law Reforms Committee dated November 2015. The objectives as mentioned are “low time to resolution”; “low loss in recovery”; “higher levels of debt financing across a wide variety of debt instruments”. The Report effectively lays stress on the principle that “the longer the delay, the more likely it is that liquidation will be the only answer.”  The impugned orders of the NCLT undermines the objectives of the Code and its legislative intent in several ways. Primarily, it fails to recognise the basic principle underlying the Code. The concept of ‘time is the essence’ is pervasive all throughout the Code and this is the sole reason why the provisions explicitly provide specific time periods for each and every process governed by the Code. Secondly, Section 75 was enacted with an intent to protect the corporate debtor from mala fide usage of the provisions. However, owing to the broad language of this provision, there are high chances that it might be used by the corporate to resort to delay tactics. This must be strictly avoided at all costs.  Lastly, Section 7 in its widest of interpretation does not envisage a pre-admission enquiry in the case of acknowledgement of due and payable debt. This provision was interpreted in great detail by the Hon’ble Apex Court in the case of Innoventive Industries Limited wherein the Court explicitly stated:-

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. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise”

It is manifestly clear that the NCLT acted in blatant contradiction to a recent dicta of the Supreme Court. Therefore, by directing a pre-admission enquiry, the Tribunal grossly misconceived the provisions and the legislative intent behind the Code.

Concluding Remark:

Therefore, it is pertinent that the adjudicating authorities strictly stick to the structural cum textual theories of interpretation while interpreting the provisions of this Code and refrain themselves from the quest of doing everything right. It is of utmost importance that the adjudicating authorities abstain from replicating an antiquated adversarial judicial system and instead act as auxiliaries in furthering the objectives of the Code. Only then will it be possible for the Code to achieve what the framers sought it to achieve, relishing the foreseen fruit of the future.

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Author 1- Mudit Ahuja – IV year student at ILS Law College, Pune | Email – Muditahuja268@gmail.com

Author 2- Anshritha Rai Final year student at ILS Law College, Pune | Email – raianshritha@gmail.com | Profile Link- https://taxguru.in/author/anshritha/

Author Bio

Qualification: Student- Others
Company: N/A
Location: Jodhpur, Rajasthan, IN
Member Since: 11 May 2020 | Total Posts: 1

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