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An intention to initiate CIRP for ‘Recovery’ of their dues is not the ultimate purpose of the Code

The National Company Law Appellate Tribunal (NCLAT), New Delhi bench comprising Justice Anant Bijay Singh, Judicial Member and Ms. Shreesha Merla, Technical Member was hearing on Thursday an Appeal challenging the order of the Adjudication Authority of the National Company Law Tribunal, Chandigarh, wherein the Adjudicating Authority admitted the Application under section 7, to initiate the Corporate Insolvency Resolution Process (CIRP). The NCLAT bench held that "Seeking to initiate CIRP, in the factual matrix of the attendant case, was only with an intention for ‘Recovery’ of their dues and opposes the very spirit, point and purpose of the Code".

The Appellant-Shareholder-Ex-Director of the Corporate Debtor M/s Jindal Buildtech Pvt. Ltd. has preferred this Appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 against the Impugned Order dated 26.03.2021 passed by the Adjudicating Authority (National Company Law Tribunal, Chandigarh Bench, Chandigarh), admitting the Section 7 Application preferred by the second Respondent.

It was submitted by the Counsel for the Appellant that the second Respondent has falsely represented himself to be a Financial Creditor of the Corporate Debtor, as the money in question was never advanced to the Corporate Debtor as financial debt, but, in fact, the same amount was deposited to open and operate some joint depots to sale and distribute goods manufactured by the Corporate Debtor.

Counsel for the Appellant argued that Section 7 Application was filed by the second Respondent without appending any document to show that the amount in question is of the loan amount; any financial agreement to establish on what terms and conditions the purported ‘short term loan’ was advanced to the Corporate Debtor; never furnished the detailed record of the default recorded with the information utility as mandated under Section 7(3) of the Code; did not file adequate evidence to prove that the Corporate Debtor owed a ‘financial debt’ to the Creditor.

Mere reliance on the bank statements to allege that some money in the nature of financial debt was given to the Corporate Debtor, does not satisfy the requirements of a ‘financial debt’ as defined under the Code, Counsel for the Appellant further claimed.

It was submitted by the Appellant that in the ongoing proceedings under Section 138 of the NI Act, the Corporate Debtor had already paid an amount of Rs. 67,90,000/- vide a Demand Draft dated 09.09.2019. As per the directions of the Trial Court.

The Counsel for the Appellant has placed reliance on the Judgment of Hon’ble Supreme Court in Pioneer Urban Land v. UOI, REED 2019 SC 08502 in support of his case that “the ‘disbursal’ must be money and must be against consideration for the ‘time value of money’, meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilises the money”

It was submitted by the Counsel of the Respondent that the first Corporate Debtor had admitted in the reply to the Section 7 Application under the heading preliminary objections “that the Corporate Debtor had taken a short-term loan of Rs. Ninety-Seven Lakhs and assured its return within a year and also returned a sum of Rs. Nine Lakhs Fifty Thousand to the Financial Creditor. It is submitted that this amount of Rs. 9,50,000/-was paid on 11.05.2016 prior to the filing of Section 7 Application. In September 2016 Respondent No. 1/Corporate Debtor issued two cheques dated 01.09.2016 to the second Respondent for a total amount of Rs. 87,50,000/-, but the same was returned unpaid and hence proceedings under Section 138 of the NI Act were initiated against the Corporate Debtor.

The Counsel for the Respondent further argued that it was never the case of the Appellant before the Adjudicating Authority that the second Respondent was not a Financial Creditor and the debt due was not financial debt. Legal Notice dated 19.10.2018 reiterating the terms of the loan including interest @ 18% p.a was never replied to, disputed or objected to by the Corporate Debtor. Hence, adverse inference ought to be drawn against the Corporate Debtor. In the reply dated 06.08.2019, the Corporate Debtor had not challenged the maintainability of the Section 7 Application nor disputed the financial debt. Hence, the Adjudicating Authority has rightly held that there is a ‘debt’ and ‘default’ in payment of the financial debt and is more than Rs. 1,00,000/-, as admitted in the application.

After hearing the submissions of both the parties at length, the Appellate Authority were of the considered view that the main issue which arises for consideration in this Appeal is whether the Section 7 Application admitted against a Solvent Company, in the background where the Company has issued two cheques as security for the amount lent, and one cheque amount has been paid, (pursuant to the Order of the Trial Court under Section 138 of the NI Act, 1881, to compound one of the cases), and for the balance second cheque amount, does the initiation of Insolvency Proceedings fall within the ambit of the scope, objective and spirit of the Code which is ‘Resolution’ and not ‘Recovery’? Whether the Adjudicating Authority while admitting a Section 7 Application, as in this case, examine only if there is a ‘Debt’ and ‘Default’ but also assesses if the intent of the Applicant is primarily only ‘Recovery of the dues’?

The Appellate Tribunal was of the ernest view that seeking to initiate CIRP, in the factual matrix of the attendant case, was only with an intention for ‘Recovery’ of their dues and opposes the very spirit, point and purpose of the Code. The Appellate Authority held that ‘A Recovery Proceeding’ of this nature does fall within the scope and ambit of the words ‘for any purpose other than Resolution’, as defined under Section 65(1) of the Code. Having regard to the facts and circumstances of the case on hand, the Appeal was allowed and the Order of the Adjudicating Authority was set aside. In effect, the Order passed by the Adjudicating Authority appointing ‘Interim Resolution Professional’, declaring moratorium, freezing of account and all other Order passed by Adjudicating Authority pursuant to the Impugned Order, were set aside. The Appellate Authority were conscious of the fact that pursuant to an interim direction of the Appellate Tribunal, the constitution of the CoC had remained stayed. The Adjudicating Authority will now close the proceedings. The first Respondent Company was released from all the rigours of law and was allowed to function independently through its Board of Directors with immediate effect.


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