Counterclaims Cannot be Set Off Against Financial Debt in Section 7 Petitions; NCLAT Reverses NCLT's Order
- REEDLAW
- Oct 16, 2024
- 3 min read
Counterclaims cannot be set off against financial debt in Section 7 petitions under the IBC, and the NCLAT has reversed the NCLT’s order.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench led by Justice Rakesh Kumar Jain (Judicial Member) and Mr. Ajai Das Mehrotra (Technical Technical) reviewed an appeal and reversed the order of the NCLT. The NCLAT Bench observed that the financial debt of Rs. 1,01,50,009/- was valid, due, and within limitation, and the NCLT erred in allowing the adjustment of Rs. 10,85,850/- as a counterclaim, which is impermissible under the IBC; thus, the petition under Section 7 was maintainable, and the matter was remanded for CIRP admission.
The appeal was filed before the National Company Law Appellate Tribunal (NCLAT) challenging the order dated 14.07.2023 passed by the Adjudicating Authority (National Company Law Tribunal, Mumbai Bench) in C.P. (IB) No. 986/NCLT/MB/CIV/2021. In this order, the petition filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) was dismissed. The appellants, shareholders and former directors of the Corporate Debtor claimed a default of Rs. 1,22,42,927/- comprising a principal amount of Rs. 1,01,50,009/- and interest at 9% per annum up to 30.06.2021.
The NCLT had dismissed the petition primarily on the ground that the financial debt did not meet the threshold requirement under Section 4 of the IBC. The Corporate Debtor asserted that the appellants owed Rs. 10,85,850/-, which, when set off against the acknowledged debt, brought the net liability below the statutory threshold of Rs. 1 crore. Additionally, the NCLT found the appellants' claim for interest untenable since no interest had been agreed upon for the relevant period, and the claim appeared irregular given the absence of any interest payments between 2009 and 2019.
The appellants contended that the Corporate Debtor’s claim of Rs. 10,85,850/- was a unilateral entry made during the pendency of the petition to defeat the insolvency proceedings. They argued that the entry was neither demanded earlier nor reflected in the Corporate Debtor’s records at the time of filing the petition. Further, they asserted that under the applicable accounting standards, such an entry could not be set off against long-term borrowing. The appellants also highlighted the absence of board resolutions authorizing the payment of interest beyond 1999-2000, refuting the debtor's claim that no interest was payable.
In defence, the Corporate Debtor alleged fraudulent conduct by Mr. Kakrania, accusing him of misrepresenting himself as a director and misappropriating funds collected as rent on behalf of the company. A police complaint had been filed against him in June 2021 for fraud. However, the NCLAT noted that the police complaint did not identify specific transactions or amounts.
After reviewing the submissions, the NCLAT held that the financial debt of Rs. 1,01,50,009/- was within the limitation period and duly acknowledged in the balance sheets. It rejected the NCLT’s reliance on the Corporate Debtor’s set-off claim, observing that no provision under the IBC permits the adjustment or counterclaim against financial debt. The tribunal found that the NCLT had erred in reducing the debt amount below the threshold limit based on the disputed entry. Accordingly, the NCLAT set aside the NCLT’s order and remanded the matter for admission of the Corporate Debtor into the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC. The appeal was allowed with no order as to costs.
Mr. Sandeep Bajaj, Mr. Vipul Jai, Mr. Mayank Biyani, Advocates represented the Appellant.
Mr. Vinod Kumar Chaurasia, the Advocate appeared for the Respondent.
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