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Even if there is a ‘debt’ and ‘default’, the AA can use its discretion in rejecting an Application

The National Company Law Appellate Tribunal (NCLAT), New Delhi bench comprising Justice Anant Bijay Singh, Judicial Member and Ms. Shreesha Merla, Technical Member was recently hearing an Appeal and held that "even if there is a ‘debt’ and ‘default’, the Adjudicating Authority should use its discretion in admitting/ rejecting an application."

The brief point for consideration which arose in this Appeal was whether the Adjudicating Authority was justified in rejecting the Section 9 Application preferred by the Appellant herein.

The Appellant/Operational Creditor strongly contested that the Adjudicating Authority has wrongly observed that the demand notice under Section 8 of the Code was issued by an advocate and was therefore not valid.

The Adjudicating Authority in para 9 of the impugned order has observed that the demand notice which is a prerequisite for filing of the Application under Section 9 is bad as no document was produced by the Applicant/Appellant showing that the advocate who has signed the Application is associated with the Company for a long period and can take such steps on behalf of the Company.

The Appellate Authority were of the considered view that as far as this issue was concerned, an advocate can, on behalf of the Company issue a demand notice under Section 8 and no such document is required to establish his ‘period of association’ with the said Company. At this juncture, reliance was placed on the observations of the Supreme Court in Macquarie Bank Limited v. Shilpi Cable Technologies Limited, REED 2017 SC 12675, where the Apex Court observed, “49. Since there is no clear disharmony between the two parliamentary statutes in the present case which cannot be resolved by harmonious interpretation, it is clear that both statutes must be read together. Also, we must not forget that Section 30 of the Advocates Act deals with the fundamental right under Article 19(1) (g) of the Constitution to practice one’s profession. Therefore, a conjoint reading of Section 30 of the Advocates Act and Sections 8 and 9 of the Code together with the Adjudicating Authority Rules and Forms thereunder would yield the result that a notice sent on behalf of an operational creditor by a lawyer would be in order”.

Therefore, the Appellate Authority were of the earnest view that the observation by the Adjudicating Authority in para -9 be set aside.

However, the Application was not dismissed on this ground alone. A perusal of the impugned order shows that the Adjudicating Authority had dismissed the Application even on merits, the grounds being that the Corporate Debtor is an’ MSME’ and a ‘going concern’ and a ‘viable entity’.

It was also observed by the Adjudicating Authority that the Operational Creditor had filed the Petition as a tool of recovery and that the Code is not intended to be a substitute for a Recovery Forum. Further, the Adjudicating Authority had also noted that the Appellant/ Applicant had not produced on record any bank statements to show that payments were received from the Corporate Debtor against the invoices based on which the claims have been raised.

It was relevant to mention here, that the relevant provisions of the Code along with the concerned Regulations establish that the Application should be complete and only then the Adjudicating Authority may decide to admit the Application.

As per the Insolvency and Bankruptcy Code, 2016 and relevant Regulations therein, unless the Operational Creditor along with its application furnishes a copy of the invoices, the bank statements and the financial accounts, the Adjudicating Authority is empowered to reject an incomplete Application.

The Appellate Authority noted the contention of the Counsel for the Appellant that merely because the Corporate Debtor was a going concern and an MSME, the Adjudicating Authority ought not to have rejected the Application on this ground. The Preamble of IBC is carefully worded to describe the spirit and objective of the Code to be ‘Reorganisation’ and ‘Insolvency Resolution’, specifically omitting the word ‘Recovery’. The Parliament has made a conscious effort to ensure that there is a significant difference between ‘Resolution’ and ‘Recovery’. The Hon’ble Supreme Court has time and again observed that the fundamental intent of IBC is ‘maximising the value of assets’ in the process of ‘Resolution’.

In Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REED 2017 SC 09545, the Apex Court has examined in detail the United Nations Legislative Guide on Insolvency, in which the IBC finds its roots. Any Application to commence CIRP can be denied when the Creditor is using Insolvency as an inappropriate substitute for Debt Recovery Procedures, the Appellate Authority noted.

If IBC is purely used for the purpose of Debt Recovery, particularly when the amounts due are small, and the Company is a solvent entity and is a going concern, the question of ‘Reorganising’ or ‘Resolution of the Company’ does not arise. This Tribunal in Binani Industries Limited v. Bank of Baroda and Another, REED 2018 NCLAT Del 11524, has differentiated between ‘Recovery’ and ‘Resolution’ and has observed that IBC is not a Recovery Proceeding. ‘Recovery’ dispossesses the ‘Corporate Debtor’ of its assets while a Resolution is an effort to keep it afloat. Further, this Tribunal in Asset Advisory Services v. VSS Projects, REED 2021 NCLAT 09523, and also in Praveen Kumar Mundra v. CIL Securities Limited, REED 2019 NCLAT Del 05544, has noted that CIRP cannot be initiated with fraudulent intent ‘for any purpose other than the Resolution of Insolvency or Liquidation’ and therefore it is clearly covered under Section 65 of the Code.

The Hon’ble Supreme court in Vidarbha Industries Power Limited v. Axis Bank Limited., REED 2022 SC 07529, had observed that even if there is a ‘debt’ and ‘default’, the Adjudicating Authority should use its discretion in admitting/ rejecting an application. In the instant case, the Adjudicating Authority had rightly rejected the Application on this ground too.

For all the aforenoted reasons, the Appeal failed on merits and was accordingly dismissed.

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