Existence of Financial Debt and Default Established Through Documentary Evidence Mandates Admission of Section 7 Application Under IBC
- REEDLAW
- Dec 6, 2024
- 3 min read
NCLAT held that the existence of financial debt and default, established through documentary evidence, mandated the admission of the Section 7 application under the IBC.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench led by Justice Ashok Bhushan (Chairperson) and Technical Member Mr. Barun Mitra reviewed an appeal and observed that the existence of financial debt and default exceeding the threshold under the Insolvency and Bankruptcy Code, 2016, as substantiated by documentary evidence such as balance sheets and TDS deposits, mandates the admission of a Section 7 application, irrespective of disputes over the quantum of debt, partial payments, or allegations of non-bona fide intent.
The National Company Law Appellate Tribunal (NCLAT) dismissed the appeal filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC), affirming the order of the National Company Law Tribunal (NCLT), Mumbai Bench-I, dated 27.06.2022. The NCLT had admitted a Section 7 application filed by Gajendra Investment Ltd. (GIL) against Rushabh Civil Contractors Pvt. Ltd. (Rushabh), citing non-payment of a financial debt. The financial assistance of ₹3.77 crore extended to the Corporate Debtor on 14.09.2016 was acknowledged in its balance sheet under "Short Term Borrowings - Inter Corporate Loans," and evidence such as TDS deposits on interest and partial repayments substantiated the claim of default. Despite a demand notice, repayment was not made, leading to the declaration of default and the subsequent filing of the application.
The appellant, an ex-director of the Corporate Debtor, contended that the absence of a financial contract undermined the application, citing discrepancies in the claimed amount and arguing that an MoU with a sister concern of the Financial Creditor had discharged the debt. It was also alleged that the application was a counterblast to another insolvency petition filed by the Corporate Debtor against Centrio Life Spaces Ltd. The Financial Creditor refuted these claims, asserting that the financial debt was supported by documentary evidence and that the application was within the limitation period.
The NCLAT, referencing statutory provisions under the IBC and precedents such as Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563 and Agarwal Polysacks Limited v. K.K. Agro Foods and Storage, Limited, REEDLAW 2023 NCLAT Del 09515, clarified that a financial debt need not be evidenced by a written contract. The Tribunal distinguished the case from Prayag Polytech, holding that the reliance on substantive evidence, rather than solely TDS entries, established the existence of financial debt. It dismissed the appellant's arguments, noting that the MoU cited was not binding on the Financial Creditor, as it was neither signed nor acted upon by them.
Addressing other contentions, the Tribunal held that disputes over the quantum of debt or partial repayments do not preclude the admission of a Section 7 application, provided the financial debt exceeds the statutory threshold. It rejected the appellant's reliance on the Vidarbha Industries Private Limited v. Axis Bank, Limited, REEDLAW 2022 SC 07529 judgment, clarifying that it does not provide a general rule against admitting applications upon proof of debt and default. The Tribunal emphasized that once the conditions of debt and default are established, the Adjudicating Authority has no discretion but to admit the application.
The NCLAT concluded that all prerequisites under Section 7 were met and upheld the NCLT’s decision to admit the Corporate Debtor into CIRP. The appeal was dismissed, the interim stay on the constitution of the Committee of Creditors was vacated, and the Interim Resolution Professional was permitted to proceed with CIRP. The intervention application was disposed of with liberty for the applicant to file claims before the Resolution Professional in accordance with the law.
Mr. Abhijeet Sinha Sr. Advocate with Mr. Malak Bhatt, Ms. Neeha Nagpal and Mr. Mandeep Singh, Advocates represented the Appellant.
Mr. Devashish Chauhan, Mr. Paras Mithal and Mr. Gaurav Raj, Advocates appeared for the Respondent.
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