NCLAT Dismisses Malicious Section 7 Petition by Related Party; No Financial Debt Established Under IBC

The NCLAT dismissed the malicious Section 7 petition filed by a related party, holding that no financial debt was established under the Insolvency and Bankruptcy Code.

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Mr. Arun Baroka (Technical Member), while adjudicating a company appeal, held that a loan transaction between entities controlled by the same promoters—lacking direct disbursement to the Corporate Debtor and not supported by evidence of default or the time value of money—does not qualify as a "financial debt" under Section 5(8) of the IBC. Consequently, a Section 7 petition filed with malicious intent to obstruct lawful recovery proceedings is liable to be dismissed under Section 65 of the Code.

The Appellant had filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, seeking initiation of CIRP against M/s Mothers Pride Dairy India Pvt. Ltd. on account of an alleged loan default of ₹4.89 crore. The disbursements were claimed to have occurred between July and November 2019 under a loan agreement dated 17.08.2019, with the total outstanding amount, including interest, stated to be ₹9.32 crore. The Appellant contended that payments were either made directly to the Corporate Debtor (CD) or to its vendors on the CD’s instructions. However, SBI, being a secured financial creditor of the CD, filed an application under Section 65 of the Code alleging that the Section 7 petition was collusive and fraudulent in nature, aimed at obstructing SARFAESI recovery proceedings.

The Adjudicating Authority (NCLT, Principal Bench, New Delhi) accepted SBI’s contentions and, by order dated 12.06.2023, dismissed the Section 7 petition while allowing SBI’s application under Section 65. A penalty of ₹10 lakhs was imposed on the Appellant for malicious initiation of CIRP. The NCLT found that the Mittal family had control over both the Appellant and the Corporate Debtor during the relevant period, and the loan agreement had been executed while the Mittal family held directorship in both entities. The Tribunal concluded that the intent behind filing the Section 7 application was not the resolution of insolvency, but to misuse the provisions of the IBC.

In an appeal before the NCLAT, the Appellant argued that the NCLT’s finding of collusion was arrived at without granting an adequate hearing, thereby violating the principles of natural justice. It was contended that default had been clearly established under Section 3(12) of the IBC and that the petition met the requirements of Section 7(5), warranting its admission. The Appellant also highlighted its admission as a financial creditor in the earlier CIRP, though classified as a related party, and claimed the present application was made for legitimate insolvency resolution. It asserted that the Mittal family had resigned from the CD’s board before certain disbursements were made and denied any fraudulent intent.

SBI, however, maintained that the alleged financial transaction lacked commercial substance and was executed during a time when the Mittal family effectively controlled both companies. It contended that the so-called loan was part of a strategy to defeat the ongoing SARFAESI recovery process. The NCLAT noted the overlapping directorships and the execution of the agreement by Yug Mittal and Kriti Mittal on behalf of both entities, thereby concluding that the transaction was a Mittal-to-Mittal arrangement without independent commercial character. The Tribunal also referred to earlier CIRP proceedings initiated in 2019, wherein similar claims were made by the Appellant and its associate company but were ultimately rejected.

The NCLAT rejected the Appellant’s reliance on judgments such as Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563; M. Suresh Kumar Reddy v. Canara Bank and Others (2), REEDLAW 2023 SC 05587, and Indowind Energy, finding them distinguishable on facts as no valid financial debt or default had been established in the present matter. It noted that the ₹92 lakhs transferred by the Appellant was part of an investment arrangement rather than a disbursement against the time value of money. The Tribunal emphasized that the filing of successive CIRP petitions by related parties under the guise of financial creditors demonstrated a pattern of abuse of the Code, and the intent was not bona fide insolvency resolution but a mechanism to block recovery by SBI.

Accordingly, the NCLAT upheld the NCLT’s findings that the Section 7 application was filed with fraudulent and malicious intent. It affirmed the dismissal of CP (IB) No. 662 of 2022 and upheld the penalty of ₹10 lakhs imposed under Section 65 of the IBC. The appeal was dismissed with both parties directed to bear their own costs.

Mr. Saurabh Balwani, Mr. Anand Prakash and Mr. Chirag Rathor, Advocates, represented the Appellant.

Mr. Harshit Khare and Mr. Prafful Saini, Advocates, appeared for the Respondent No. 1/SBI.

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