Illegal Possession Cannot Stall CIRP: NCLAT Upholds Financial Creditor’s Section 7 Claim
- REEDLAW
- Sep 24
- 3 min read
REEDLAW Legal News Network reports: In a crucial decision, the National Company Law Appellate Tribunal, Principal Bench, held that illegal possession of a corporate debtor’s assets by a third party does not prevent the initiation of a Corporate Insolvency Resolution Process (CIRP). The Tribunal further affirmed that a Financial Creditor’s Section 7 application remains maintainable even where partial payments have been made or assets are occupied by another party.
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 and connected Interlocutory Application, held that the illegal possession of the corporate debtor’s assets by a third party does not bar the initiation of CIRP. The Tribunal observed that a Financial Creditor’s Section 7 application continues to be maintainable notwithstanding prior partial payments or occupation of assets by the Appellant.
The Appellate Tribunal examined an appeal filed by an occupier of the assets of a corporate debtor challenging the admission of a financial creditor’s application under Section 7 of the Insolvency and Bankruptcy Code, 2016. The financial creditor had extended credit facilities to the corporate debtor since 2005, which eventually turned non-performing on 27 September 2011. A recall notice was issued in 2012, and proceedings were initiated before the Debt Recovery Tribunal for the recovery of dues. The corporate debtor subsequently entered into an agreement with the appellant in January 2014, allowing the appellant to operate the cold-storage business upon payment of a sum of ₹50 lakhs and acknowledging the debt owed to the financial creditor. A one-time settlement (OTS) proposal for ₹12.50 crores was sanctioned by the financial creditor in May 2014, under which the appellant made part-payments aggregating to about ₹6.72 crores. However, the balance was never cleared, and the OTS failed.
The appellant contended before the Tribunal that the Section 7 application, filed in November 2019, was barred by limitation, as the account had been classified as NPA in 2011 and no valid acknowledgement had extended the limitation period. It was also argued that the appellant, having made substantial payments and obtained an interim injunction from a civil court, had locus to oppose the admission of the application. The financial creditor countered that the appellant had been in unauthorised possession of the corporate debtor’s assets for years without fulfilling the OTS terms and that several acknowledgements of debt, including those made in 2014 and thereafter, kept the claim within time. The Resolution Professional supported the financial creditor, noting that the appellant had obstructed the taking of
possession and continued to exploit the assets without authority.
The Tribunal held that the corporate debtor had repeatedly acknowledged the debt, including in the 2014 agreement and subsequent settlement proposals, and had never raised any plea of limitation before the adjudicating authority. Payments made by the appellant towards the corporate debtor’s loan account up to June 2015 and further correspondence regarding settlement in 2018 constituted valid acknowledgements under the Limitation Act. It concluded that the Section 7 application was filed within the prescribed limitation period and that the financial creditor had proved the existence of debt and default. The appeal was accordingly dismissed, upholding the order admitting the corporate debtor into the corporate insolvency resolution process and affirming the appointment of the Resolution Professional.
Mr. Krishnendu Datta, Sr. Advocate, with Mr. Kumar Anurag Singh, Mr. Zain A. Khan and Mr. Akhil Nene, Advocate, represented the Appellant.
Ms. Zeba Khan, Advocate, appeared for the Respondent No. 1.
Mr. Kushal Bansal, Advocate, appeared for the Resolution Professional (RP).
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