Partial Disbursement Not a Ground to Reject Section 7 IBC Application: NCLAT
- REEDLAW
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REEDLAW Legal News Network reports: In a pivotal ruling, the National Company Law Appellate Tribunal clarified that once the existence of a financial debt and default above the statutory threshold stood established, issues such as partial disbursement of the sanctioned amount, disputes over mortgage, valuation, or the perceived financial worth of the corporate debtor were irrelevant for rejecting a Section 7 application, and admission of the corporate insolvency resolution process was found to be legally justified.
The National Company Law Appellate Tribunal, Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Mr. Arun Baroka (Technical Member), while adjudicating a Company Appeal, held that once the existence of a financial debt and default exceeding the statutory threshold was established and disbursement was undisputed, non-disbursement of the entire originally sanctioned amount, disputes relating to mortgage or valuation of the Corporate Debtor, or its alleged financial worth were immaterial considerations. The Appellate Tribunal held that such issues could not be relied upon to defeat a Section 7 application under the Insolvency and Bankruptcy Code, 2016, and that admission of CIRP in such circumstances was justified.
The Appellate Tribunal had considered the appeal filed against the order of the Adjudicating Authority by which the application under Section 7 of the Insolvency and Bankruptcy Code, 2016, filed by the Financial Creditor had been admitted. The Financial Creditor had claimed a financial debt and default exceeding the statutory threshold, and the Corporate Debtor had opposed the Section 7 application before the Adjudicating Authority. Upon hearing the parties, the Adjudicating Authority returned a clear finding on the existence of debt and default and admitted the application, the order of which was assailed in appeal.
Before the Appellate Tribunal, the Appellant had contended that although a higher loan amount had been sanctioned, the actual disbursement was substantially lower and that this discrepancy vitiated the initiation of CIRP. It had further been argued that documents relating to the mortgaged property were stated to have been handed over to the Financial Creditor, while the Bank had later communicated that original title deeds were not available, despite the Section 7 application referring to a mortgage. The Appellant had also relied on the valuation of the Corporate Debtor to contend that admission of the application was erroneous.
The Tribunal, however, held that non-disbursement of the entire sanctioned amount could not be a ground to reject an application under Section 7, particularly when it was undisputed that the sanctioned amount had subsequently been revised and that disbursement of the revised amount had admittedly taken place. It was noted that the Corporate Debtor had not disputed the disbursement or pleaded repayment of the amount due. On the issue of mortgage and title deeds, the Tribunal observed that a mortgage by deposit of title deeds could only extend to assets in respect of which title deeds were actually deposited, and in the absence of a registered mortgage deed or clear material on record, it was not necessary at the present stage to return any conclusive finding on mortgage or title.
The Tribunal emphasised that once debt and default in excess of the statutory minimum were established, considerations relating to the overall worth of the Corporate Debtor were irrelevant for the purpose of admission under Section 7. It was further noted that the Corporate Debtor had made proposals for one-time settlement during the pendency of proceedings and had also invoked Section 12A, which itself indicated acknowledgement of debt and default. The Tribunal found no error in the order of the Adjudicating Authority admitting the application.
While dismissing the appeal, the Tribunal clarified that it remained open to the Corporate Debtor to submit any appropriate proposal under Section 12A, which could be considered by the Committee of Creditors in accordance with law. Issues relating to the alleged post-moratorium sale of assets were held to be beyond the scope of the present appeal and left open to be agitated before the Adjudicating Authority. Consequently, the appeal and all connected interlocutory applications were dismissed.
Mr. Krishna Sharma and Ms. Kaushambi, Advocate, represented the Appellant.
Mr. Anuj P. Agarwala, Advocate, Appellant for the Respondent No. 1.
Mr. S. Dixit and Mr. Karan Vir Khosla, Advocates, appeared for the RP Rishi Sood, Intervenor.
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