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The Asset Reconstruction Company's proceedings against both borrower & guarantor were legally valid


The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench comprising Justice Ashok Bhushan, Chairperson and Barun Mitra, Technical Member was hearing an appeal and held that the initiation of proceedings by an Asset Reconstruction Company and simultaneous proceedings against the principal borrower and corporate guarantor were legally valid.


In a recent NCLAT judgment, the case revolved around an appeal filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC). This appeal stemmed from an Order dated 11.05.2022, referred to as the "Impugned Order," which was issued by the Adjudicating Authority, the National Company Law Tribunal in New Delhi, in a matter related to CP (IB) No. 108 (PB)/2022.


The central issue in this case was the admission of an application under Section 7 of the IBC by CFM Asset Reconstruction Pvt. Ltd. (Respondent No.1), which initiated the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, M/s Micro Stock Holdings Pvt. Ltd. The appeal was filed by a shareholder of the Corporate Debtor who was aggrieved by this order.


The key arguments presented by the Appellant included challenges to the proper service of notice to the Corporate Debtor, the legality of the assignment agreement dated 18.01.2021, the lack of privity of contract between the Corporate Debtor and Respondent No.1, and the contention that two simultaneous Section 7 proceedings could not be initiated for the same set of claims.


The NCLAT carefully considered these arguments and ultimately upheld the Adjudicating Authority's decision to admit the Section 7 application. They found no error in the admission of the application, as there was no dispute regarding the debt and default by the Corporate Debtor. Additionally, the NCLAT ruled that Respondent No.1, as an Asset Reconstruction Company, had the right to initiate proceedings under Section 7, and there was no legal barrier to such initiation.


Furthermore, the NCLAT rejected the argument that two simultaneous Section 7 proceedings could not be initiated against both the principal borrower and the corporate guarantor, citing a relevant Supreme Court judgment.


In conclusion, the NCLAT upheld the Impugned Order, dismissing the appeal filed by the shareholder of the Corporate Debtor.


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