Dispute with financial creditor not relevant for deciding admission of insolvency resolution process – Eshwars
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Dispute with financial creditor not relevant for deciding admission of insolvency resolution process

[First published in Lexology on 3rd October 2019. To read Article in Lexology Click here]

AANCHAL M NICHANI

ASSOCIATE – CORPORATE ADVISORY & INTELLECTUAL PROPERTY

The National Company Law Appellate Tribunal (“NCLAT”) vide its order dated 23.09.2019 passed in the matter of Vinayaka Exports and another Vs. M/s. Colorhome Developers Pvt. Ltd., overturned the decision of the National Company Law Tribunal, Chennai Bench (“NCLT”) dismissing an application filed by two financial creditors under Insolvency and Bankruptcy Code (“Code”) owing to the pendency of a civil suit and pre-existing dispute between the parties.

FACTS:

Two financial creditors who had lent a sum of Rs. 82 million and Rs. 20 million filed an application seeking commencement of insolvency resolution process on the corporate debtor M/s. Colorhome Developers Pvt. Ltd., who had also issued two promissory notes for the aforesaid sums. The corporate debtor had also executed a mortgage deed dated 05.06.2015 in favour of one of the financial creditors.

The corporate debtor claimed before NCLT that the aforesaid amounts were disbursed to the sole proprietorship of the managing director of the corporate debtor prior to its incorporation, and that it was not as a loan to the corporate debtor.

Further, it was brought to light that there are court proceedings such as criminal complaints filed by the corporate debtor and civil suits before various forums are pending between the financial creditors and the corporate debtor.

ORDER PASSED BY NATIONAL COMPANY LAW TRIBUNAL:

The NCLT observed that there are disputes between the financial creditors and the corporate debtor and there are proceedings against them in various forums in matters relating to the present petition. It also observed that, in the statement of accounts, the name of the sole proprietorship concern and the corporate debtor is used interchangeably, and that there is no segregation of the amounts paid by both the entities from which the liability can be drawn clearly.

For above reason, the Tribunal took that view that the petition is liable to be dismissed under Section 5(6) and Section 5(6)(a) of the IBC, 2016, construing the pending civil suit as pre-existing dispute in the amount of debt between both the parties.

Section 5(6) of the IBC, defines in an inclusive way the term “dispute”, to include a suit or arbitration proceedings relating to (a) the existence of the amount of debt; (b) the quality of goods or service; or (c) the breach of a representation or warranty.

DECISION OF THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL:

The aggrieved financial creditors appealed before Appellate Tribunal, which dealt with the appeal in depth and relying on the promissory notes executed by the corporate debtor and also mortgage deed as security for the said debt, the NCLAT disagreed with the view of NCLT that there is no segregation of the amounts paid by the sole proprietorship and the corporate debtor, and held the existence of the debt that is due and that there is a default in repayment of the same.

The Appellate Tribunal read into paragraphs 27, 28, 29 & 30 of the Supreme Court decision in Innoventive Industries Limited v. ICICI Bank and Anr., wherein the Supreme Court has dealt in the great detail and clearly demarcated the difference between the criteria to be considered for admission of an application filed by a financial creditor and that by an operational creditor.

The NCLAT, while setting aside the order of NCLT, with directions to pass orders to admit the corporate insolvency resolution process on the corporate debtor, observed that it is only in an application filed by an operational creditor, can the corporate debtor raise the defence of the existence of a pre-existing dispute, or record of the pendency of a suit or arbitration, at the time of responding to the demand notice that is issued by the operational creditor. NCLAT also held that there is no provision for raising the defence of existence of such dispute by the corporate debtor in an application by a financial creditor, and hence the NCLT is not entitled to look into the same, and all NCLT is required to satisfy itself for admitting corporate insolvency resolution process on a corporate debtor in an application filed by a financial creditor is whether there is a debt that is due and payable, and that there has been a default with respect to the same.

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