Viability Of Corporate Debtor Can't Be Considered While Deciding Petition U/S 7 Of IBC Once Debt & Default Are Established: NCLAT

Brief Facts:

This Appeal has been filed by Edelweiss Asset Reconstruction Company Ltd (EARCL/Appellant) challenging the Order dated 06.11.2024 passed by the National Company Law Tribunal, Ahmedabad Bench (“Adjudicating Authority/NCLT”) by which an application filed by the Appellant under section 7 of the Code seeking initiation of Corporate Insolvency Resolution Process (CIRP) against Takshashila Heights Pvt Ltd (Corporate Debtor) was dismissed.

The Corporate Debtor committed default in respect of two loan facilities sanctioned in 2018, amounting to Rs 70 crores (Rs 40 crores and Rs 30 crores respectively), originally extended by ECL Finance Ltd and subsequently assigned to the Appellant on 09.05.2022.

The petition under section 7 of the Code was filed on 31.01.2024 claiming an outstanding sum of Rs 93.54 crores.This was supported by evidence of debt and default. However, the Adjudicating Authority dismissed the Petition holding that the proceedings were aimed at recovery rather than resolution, thus constituting a misuse of IBC provisions, and that initiating CIRP would prejudice the interests of stakeholders, given the Corporate Debtor's status as a going concern.

Against the above, the present appeal has been filed.

The Appellant submitted that the Corporate Debtor has committed defaults in repayment of the outstanding dues despite repeated requests and reminders given by the Financial Creditor.

It was further submitted that despite the recall notice of the Financial Creditor and in view of the Corporate Debtor's inability to repay its debts, which include the outstanding dues due to the Financial Creditor, the initiation of CIRP in respect of the Corporate Debtor will be in the public interest and will benefit all creditors of the Corporate Debtor.

It was further submitted that there were no material facts on record that conclusively established or proved any "malicious" or "fraudulent" intent on the part of the Appellant to initiate CIRP against the Corporate Debtor within a malicious intent, which would stop the admission of the Petition in view of Section 65 of the Code.

Per contra, the Respondent submitted that the sequence of actions by the Applicant clearly indicate its mala fide intent and ulterior motive to recover its outstanding debts through pressure tactics and not resolution being the primary intent and object of the Code. Moreover, the said conduct is nothing but forum shopping through misuse of the provisions of the laws, i.e, IBC, SARFAESI Act and Negotiable Instruments Act under the guise of exercise of rights/remedies available under the said laws.

It was further submitted that the Applicant has not approached this Adjudicating Authority with clean hands and has preferred the present Application as a tool to recover of the monies and that the same is reflecting the fraudulent and mala fide intention to misuse and abuse the provisions of the Code and that the said approach of the Applicant is against the intent and object of the Code.

Observations:

The Tribunal noted that a restructuring agreement was entered into between the parties. Although, the Respondent paid 1st instalment but defaulted in making the second installment. This triggered a default under clauses 8 and 9 of the Restructuring Agreement. Despite giving sufficient opportunities and after the expiration of a 15 days window period to cure the default, the Respondent failed to discharge the outstanding liabilities. Consequently, the agreement was revoked as per clause 8 of the Agreement via letter dated 29.12.2023.

It further added that the said agreement was revoked not due to the Mala fide intent rather on account of default committed by the Respondent in clearing the outstanding liability of Rs. 2.24 crores due on 30.09.2023 which was also confirmed by the Respondent through its own e-mails.

It held that therefore, under such circumstances, the Appellant was under no obligation to reopen the scheme and the Appellant rightfully exercised its right to file an application under section 7 of the Code. Since the scheme was revoked, the Appellant was not obligated to issue an NOC. This was communicated via e-mail sent on September 26, 2023.

It further observed that e-mails dated March 15, 28 and 29, 2024 make it clear that the Respondent acknowledged its liability, admitted the commission of persistent default, showed difficulties in raising the funds, issues with sale of assets, non-compliance with civil authority requirements and inability to sell units at market prices. All these facts substantiate the case of the Appellant for initiating the CIRP against the corporate debtor.

It held that the IBC and the SARFASESI are distinct legislations and the actions taken under one of the enactments do not impact the other. The Corporate Debtor just before the auction of its secured assets under the SARFAESI Act filed a securitisation application before the DRT by which it challenged the actions initiated by the Appellant against the secured assets of the corporate debtor on false and frivolous grounds which is currently pending

Based on the above, it held that the Corporate Debtor is merely attempting to thwart all the attempts of the repayment of its outstanding dues while also objecting to the commencement of CIRP by this Tribunal.

In the case of ES Krishnamurthy,the Supreme Court has held that the Adjudicating Authority under Section 7(5) of the Code is empowered only to verify whether a default has occurred or not occurred.

It further noted that in the case of M Suresh Kumar Reddy, the Supreme Court held that once the NCLT is satisfied that the default has occurred, there is hardly any discretion left with the NCLT to refuse admission of the Application under Section 7 of the Code. The Apex Court referred to their decision in Innoventive Industries wherein the entire scope of Section 7 was explained and it was held that if the NCLT is satisfied there is a debt and default, it is bound to admit a Petition under Section 7 of the IBC.

It further observed that the Respondent's non cooperative, arbitrary, and malafide conduct, including its failure to furnish information as sought by SBI Venture and its inaction in progressing the underlying project— factors prompted SBI Venture to resile from its initial opposition of admission of Section 7 petition.

The Tribunal observed that the corporate debtor has failed to discharge its liabilities despite repeated reminders and a recall notice being given by the financial creditor. Under such circumstances, the initiation of the CIRP cannot be refused.

Coming to the submissions of the Intervenor, it held that “the said intervenor is not a party to the underlying financial transaction forming the subject matter of the Section 7 Petition and does not qualify as a financial or Operational Creditor under the Code. Its attempt to oppose the CIRP initiation is found to be entirely without locus. We note that once the requirements of financial debt and default are satisfied, there is no scope under the Code for unrelated third parties to intervene, particularly at the admission stage.”

The Tribunal further observed that despite the claims of the Respondent Corporate Debtor of being a viable unit, the Corporate Debtor has made no payments towards their outstanding dues and the averments made with respect to the Corporate Debtor being a going concern or a viable entity do not absolve the Corporate Debtor from its liabilities to repay the outstanding dues of the Applicant Financial Creditor.

The Tribunal concluded that various proceedings were initiated by the Appellant before filing the petition under section 7 of the code can't be a valid ground to reject the petition nor can this be considered as Malicious under section 65 of the code therefore arguments of the Respondent on this issue cannot be accepted.

Accordingly, the present appeal was allowed and the impugned order was set aside.

Case Title: Edelweiss Asset Reconstruction Company Limited Versus Takshashila Heights India Pvt. Ltd.

Case Number: Company Appeal (AT) (Insolvency) No. 2261 of 2024

Judgment Date: 01/07/2025

For Appellant : Mr. Abhijeet Sinha, Sr. Advocate with Mr. Aditya Vashishth and Mr. Anmol Bansal, Advocates (EARCL).

For Respondent : Mr. Saurabh Kalia and Mr. Avik Sarkar, Advocates Mr. Arjun Sheth and Mr. Rajiv Chawla, Advocates for Intervenor.

Click Here To Read/Download The Order