2025 (7) TMI 225 - AT - IBC

Admissibility of Petition filed u/s 7 of the Insolvency and Bankruptcy Code 2016 - seeking initiation of CIRP - financial defaults by the Corporate Debtor - account classified as NPA - existence of debt and default or not - Adjudicating Authority dismissed the Petition holding that the proceedings were aimed at recovery rather than resolution thus constituting a misuse of IBC provisions. HELD THAT - This issue has been settled in a subsequent judgment of the of the division bench of Hon ble Supreme Court in the case of M Suresh Kumar Reddy 2023 (5) TMI 570 - SUPREME COURT wherein it has been 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 IBC. The Apex Court referred to their decision in Innoventive Industries 2017 (9) TMI 58 - SUPREME COURT 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 which was reiterated in ES Krishnamurthy 2021 (12) TMI 683 - SUPREME COURT while holding that the NCLT cannot direct parties to enter into settlement terms. In the aforesaid judgment of M Suresh Kumar Reddy the Supreme Court has clearly held that the decision passed in the Vidarbha Industries 2022 (7) TMI 581 - SUPREME COURT was in the setting of the facts of that case only. The Respondent claims that in the project namely Takshashila Elegna there is a total of 279 units consisting of 259 residential units (flats) and 20 commercial units (shops) and out of which the Corporate Debtor has already booked/sold 185 residential units and one commercial unit. The financial assistance provided by the Appellant is only a certain part of the project i.e. only 19 commercial units and one residential flat of the group company has been provided as collateral security. Therefore pushing the Corporate Debtor through the rigors of IBC would unfairly prejudice the homebuyers and other stakeholders. Corporate Debtor has obtained building usage certificate permission on 10th April 2024 for certain parts of the project thereby making the Corporate Debtor eligible to sell all the commercial units and some of the residential units. It claims that the intent of the Appellant is only to recover the defaulted amount which goes against the very spirit of IBC. On the other hand it is noticed that the Corporate Debtor has committed defaults in repayment of the outstanding dues despite repeated requests and reminders of the Financial Creditor and 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 cannot be rejected. From the materials placed on record it is noted that he 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. It is noted 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. Invocation of Rule 11 in this context is wholly impermissible and contrary to the principles laid down in the case of Innoventive Industries which mandates admission upon establishment of debt and default. The Intervenor is a registered society of a completed tower and cannot be treated as a representative of pending allottees. This is an attempt by the intervener to stall CIRP and is therefore meritless and cannot be considered as it is without any merit and is rejected. In the present case the Corporate Debtor itself has acknowledged both the debt and default and this admission is explicitly recorded in para 17 of the Impugned Order. It leaves no room for further adjudication on the issue of debt and default. The Adjudicating Authority itself has recorded in para 23 of the Impugned Order that there exists a debt and default. In addition to the above the Appellant had annexed the NeSL report with the subject Section 7 petition which clearly evidences the default committed by the Corporate Debtor. Adjudicating Authority erroneously concluded that the Appellant was more interested in recovery than in resolving the Corporate Debtor s insolvency. The rejection of the Application for admission under Section 7 of the Code when the debt and default is clearly established in the facts and circumstances of the case is an infirmity in the Impugned Order which cannot be ignored - the order of the Adjudicating Authority set aside - appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the Adjudicating Authority (NCLT) was justified in dismissing the Section 7 petition for initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor despite existence of debt and default?

- Whether the discretion under Section 7(5)(a) of the Insolvency and Bankruptcy Code, 2016 (IBC) permits rejection of a petition on grounds such as the Corporate Debtor being a going concern or the Financial Creditor having initiated recovery proceedings under other laws?

- Whether the invocation of multiple recovery proceedings (SARFAESI, DRT, Negotiable Instruments Act) alongside the Section 7 petition indicates malafide intent or misuse of IBC provisions by the Financial Creditor?

- Whether the decision in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. (2022) is applicable as a binding precedent to reject the petition in the present facts?

- Whether the Corporate Debtor's claims of viability, restructuring efforts, and ongoing project completion justify refusal to initiate CIRP?

- Whether third-party interventions by entities such as the Elegna Co-op Housing and Commercial Society Ltd. have locus standi to oppose admission of CIRP at the stage of Section 7 petition?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of dismissal of Section 7 petition despite debt and default

The legal framework under Section 7 of the IBC mandates that the Adjudicating Authority must admit an application filed by a Financial Creditor upon satisfaction of existence of financial debt and default by the Corporate Debtor. The Supreme Court in Innoventive Industries Ltd. v. ICICI Bank Ltd. and Swiss Ribbons Pvt. Ltd. v. Union of India has clarified that the trigger for insolvency resolution is the occurrence of default, and the NCLT's role is limited to verification of debt and default. The Adjudicating Authority cannot go beyond this limited scope to evaluate viability or commercial prospects of the Corporate Debtor at the admission stage.

In the present case, the Corporate Debtor admitted the debt and default, and the Financial Creditor furnished substantial evidence including sanction letters, assignment agreement, restructuring letter, record of default, and NeSL report. Despite this, the Adjudicating Authority dismissed the petition, relying on the Corporate Debtor's status as a going concern and ongoing recovery proceedings.

The Court's reasoning emphasized that such dismissal is contrary to the settled law and the statutory scheme of the IBC, which does not permit rejection of Section 7 petitions merely on the basis of the Corporate Debtor's viability or because recovery actions under other statutes are ongoing.

Issue 2: Discretion under Section 7(5)(a) and applicability of Vidarbha Industries judgment

The Vidarbha Industries judgment recognized a discretionary power under Section 7(5)(a) for the Adjudicating Authority to refuse admission in exceptional circumstances, such as where the Corporate Debtor is solvent and temporarily defaulting. However, the Supreme Court in subsequent judgments, notably M. Suresh Kumar Reddy v. Canara Bank, clarified that Vidarbha is an exception limited to its peculiar facts and cannot be treated as a general rule.

The Court held that once debt and default are established, the Adjudicating Authority has very limited discretion and must admit the petition. The discretion cannot be exercised arbitrarily or based on extraneous considerations such as the Corporate Debtor's ongoing projects or recovery proceedings. The present case did not present any exceptional circumstances warranting departure from the binding precedents of Innoventive Industries, Swiss Ribbons, and ES Krishnamurthy.

Issue 3: Allegations of malafide intent and misuse of IBC provisions

The Corporate Debtor contended that the Financial Creditor's simultaneous pursuit of recovery under SARFAESI, DRT, and the Negotiable Instruments Act, along with the Section 7 petition, demonstrated malafide intent and forum shopping, thus justifying dismissal under Section 65 of the IBC.

The Court rejected this contention, observing that the IBC is a distinct and overriding statute that does not prohibit creditors from pursuing multiple remedies concurrently. The Financial Creditor's invocation of legal remedies was consistent with its rights and did not amount to abuse of process. There was no material on record to establish malicious or fraudulent intent to misuse insolvency proceedings.

Issue 4: Corporate Debtor's restructuring efforts and ongoing project viability

The Corporate Debtor argued that it had entered into a restructuring agreement with the Financial Creditor, had paid the first instalment, and was a going concern with ongoing projects and recently obtained building usage certificates. It claimed that initiating CIRP would prejudice homebuyers and other stakeholders.

The Court analyzed the restructuring agreement and found that the Corporate Debtor defaulted on subsequent instalments, leading to valid revocation of the restructuring by the Financial Creditor. The obligation to issue provisional No Objection Certificates (NOCs) for sale of secured assets was conditional upon full payment of sale proceeds, which was not complied with. The Corporate Debtor's failure to cure defaults despite multiple opportunities justified revocation and initiation of CIRP.

The Court further held that the Corporate Debtor's viability or ongoing projects do not absolve it from repaying debts. Completion of some projects is not determinative of financial health. The interest of homebuyers or other stakeholders cannot override the statutory mandate to admit insolvency petitions upon default.

Issue 5: Locus standi and merit of third-party intervention

The Elegna Co-op Housing and Commercial Society Ltd., representing unit holders, intervened opposing CIRP initiation, citing prejudice to homebuyers and uncertainty over allotments.

The Court held that the intervener was not a party to the financial transaction and did not qualify as a financial or operational creditor under the Code. The IBC does not permit unrelated third parties to oppose admission at the Section 7 stage. The intervention was an impermissible attempt to stall CIRP and was rejected for lack of locus and merit.

3. SIGNIFICANT HOLDINGS

"The Adjudicating Authority failed to consider that reliance upon the decision in the case of Vidarbha Industries Power Ltd on the issue of admission of insolvency process in the facts of the present case is completely erroneous as the Supreme Court has itself held that the decision in Vidarbha was passed in the peculiar facts of that case and is an exception, not the rule."

"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 IBC."

"The Adjudicating Authority cannot direct parties to enter into settlement terms or reject an application on the ground of the Corporate Debtor being a going concern or the pendency of recovery proceedings under other laws."

"The invocation of multiple legal remedies by a Financial Creditor, including SARFAESI and DRT proceedings, does not indicate malafide intent or misuse of IBC provisions."

"Third-party interventions by entities not qualifying as financial or operational creditors have no locus standi to oppose admission of CIRP at the Section 7 stage."

"The Corporate Debtor's failure to comply with the terms of restructuring and persistent defaults justify revocation of restructuring and initiation of CIRP."

"The existence of debt and default, supported by clear evidence, mandates admission of insolvency petition under Section 7."

The Court set aside the impugned order dismissing the Section 7 petition and directed admission of the insolvency petition within 30 days, emphasizing adherence to binding Supreme Court precedents and statutory mandates under the IBC.