Petition liable to dismissed if CD colluded with FC to take benefit of Moratorium

Status as on- 18/07/2021

Case- NCLAT judgement dated 13-07-2021 in Company Appeal (AT)(Ins.) No. 143 of 2021

Brief Facts of the case

The Financial Creditor filed an Application under Section 7 of the IBC for initiating Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. The Corporate Debtor from time-to-time availed loan from the Financial Creditor. That despite repeated reminders and follow ups, the Corporate Debtor miserably failed to pay the outstanding payable amount to the Financial Creditor. Adjudicating Authority issued notice to the Corporate Debtor. The Corporate Debtor through an affidavit admitted the debt of the Financial Creditor and then submitted that they have no objection, if the Adjudicating Authority admits the Application on its merits. The Adjudicating Authority dismissed the Application and held that it is a case of collusive Application whereby the Corporate Debtor is trying to seek benefits of Moratorium under Section 14 of the IBC and other advantages in accordance with other provisions of IBC 2016 and in particular Section 31, 53 thereof by getting itself- admitted under the Corporate Insolvency Resolution Process (CIRP) and the Financial Creditors is an active partner to this exercise. Being aggrieved with this order the Financial Creditor filed an appeal to the NCLAT.

Held

The Hon’ble NCLAT held as follows:

The NCLAT held that there are no merits in the Appeal and the Appeal deserves to be dismissed.
While admitting the Application under Section 7 of the IBC, it is the duty of the Adjudicating Authority to investigate the real nature of the transaction in order to prevent any person from taking undue benefit of its provisions to the detriment of the rights of legitimate creditors. Hence the AA did note exceed in its jurisdiction under Section 7 (5) of the IBC.
The transaction in question is not a financial debt within the meaning of Section 5 (8) of the IBC.
There is inevitable conclusion that the Financial Creditor colluded with the Corporate Debtor and filed the Application with other than the Resolution or for ulterior motive to prevent the Bank of Baroda to recover the debt from the Corporate Debtor.

Conclusion

The NCLAT referred to the Hon’ble Supreme Court’s judgements in the cases of Phoenix Arc Pvt. Ltd. Vs. Spade Financial Services Ltd. Ors, Swiss ribbons (P) Ltd v Union of India and Anuj Jain IRP for Jaypee Infratech Ltd. Vs. Axis Bank Ltd.

Concluding that the Corporate Debtor was trying to seek benefits of moratorium under Section 14 of the IBC and other advantages in accordance with other provisions of the IBC the NCLAT said that nobody will believe that the Corporate Debtor Company having paid up capital of Rs. 7 Crores 30 lacs and cash credit limit for the amount of Rs. 24 Crores, is not able to make a payment of Rs. 10 lacs and they have no objection, if the CIRP is initiated against the Company. In this case when the Corporate Debtor has admitted the default in repayment then they should have made the prayer that they are ready to settle the matter with Financial Creditor instead of submitting that they have no objection in admitting the application.

Disclaimer – The above article is based on the personal interpretation of the related orders and laws. The readers are expected to take expert opinion before relying upon the article. For more information, please contact us at rera@centrik.in