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NO PRE-ADMISSION ENQUIRY BY ADJUDICATING AUTHORITY REGARDING PROOF OF DEFAULT

Updated: Jul 31




About the author:


Ashutosh K. Sharma, Advocate

High Court of Delhi

[Ashutosh K. Sharma, is an independent advocate based in New Delhi. He regularly represents the clients before various judicial forums and mainly deals in corporate litigation.]

The article analyses the recent judgment passed by the National Company Law Appellate Tribunal discussing the scope of enquiry by Adjudicating Authority regarding proof of default at the very threshold stage.

Case: National Company Law Appellate Tribunal decision impugning pre-admission enquiry by Adjudicating Authority in regard to proof of default.


The Hon'ble National Company Law Tribunal ("the Appellate Tribunal"), on 22.05.2020, rendered its decision in the twin appeals preferred by the same Financial Creditor viz Allahabad Bank against two different Corporate Debtors in Allahabad Bank v. Poonam Resorts Limited [Company Appeal (AT) (Ins.) No.1303 of 2019] and Allahabad Bank vs. Link House Industries Limited [Company Appeal (AT) (Ins.) No.1304 of 2019] where the Appellate Tribunal discussed the scope of enquiry by Adjudicating Authority regarding proof of default at the very threshold stage.


In this judgment, the Appellate Tribunal while analysing the Section 7 of the Insolvency & Bankruptcy Code, 2016 (I&B Code) and the observations made by Hon'ble Apex Court, held that I&B Code does not envisage a pre-admission enquiry in regard to proof of default by directing a forensic audit of the accounts of the Financial Creditor, Corporate Debtor or any financial institution.


Facts of the case: The Company Petition (IB)-3631(MB)/2018 and Company Petition (IB)- 3621(MB)/2018 are the applications filed under Section 7 by the Appellant- Financial Creditor, i.e. Allahabad Bank on 5th September 2018 against Respondents- Corporate Debtors praying for initiation of Corporate Insolvency Resolution Process on the ground that the Corporate Debtors had committed default qua the financial debt that was payable in law and in fact to the Allahabad Bank. The applications were pending consideration before the Adjudicating Authority since 18th September 2019.


The Corporate Debtors moved applications under Section 75 of the I&B Code, alleging that false information has been furnished by the Bank in Insolvency applications. The Corporate Debtors raised the objections that the Corporate Insolvency Resolution Process had been initiated fraudulently with a malicious intent to drag a solvent corporate who is willing to pay amounts that are due and payable legally. The Adjudicating Authority, while deciding the said applications of the Corporate Debtors vide impugned orders observed that during the entire loan process, due diligence was not carried out. Therefore, appointed PWC Mr. Gaganpreet Singh Puri, Price water House Coopers Services LLP as Forensic Auditor to examine allegations raised by the Corporate Debtor and submit an Independent Report delineating some factual aspects bearing upon utilisation of the credit facility extended by the Financial Creditor to Corporate Debtor. The Financial Creditor challenged the impugned orders before the Appellate Tribunal contending that the Adjudicating Authority has, apart from giving a go by to the provisions of I&B Code, also failed to follow the dictum of law laid down by the Hon’ble

Apex Court in Innoventive Industries Limited v. ICICI Bank and Anr.- (2018) 1 SCC 407


Issue: The Appellate Tribunal considered the question whether the Adjudicating Authority was justified in ignoring the time frame prescribed under Section 7 of the I&B Code and embarking upon an enquiry to determine whether the applications filed under Section 7 contained false information when the matters were at the very threshold stage.


Analysis and Findings of the Appellate Tribunal: The Appellate Tribunal set aside the impugned orders and allowed the Appeals filed by the Financial Creditor.


The Appellate Tribunal observed that I&B Code inter alia, consolidates and amends the law relating to insolvency resolution of corporate persons in a time-bound manner for various objects sought to be achieved by the statute as specified in the preamble. Section 7 of the I&B Code deals with the initiation of the Corporate Insolvency Resolution Process by the Financial Creditor. The Appellate Tribunal further observed that the plain language of sub-section (4) of Section 7 leaves no room for doubt that the Adjudicating Authority is required to ascertain the existence of a default from records of an information utility. The Adjudicating Authority can also ascertain the same from other evidence furnished by the Financial Creditor, which has to be done within 14 days of the receipt of application. The I&B Code has a specified time frame for the conclusion of the Corporate Insolvency Resolution Process within 180 days, and the extended period prescribed is 270 days. With the latest amendment, provision has been made for the inclusion of a period of judicial intervention, thereby taking the total extended period up to 330 days. A mere glance at the legal framework governing the Corporate Insolvency Resolution Process brings it to the fore that speed is the password, and all authorities under the I&B Code have to adhere to the prescribed timelines.


The Appellate Tribunal referred to the decision in Innoventive Industries Limited where the Supreme Court had examined the process of triggering of insolvency by Financial Creditors. In Innoventive Industries, the Supreme Court observed that “the speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. It must do within 14 days of the receipt of the application.” The Apex Court in that case further observed that "in the case of a corporate debtor who commits a default of financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is “due,” i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise." (Emphasis supplied).


Given the law on this subject and after referring the observations of Hon'ble Apex Court, the Appellate Tribunal concluded that "the dictum of law propounded by the Hon’ble Apex Court is loud and clear. The Adjudicating Authority cannot travel beyond the letter of the law and the dictum of the Hon’ble Apex Court. The satisfaction in regard to the occurrence of default has to be drawn by the Adjudicating Authority either from the records of the information utility or other evidence provided by the Financial Creditor. The Adjudicating Authority cannot direct a forensic audit and engage in a long drawn pre-admission exercise which will have the effect of defeating the object of the I&B Code. If the Financial Creditor fails to provide evidence as required, the Adjudicating Authority shall be at liberty to take an appropriate decision".


Finally, the Appellate Tribunal held that the I&B Code does not envisage a pre-admission enquiry in regard to proof of default by directing a forensic audit of the accounts of the Financial Creditor, Corporate Debtor or any financial institution. Viewed; thus, the impugned order cannot be supported. The application under Section 75 of the I&B Code on behalf of the Corporate Debtors cannot be permitted to frustrate the provisions of the I&B Code when the matter is at the stage of admission.


In the present case, the Appellate Tribunal looked at the scope of the Adjudicating Authority in light of the object and Section 7 of the I&B Code. The Appellate Tribunal in light of the object of the code observed that the Adjudicating Authority could not engage in a prolonged drawn pre-admission exercise which will have the effect of defeating the object of the I&B Code. The Appellate Tribunal observed that Section 75 is a penal provision which postulates an enquiry and recording of finding in respect of culpability of the Applicant regarding commission of an offence. The same cannot be allowed to thwart the initiation of the Corporate Insolvency Resolution Process unless in a given case forgery or falsification of documents is patent and prima facie established.

The Appellate Tribunal lastly allowed the Appeals and set aside the impugned orders.


Conclusion: The decision of the Appellate Tribunal discussed the scope of enquiry by Adjudicating Authority regarding proof of default at the very threshold stage, i.e. pre-admission stage. The decision further marks a significant development on Application under Section 75 of the I&B Code.


It is interesting to note that the Appellate Tribunal has considered the object of the I&B Code and noted that the Adjudicating Authority could not act beyond the letter of the law and the dictum of the Hon’ble Apex Court. Recently, in December 2019 also the Appellate Tribunal in the case of Union of India Through SFIO vs. Maharashtra Tourism Development Corporation & Anr. [Company Appeal (AT) (Ins.) No.964 of 2019] has clarified that the Adjudicating Authority has no jurisdiction to direct investigation through SFIO into affairs of the company as the power is vested with the central government. Such a decision of Appellate Tribunal indicates that the Adjudicating Authority is not competent to straight away direct any investigation. However, it may adversely impact the command of the Adjudicating Authority.



Source:- https://nclat.nic.in/Useradmin/upload/1878915815ec7a0ed5920e.pdf


Disclaimer: Kindly note that the views and opinions expressed are of the author, and not Law Colloquy.


#law#corparate law#lawstudents#companylaw#lawcolloquy

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