NCLAT orders relook at insolvency application

NCLAT orders relook at insolvency application

Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules 2016 - Rule 7 only provides the procedure for filing the application under Section 10 of I&B Code

The appeal preferred by the appellant JKS The Banyaan Private Limited (Corporate Applicant) against the order passed by the Adjudicating Authority (NCLT, Division Bench-I, Chennai) has been allowed by the NCLAT.

The Adjudicating Authority had rejected the application preferred by the appellant under section 10 of the Insolvency & Bankruptcy Code, 2016 (I&B Code) in Form 6 of the Insolvency and Bankruptcy (Application to the Adjudicating Authority) Rules 2016 (Adjudicating Authority Rules).

The Appellant mainly submitted that the Adjudicating Authority had acted beyond its scope by getting into the details of the financial statements of the appellant in case the application was incomplete the corporate applicant was to be granted time to rectify the defects. The appellant further submitted that the appellant had established the existence of a debt, occurrence of default and the shareholders had accorded their approval for initiation of CIRP. The application under section 10 was complete, there was no defect therein.

It was further submitted that no winding up proceedings were pending against the appellant and the appellant was not covered by the ineligibilities provided under Section 11 of I&B Code. The appellant had, therefore, satisfied all the conditions under Section 10 of the code.

On the contrary, the respondent submitted that the Adjudicating Authority had rightly held that Rule 7 of Adjudicating Authority Rules empowers the Adjudicating Authority to ascertain whether the documents filed along with the application are in order. The application was incomplete and the corporate applicant could not rectify the defects even after granting time. In such a situation the Adjudicating Authority had no option but to reject the application.

The question for consideration was whether Rule 7 of Adjudicating Authority Rules empowers the Adjudicating Authority to examine the documents filed with the application under section 10 of I&B Code.

The Appellate Tribunal opined that the moment the Adjudicating Authority was satisfied that there was a debt and a default had occurred, the application must have been admitted unless it was incomplete. Section 10 of I&B Code does not empower the Adjudicating Authority to go beyond the records as prescribed under Section 10 and the information as required to be submitted in Form 6 of Adjudicating Authority Rules.

The Appellate Tribunal opined that Rule 7 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules 2016 only provides the procedure for filing the application under Section 10 of I&B Code. It does not empower the Adjudicating Authority to examine the financial statements annexed with the application.

The Adjudicating Authority had analyzed the financial statements of the corporate applicant and held that there were discrepancies in financial statements. The Appellate Tribunal was of the view that the Adjudicating Authority exceeded its jurisdiction in analyzing the financial statements of the Corporate Applicant.

In the present case, the financial creditor had initiated proceedings under SARFAESI Act against the borrower. The applicant being a guarantor has filed the application under Section 10 of I&B Code hence the Adjudicating Authority had drawn an inference that the corporate applicant had filed the application under Section 10 with an intention to defeat the SARFAESI measures initiated by the financial creditor.

Thus the application was filed with an ulterior motive. The Appellate Tribunal was unable to agree with the finding of the Adjudicating Authority and held that this fact was unrelated and beyond the requirement under I&B Code or forms prescribed under the Adjudicating Authority Rules. Therefore, the application could not be rejected on this ground.

The existence of debt and default was established and no winding-up proceedings against the appellant and appellant was covered by the ineligibilities provided under Section 11 of the I&B Code. However, the Adjudicating Authority had rejected the application on extraneous grounds. Therefore, the impugned order was set aside.

The case has been remitted back to the Adjudicating Authority (NCLT, Chennai) on 20 January 2021 to admit the application under Section 10 after notice to the parties if there is no defect.