No winding up proceedings in the absence of ineligibilities provided under Section 11 of IBC: NCLAT

No winding up proceedings in the absence of ineligibilities provided under Section 11 of IBC: NCLAT

In the Appeal filed by Pondicherry Extraction Industries Pvt. Ltd (Appellant/Corporate Applicant) against Bank of Baroda (Respondent), the National Company Law Appellate Tribunal (NCLAT) remitted the matter back to the adjudicating authority (NCLT, Chennai) to admit the application under Section 10 of Insolvency & Bankruptcy Code, 2016 (I&B Code) after notice to the parties if there is no defect.

As to the facts of the case, the Appellant was a Guarantor to the Financial creditor (Respondent/Bank of Baroda) to secure the amount borrowed by one JR Foods Ltd. (the borrower) from the Financial creditor i.e. Bank of Baroda.

The borrower defaulted in its repayment obligations to the financial creditor and accordingly in March 2019, the accounts of the borrower were classified as NPA by the financial creditor.

The Bank issued a demand notice under section 13(2) of the SARFAESI Act 2002 was issued to the borrower and the appellant who stood as the guarantor.

The Corporate Applicant filed an application under Section 10 of I&B Code before the

Adjudicating Authority (NCLT). However, the Bank opposed the same stating that the application was filed with the intention to defeat the SARFAESI measure. The NCLT rejected the application holding that the application filed by the corporate applicant is surrounded with doubts,

This Appeal was preferred by the appellant (Corporate Applicant) against the order passed by the Adjudicating Authority (NCLT, Division Bench-I, Chennai) whereby the application preferred by the appellant under section 10 of the I&B Code in Form 6 of the Insolvency and Bankruptcy (Application to the Adjudicating Authority) Rules 2016 (Adjudicating Authority Rules) had been rejected.

The appellant submitted that the Adjudicating Authority had acted beyond its scope by getting into details of the financial statements of the appellant though this Appellate Tribunal in Leo Duct Engineers & Consultants Ltd vs. Canara Bank and Standard Charted Bank laid down the prerequisites for admission i.e. existence of debt, occurrence of default and the corporate applicant not suffering from any disqualifications laid down under Section 11 of the I&B Code.

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

The Appellate Tribunal opined that the Adjudicating Authority assumed that Rule 7 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules 2016 empowers the authority to ascertain whether the documents annexed with the application under Section 10 of I&B Code are in order.

It was also affirmed by the Appellate Tribunal that Rule 7 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 respondent had placed reliance on the judgment of Unigreen Global Pvt. Ltd. There is no ratio of this judgment that Rule 7 of Adjudicating Authority Rules empowers the Adjudicating Authority to examine the documents annexed with the application under Section 10 of I&B Code. Thus, this judgment was held to be not helpful to the respondent.

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

The case of Unigreen Global Pvt. Ltd. was also discussed wherein it was stated that if any action has been taken by the financial creditor under SARFAESI Act 2002, against the Corporate Debtor or a suit is pending against the corporate debtor under Section 19 of DRT Act before a Debt Recovery Tribunal or appeal pending before the Debt Recovery Appellate Tribunal, it cannot be a ground to reject an application under Section 10 of I&B Code.

In the present case the financial creditor had initiated proceedings under SARFAESI Act against the borrower. The applicant being a guarantor had 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 Appellate Tribunal was of the view that the existence of debt and default was established and no winding up proceedings against the appellant and appellant was not 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.