National Company Law Appellate Tribunal dismisses appeal under pending SARFAESI proceedings

National Company Law Appellate Tribunal dismisses appeal under pending SARFAESI proceedings

The Appellate Tribunal dismissed appeal on the ground of collusion to prevent bank to recover debt from Corporate Debtor

The National Company Law Appellate Tribunal (NCLAT) upheld the order passed by the National Company Law Tribunal (NCLT) at the Ahmadabad Bench, which dismissed the application u/S 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) as being collusive.

The matter titled Shree Ambica Rice Mill v M/s Kaneri Agro Industries Limited was heard by the Principal Bench of the National Company Law Appellate Tribunal at New Delhi, comprising of Justice Jarat Kumar Jain and Dr Ashok Kumar Mishra.

The factual background of the case is that the Shree Ambica Rice Mill was the Appellant – Financial Creditor who is a partnership firm carrying on the business of agriculture produce while M/s Kaneri Agro Industries Limited was the Respondent – Corporate Debtor Company, having authorized and paid-up share capital of Rs 7.30 crore. It was the case of the Financial Creditor that the Corporate Debtor took a loan of Rs 10 lakh from the Financial Creditor and despite repeated reminders, the Corporate Debtor failed to pay the outstanding payable amount to the Financial Creditor. The application filed by the Financial Creditor u/S 7 of the IBC before the NCLT was dismissed on the ground of being collusive whereby the Corporate Debtor was trying to seek benefits of a moratorium.

The Appellant submitted that the NCLT erred in holding that the Appellant was not a Financial Creditor. The Appellant further submitted that the NCLT exceeded its jurisdiction while investigating the nature of the transaction and thus, the order was not in consonance with the provisions of explanation to Section 7 (1) of the IBC. The Respondent – Corporate Debtor was in agreement with the arguments of the Appellant – Financial Creditor.

The bench considered various judgments of the Supreme Court while dealing with the issue of whether the Adjudicating Authority had exceeded its jurisdiction while examining the nature of the transaction in question. It observed that the Adjudicating Authority is obliged to investigate the nature of the transaction and should be very cautious in admitting the application in order to prevent taking undue benefit of provisions of IBC to detriment of the rights of legitimate creditors as well as to protect the Corporate Debtor from being dragged into CIRP with malafide. Section 65 was further discussed by this bench wherein it stated this section provides punishment with fine where any person furnishes any information u/S 7 of the IBC, which is false in material particulars, knowing it to be false or omits any material facts, knowing it to be material.

The bench while dealing with the issue of 'Financial Debt', referred the Section 5(8) of the IBC, which states that 'Financial Debt' means a debt along with interest, if any, which is disbursed against the consideration for the time value of money. The essential requirement being disbursement and consideration for the time value of money. It was observed by the tribunal that the transaction in question was not a 'Financial Debt' within the meaning of Section 5 (8) of the IBC since the essential ingredients of disbursement and consideration for the time value of money were missing.

The bench was not convinced that Corporate Debtor having paid-up share capital of Rs 7.30 crore and cash credit limit to the tune of Rs 24 crore from the Bank of Baroda had to take a loan for Rs 10 lakh from the Financial Creditor and that the Corporate Debtor was unable to pay it back nor did it object the admittance of the application u/S 7 of the IBC. It was found that the bank had initiated recovery proceedings against the Corporate Debtor under the provisions of Section 13 (4) of the SARFAESI Act. The appeal was dismissed as the bench concluded that the Financial Creditor colluded with the Corporate Debtor with the ulterior motive to prevent the Bank of Baroda to recover the debt from the Corporate Debtor.