Insolvency & BankruptcyNational Company Law Tribunal & NCLATDichotomy of Inability to Pay-Off Debts and Committing Default

September 11, 20200
National Company Law Appellate Tribunal, New Delhi
Monotrone Leasing Private Limited Vs. PM Cold Storage Private Limited
CA (AT) (Ins) No. 99 of 2020 | 16.07.2020
An application under Section 7 of the Insolvency and the Bankruptcy Code, 2016 (“Code”) was filled by Monotrone Leasing Private Limited (“Appellant”) for initiating Corporate Insolvency Resolution Process (“CIRP”) against PM Cold Storage Private Limited (“Corporate Debtor”) on the ground that the Corporate Debtor had defaulted in paying the financial debt.
Appellant had extended a loan of Rs.25 Lakhs to the Corporate Debtor for 90 days which was payable with interest @ 15% per annum. To secure the loan, the Corporate Debtor handed over a post-dated cheque dated 12th September 2017 for a sum of Rs.25 lakhs in favour of the Appellant.
Another post-dated cheque of Rs.25,00,000/- dated 09th October 2018 was issued by the Corporate Debtor in favour of the Appellant, which was dishonoured by the Bank on account of insufficient funds in the account. Subsequently, notice under Section 138 of Negotiable Instrument Act was served by the Appellant.
The Corporate Debtor on the other hand claimed that :
  1. no debt was due and payable;
  2. the Corporate Debtor had not made any defaults as alleged by the Appellant;
  3. that the borrowed money has been balanced by a significant number of transactions between the parties;
  4. there was a civil suit between the parties with respect to the alleged transaction;
  5. the transaction is not an inter-corporate deposit;
  6. the Corporate Debtor was not liable to pay the interest amount; and
  7. the alleged cheque is not valid as it was furnished as a security to the transaction.
The Adjudicating Authority rejected the Application on the ground that it cannot act as Recovery Tribunal. Further, observing that there was no sufficient evidence to prove that Corporate Debtor owed ‘financial debt’ to the Appellant. It was noted by the Adjudicating Authority that the financial statement of the Corporate Debtor showed a balance which was more than Rs.25 Lakhs therefore, it is a solvent company and there is no question of any default.
Aggrieved by the impugned order passed by the Adjudicating Authority, the Appellant approached the Appellate Tribunal seeking permission to initiate CIRP against the Corporate Debtor.
The following issues were considered by the Appellate Tribunal:
  1. Whether an application under Section 7 of the Code can be rejected on the ground of insufficient evidence of existence of financial debt?
  2. Whether a presumption can be drawn that a solvent company cannot commit default? 
  3. Whether an application under Section 7 of the Code can be rejected on the ground of pendency of civil suit between the parties?
  4. Whether an application under Section 7 of the Code can be rejected ground that Adjudicating Authority is not a forum for recovery of amount?
With regards to the first issue, the Appellate Tribunal relied upon the statement regarding disbursement of the loan, acknowledgement of the loan, balance confirmation letters, TDS certificate, documents about interest payment for the relevant periods; filed by the Appellant and held that clearly the loan extended by the Appellant is a financial debt.
It furtherance of this, the Court observed that the Corporate Debtor had acknowledged the receipt of the inter-corporate deposit and further secured it by providing a post-dated cheque dated 12th September 2017.
Further, the Appellate Tribunal noted that the Adjudicating Authority can admit or reject an application for initiation of CIRP solely on the basis of the criteria set out in Sections 7, 9 or Section 10 of the Code.
To further elaborate on the guiding principles to accept or reject an application under Section 7, the Appellate Tribunal referred the case, Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 and held that –
“In the above case, Hon’ble the Supreme Court of India has held that, to admit an application filed under Section 7 of IBC, the Adjudicating Authority is to be satisfied that a default has occurred; that the Corporate Debtor is entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the Adjudicating Authority is satisfied that a default has occurred, the Application must be admitted unless it is incomplete.”
The Appellate Tribunal held that the Adjudicating Authority’s conclusion that because no financial debt existed, the Application is liable to be rejected is sans any evidence.
Regarding the second issue, the Appellate Tribunal dismissed the rationale of the Adjudicating Authority that the Corporate Debtor could not commit a default because it is a solvent company and emphasized that
“a presumption cannot be drawn merely on the basis that a company, being solvent, cannot commit any default. As observed in financial and economic parlance, the inability to pay- off debts and committing default are two different aspects which are required to be adjudged on equally different parameters. Inability to pay debt has no relevance for admitting or rejecting an application for initiation of CIRP under the IBC.”
 Thus, the inability to settle the debt was unrelated to the acceptance or rejection of an application of CIRP under the Code.
The Appellate Tribunal held that the law laid down in the landmark case, Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 is clear that  it is not the “inability to pay debts” but  “determination of default” that is relevant for admitting an Application filed under Section 7, 9 or 10 of IBC. This new position of law allows the financial creditors to establish, by strong factual evidence, that there was an obligation to pay the debt and that the debtor had failed to satisfy his obligation. Therefore, it is not imperative to ascertain the Corporate Debtor’s inability to pay off the debt for admitting an application under Section 7 of the Code. 
Regarding the third issue, the Appellate Tribunal reiterated the settled position of law that the Code prevails over any other provision or law contrary or inconsistent with any of its provisions, as enumerated in Section 238 of the Code. The Civil Court did not have the jurisdiction over the matter which was pending under the Code. Thus, the Adjudicating Authority had erred in refusing the application on the grounds that a civil suit was pending between the parties.
Regarding the fourth issue, the Appellate Tribunal held that since the proceedings under the Code are summary in nature, it is difficult to assess the applicant ‘s intent to file a request pursuant to Sections 7, 9 or 10 of the Code unless it is specifically shown by documentary evidence. Further, the Tribunal observed that:
“Section 65 of the Code provides for penal action for initiating Insolvency Resolution Process with a fraudulent or malicious intent or for any purpose other than the resolution. However, the same cannot be construed to mean that if a petition is filed under Section 7, 9 or 10 of the Code without any malicious or fraudulent intent, then also such a petition can be rejected by the Adjudicating Authority on the ground that the intent of the Applicant/Petitioner was not resolution for Corporate Insolvency Resolution Process.”
Henceforth, the Appellate Tribunal allowed the appeal and directed the Adjudicating Authority to pass the order of admission.
The Code was introduced to simplify and strengthen insolvency and resolution legislation and it only envisages a summary adjudication by the Adjudicating Authority.
The Appellate Tribunal’s decision is very much in accordance with the settled position of law and recognizes default as the most important element for the initiation of a corporate insolvency resolution process against corporate debtors. If the default reaches the threshold limit, the financial creditor(s) can request an application under section 7.
The Adjudicating Authority’s discretionary power is limited to the purpose of determining whether or not there has been a default on payment of a debt and there is no need to determine the exact amount of the default. If the application is made in compliance with Form 1 and meets the conditions laid down in Section 7, it is said to be complete.
This judgment, therefore, takes a refreshing approach on dichotomy of inability to pay-off debts and committing default by settling the controversy to the extent of the powers of the Adjudicating Authority to accept or decline an application under Section 7.
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