2017 (4) TMI 1267 - Tri - Insolvency and Bankruptcy

Petition admitted under Insolvency Code for debt default - Moratorium declared, Resolution Professional appointed

The Tribunal admitted the petition filed by Punjab National Bank under Section 7 of the Insolvency and Bankruptcy Code, 2016, against the Corporate Debtor ... Default under the Insolvency and Bankruptcy Code - admission of an application under Section 7 - sufficiency of evidence of default from information utility or other records - role and duties of the Interim Resolution Professional - moratorium on suits and enforcement on insolvency commencement date - no requirement of consent of other financial creditors for filing under Section 7 - natural justice limited by statutory timeline and Rule 4(3) - overriding effect of the Code over other lawsDefault under the Insolvency and Bankruptcy Code - sufficiency of evidence of default from information utility or other records - There was a default by the corporate debtor and the existence of default could be established from records other than an information utility. - HELD THAT: - The Tribunal held that Section 7(3) permits the financial creditor to furnish records of default recorded with an information utility or such other record or evidence as may be specified. In the absence of an established information utility, Regulation 8(2) and the copies of sanctioned loan documents and certified statements of account suffice to show default. The term 'default' is wide and exact quantification of the amount is not a precondition for admission; the IRP and the Regulations provide for further substantiation and estimation of claims. [Paras 10, 11, 16, 18, 19]Default by the corporate debtor is established on the record presented and the application may be admitted notwithstanding that exact computation of the default will be revisited during the resolution process.Admission of an application under Section 7 - no requirement of consent of other financial creditors for filing under Section 7 - A single financial creditor may file an application under Section 7 without the consent of other financial creditors; neither Section 7 nor the Rules require joinder or prior consent of other financial creditors. - HELD THAT: - The Tribunal construed Section 7(1) and its explanation to mean that a financial creditor, either by itself or jointly, may initiate insolvency proceedings when a default has occurred; the provision is inclusive and does not import the consent threshold from SARFAESI or other statutes. The statutory Form 1 prescribes particulars of the applicant only and does not mandate inclusion or joinder of other financial creditors or publication to shareholders. The Code's procedural scheme and the duties of the IRP provide safeguards for other creditors. [Paras 24, 25, 30]The petition is not rendered incompetent or incomplete for being filed by a single financial creditor without consent of other lenders.Natural justice limited by statutory timeline and Rule 4(3) - The corporate debtor is entitled to notice and an opportunity to raise objections as contemplated by Rule 4(3), but there is no requirement for publication to shareholders or for broader notice beyond the registered office. - HELD THAT: - Rule 4(3) requires the applicant to dispatch a copy of the application to the corporate debtor's registered office to alert it to deposit the default amount or raise objections within the timeframe. The Tribunal held that this satisfies the statute's natural justice requirements within the Act's tight timelines; broader publication to shareholders or impleading other persons is not mandated by the Code or Rules. [Paras 3, 27]Compliance with Rule 4(3) is the prescribed notice; absence of public notice to shareholders does not invalidate the petition.Moratorium on suits and enforcement on insolvency commencement date - overriding effect of the Code over other laws - On admission the Tribunal declared moratorium under Section 14 and held that the Code overrides inconsistent provisions of other laws. - HELD THAT: - The Tribunal applied Section 14(1) to prohibit institution or continuation of suits or proceedings against the corporate debtor, transfer or encumbrance of its assets, and enforcement of security interests, and observed Section 238 gives the Code overriding effect. Pending litigation does not preclude admission of the Section 7 petition because such proceedings are rendered subject to the moratorium and the Code's scheme. [Paras 33, 34, 39]A moratorium is declared from the date of the order until completion of the CIRP or approval of a resolution plan or liquidation as applicable.Role and duties of the Interim Resolution Professional - The IRP (once appointed) will be responsible for verifying claims, constituting the committee of creditors, and safeguarding interests including handling pari-passu charges; exact quantification of claims is for the IRP to determine. - HELD THAT: - The Tribunal noted Regulations 10, 11 and 14 permit the IRP to call for evidence, make best estimates when amounts are imprecise and revise admitted claims on additional information. Section 21 requires constitution of a committee of creditors comprising all financial creditors; issues of pari-passu charges and protection of other creditors' interests fall within the IRP's statutory duties. Consequently, disputes about detailed computation and inter-creditor priorities are to be adjudicated and managed in the CIRP process. [Paras 6, 16, 17, 26]Determination and admission of the precise amounts of claims and resolution of inter-creditor issues are to be undertaken by the IRP and the CIRP machinery.Sufficiency of evidence of default from information utility or other records - Exact computation of the amount of default is not required at the admission stage; the Tribunal accepted bank statements and sanction documents as prima facie evidence while leaving final computation to the IRP. - HELD THAT: - The Tribunal emphasised that Regulation 14(1) permits the IRP to estimate claims where precise amounts are not ascertainable and Regulation 11 places the onus of proving debt on the creditor. The applicant's certified statements of account and calculation sheets support prima facie default; however the Tribunal expressly left the final quantification to the IRP during CIRP. [Paras 17, 18, 19]Prima facie evidence of default suffices for admission; precise calculation will be revisited and finalised by the IRP.Natural justice limited by statutory timeline and Rule 4(3) - role and duties of the Interim Resolution Professional - Directions for custody and inventory were given: the IRP must prepare an inventory of assets and may permit an authorised representative of the corporate debtor to attest the inventory as witness. - HELD THAT: - Responding to concerns about preservation of evidence and custody of premises, the Tribunal directed the IRP to prepare an inventory of articles and keep them in safe custody, permitting a corporate debtor representative to associate in and attest the inventory. The Tribunal reiterated the IRP's duty to act impartially and to maintain ethical standards under the Code and the Board's regulations. [Paras 36]IRP to take custody as a going concern, prepare inventory, and permit authorised representative to attest the inventory; IRP must adhere to Code of Conduct.Final Conclusion: The application filed by the financial creditor is admitted; a moratorium is declared with the directions set out; the Insolvency Resolution Professional is to be appointed and shall verify, admit and quantify claims, constitute the committee of creditors and manage the CIRP in accordance with the Code and Regulations. Issues Involved:1. Default in payment of financial debt by Corporate Debtor.2. Compliance with procedural requirements under the Insolvency and Bankruptcy Code, 2016.3. Validity of the appointment of Interim Resolution Professional (IRP).4. Determination of the existence and amount of default.5. Impact of pending litigations on the insolvency proceedings.6. Protection of interests of other financial creditors and shareholders.7. Application of moratorium upon admission of the insolvency petition.Detailed Analysis:1. Default in Payment of Financial Debt by Corporate Debtor:The application was filed by Punjab National Bank (PNB) under Section 7 of the Insolvency and Bankruptcy Code, 2016, against the Corporate Debtor for default in payment of financial debt. The Corporate Debtor admitted the default but contested the calculation of the outstanding amount. The Tribunal emphasized that the term 'default' under Section 3(12) of the Code is broad and does not necessitate precise calculation before admitting the application.2. Compliance with Procedural Requirements:The application was filed in Form No. 1 as required by Rule 4(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. The petitioner complied with all procedural requirements, including dispatching the application to the Corporate Debtor's registered office and filing an affidavit of dispatch.3. Validity of the Appointment of Interim Resolution Professional (IRP):The proposed IRP, Mr. Vivek Goyal, was initially appointed in another case after the filing of this petition. The petitioner later proposed Mr. Navneet Gupta as the new IRP, and his written communication in Form II was found complete. The IRP must not be a related party to the Corporate Debtor or the petitioner Bank and must abide by the Code of Conduct set by the Board.4. Determination of the Existence and Amount of Default:The Tribunal noted that the existence of default must be ascertained from records or evidence provided by the financial creditor. The petitioner provided certified statements of account under the Banker's Book Evidence Act, showing no installment was deposited after the account was declared NPA in 2014. The total amount in default was calculated as Rs. 52,57,19,407, though the exact amount would be determined by the IRP.5. Impact of Pending Litigations on the Insolvency Proceedings:The Corporate Debtor argued that various pending litigations should be considered before admitting the application. The Tribunal held that pending litigations do not affect the insolvency proceedings unless there is an adjudication on the claim or default. The Code has an overriding effect on other laws, and the moratorium under Section 14 would stay all pending suits and proceedings against the Corporate Debtor.6. Protection of Interests of Other Financial Creditors and Shareholders:The Corporate Debtor raised concerns about the interests of other financial creditors and shareholders. The Tribunal clarified that the IRP would represent all creditors, not just the petitioner, and would constitute a committee of creditors as per Section 21 of the Code. The consent of 60% of creditors required under Section 13(9) of the SARFAESI Act does not apply to proceedings under the Code.7. Application of Moratorium Upon Admission of the Insolvency Petition:The Tribunal declared a moratorium prohibiting the institution or continuation of suits or proceedings against the Corporate Debtor, transferring or disposing of assets, and recovering any property occupied by the Corporate Debtor. The moratorium would remain effective until the completion of the corporate insolvency resolution process or until the Tribunal approves a resolution plan or orders liquidation.Conclusion:The Tribunal admitted the petition, declared a moratorium, and scheduled further directions for the appointment of the IRP. The order was communicated to the petitioner and the Corporate Debtor forthwith.