2019 (1) TMI 84 - AT - Insolvency and Bankruptcy

Appellate Tribunal Overturns Authority's CIRP Rejection, Clarifies Jurisdiction

Neha Himatsingka And Anr. Versus Himatsingka Resorts Private Limited And Anr.

The Appellate Tribunal set aside the Adjudicating Authority's rejection of applications to initiate Corporate Insolvency Resolution Process (CIRP) under ... Corporate Insolvency Resolution Process - due unsecured loans - Held that:- The Respondents have taken plea that one Sri Bhagya Kalita or for the matter the ‘Corporate Debtor’ had no obligation whatsoever to repay the entire unsecured loans, obtained by the ‘Corporate Debtor’ prior to 15th December, 2014 due to change of management. The Adjudicating Authority has referred to an agreement dated 15th December, 2014, wherein one Sri Bhagya Kalita, who is the Managing Director of the ‘Corporate Debtor’ had agreed to purchase the entire shareholdings of Mr. Rajesh Himatsingka, his son Mr. Kanishka Himatsingka and his daughter-in-law Ms. Neha Himatsingka. Giving reference to their cases and the agreement dated 15th December, 2014, the Adjudicating Authority has exercised inherent power and refused to entertain the application. We are not going on the detailed reason given by the Adjudicating Authority for exercising inherent power as we have already held that the Adjudicating Authority has no jurisdiction to exercise inherent power for deciding any disputed question whether claim is bonafide or malafide. For the reasons aforesaid, we set aside the impugned order dated 15th April, 2018 passed by the Adjudicating Authority in the case of ‘Himatsingka Auto Enterprises’ and remit the matter to the Adjudicating Authority for deciding the matter fresh after notice to the parties.The parties are not given liberty to raise any question or dispute, all matters having already heard and decided in the present appeal. If there is debt and default, the Adjudicating Authority will admit the case. If the application under Section 7 filed by ‘Neha Himatsingka & Anr.’ is admitted in that case the question of admission of the Second application under Section 7 by ‘Himatsingka Auto Enterprises’ against the same ‘Corporate Debtor’ will not arise. ‘Himatsingka Auto Enterprises’ in such case may file claim before the ‘Interim Resolution Professional’ as may be appointed while dealing with the case of ‘Neha Himatsingka & Anr. Vs. Himatsingka Resorts Private Limited’. Issues Involved1. Initiation of Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code).2. Jurisdiction and powers of the Adjudicating Authority (National Company Law Tribunal, Guwahati Bench).3. Determination of default in repayment of loans by the Corporate Debtor.4. Status and rights of Financial Creditors.5. Application of inherent powers by the Adjudicating Authority.6. Objections raised by the Corporate Debtor including maintainability, limitation, and management change.Detailed Analysis1. Initiation of Corporate Insolvency Resolution Process (CIRP)Both appeals involved applications under Section 7 of the I&B Code for initiating CIRP against the Corporate Debtor. The Financial Creditors alleged defaults in repayment of unsecured loans. The Adjudicating Authority initially rejected these applications, leading to the appeals.2. Jurisdiction and Powers of the Adjudicating AuthorityThe Adjudicating Authority, Guwahati Bench, rejected the applications by exercising inherent powers to address extraordinary situations, which is beyond the scope of the I&B Code. The Appellate Tribunal found that the Adjudicating Authority exceeded its jurisdiction and should have confined its examination to the existence of debt and default as per Sections 7, 9, and 10 of the I&B Code.3. Determination of Default in Repayment of LoansThe Financial Creditors provided evidence of loans disbursed and alleged defaults in repayment. The Adjudicating Authority, however, concluded there was no default based on the representation of the application and certain agreements. The Appellate Tribunal emphasized that the Adjudicating Authority should ascertain the existence of default from the records and evidence provided by the Financial Creditors.4. Status and Rights of Financial CreditorsThe Adjudicating Authority initially questioned the status of the Appellants as Financial Creditors. The Appellate Tribunal clarified that the Financial Creditors had provided loans to the Corporate Debtor, which were invested with a time value of money, thus confirming their status as Financial Creditors under Sections 5(7) and 5(8) of the I&B Code.5. Application of Inherent Powers by the Adjudicating AuthorityThe Adjudicating Authority exercised inherent powers under Rule 11 of the National Company Law Tribunal Rules, 2016, which is not applicable in cases under Sections 7, 9, or 10 of the I&B Code. The Appellate Tribunal set aside the orders, stating that inherent powers cannot be used to decide disputes or determine the maintainability of applications under Section 7.6. Objections Raised by the Corporate DebtorThe Corporate Debtor raised several objections, including the maintainability of the application, the claim being barred by limitation, and a change in management. The Adjudicating Authority did not accept these objections and proceeded on merit. The Appellate Tribunal found that the objections regarding limitation were rightly rejected, and the existence of debt and default was sufficient for admitting the application.ConclusionThe Appellate Tribunal set aside the impugned orders and remitted the matters to the Adjudicating Authority for admission of the applications under Section 7 of the I&B Code. The Adjudicating Authority was directed to admit the cases if debt and default were established, without considering any new objections. The appeals were allowed with specific directions for further proceedings.