Tribunal Overturns Rejection of Insolvency Applications, Emphasizes Default Triggers

The Tribunal allowed both appeals challenging the rejection of applications under Section 7 of the Insolvency and Bankruptcy Code. It clarified that a default triggers insolvency proceedings regardless of debt disputes, emphasizing evidence of default is crucial. The rejection based on lack of invoked shares details was overturned, highlighting the importance of repayment clauses. The Tribunal remitted the matter for further consideration, suggesting settlement before admission and no costs awarded.

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Issues Involved:
1. Rejection of applications under Section 7 of the Insolvency and Bankruptcy Code, 2016.
2. Interpretation of default and debt under the I&B Code.
3. Consideration of invoked shares and repayment clauses.
4. Adjudication on invocation of pledged shares.
5. Adjudication on the rejection of applications against the Principal Borrower and Corporate Debtor.

Issue 1: Rejection of applications under Section 7 of the Insolvency and Bankruptcy Code, 2016:
The appeals were heard together as the Appellant was common, challenging the rejection of applications filed under Section 7 of the I&B Code. The first appeal (No. 497 of 2018) was against the rejection of the application against the Corporate Debtor due to the rejection of the application against the Principal Borrower. The second appeal (No. 498 of 2018) was against the rejection of the application against the Corporate Debtor based on the lack of details of invoked shares. The Adjudicating Authority had rejected the applications, leading to the appeals.

Issue 2: Interpretation of default and debt under the I&B Code:
The Appellant argued that a default of more than Rs. 1 Lakh is sufficient for maintaining an insolvency petition under the I&B Code, even if a substantial portion of the debt has been repaid. The Adjudicating Authority erred in concluding that the substantial recovery of debt made the appeal not maintainable. The Supreme Court precedent clarified that a default triggers the insolvency resolution process, and the Adjudicating Authority must verify the default based on evidence provided by the Financial Creditor, regardless of any dispute over the debt.

Issue 3: Consideration of invoked shares and repayment clauses:
The Adjudicating Authority rejected the application against the Corporate Debtor for failing to provide details of the invoked shares. The Appellant contended that the invocation of pledged shares could not have occurred before the default, as per the repayment clauses in the sanction letters. The clauses indicated that the date of sale of shares mattered, not the date of invocation. The Appellant had given due credit for the sale of shares, which was reflected in the outstanding amount.

Issue 4: Adjudication on invocation of pledged shares:
The Adjudicating Authority heavily relied on a chart provided by the Corporate Debtor to conclude that a substantial debt had been paid off. However, the Appellant argued that the shares were not invoked and sold on the date of pledge, as evidenced by a letter from the Corporate Debtor requesting the release of pledged shares after a loan repayment. The clause in the Share Pledge Agreement also clarified that the economic risk of the shares remained with the Pledgor until the sale to a third party.

Issue 5: Adjudication on the rejection of applications against the Principal Borrower and Corporate Debtor:
The Tribunal found that there was a debt exceeding Rs. 1 Lakh, and the rejection of both applications was incorrect. The matter was remitted to the Adjudicating Authority for admission of the case if the record was complete, after notice to the parties. The Tribunal clarified the sequence in which the cases against the Principal Borrower and Corporate Debtor should be considered, emphasizing that the same debt amount cannot be claimed in two different Resolution Processes.

In conclusion, the Tribunal allowed both appeals, setting aside the impugned orders and remitting the matter to the Adjudicating Authority for further consideration. It was highlighted that settlement between the parties was an option before admission of the case, with no costs awarded in the circumstances of the case.

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