2020 (8) TMI 386 - AT - Insolvency and Bankruptcy

Financial Creditor wins appeal; Adjudicating Authority to accept application under Section 7

The Tribunal found that the Financial Creditor successfully proved the default of the Corporate Debtor in paying the financial debt, despite challenges ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - existence of debt and dispute or not - HELD THAT:- The Adjudicating Authority has rejected the Application filed under Section 7 of the Code on the ground that CIRP cannot be initiated for recovery of dues as the Tribunal is not a recovery forum. It is contended by the Respondent that Section 65 of the IBC prohibits initiation of CIRP if the purpose of proceeding is other than resolution for insolvency. 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. As the proceedings under IBC are summary in nature, it is difficult to determine the intent of the Applicant filing an application under Section 7, 9 or 10 of the Code unless shown explicitly by way of documentary evidence. This situation may arise in specific instances where a petition is filed under IBC specifically with a fraudulent or malicious intent. The Appeal deserves to be allowed - the Appellant/ Financial Creditor has proved that the Corporate Debtor has committed default of more than One lakh rupees, Application filed by the Appellant under Section 7 of the Code is complete and no disciplinary proceeding is pending against the proposed Resolution Professional. Therefore, the Application filed under Section 7 by the Appellant / Financial Creditor should have been admitted by the Adjudicating Authority. Appeal allowed. Issues Involved:1. Whether the Corporate Debtor committed default in paying the financial debt.2. Whether the Financial Creditor provided adequate evidence to prove the existence of financial debt.3. Whether the Adjudicating Authority erred in rejecting the application based on the solvency of the Corporate Debtor.4. Whether the pendency of a civil suit between the parties affects the application under Section 7 of the IBC.5. Whether the Adjudicating Authority is a forum for recovery of dues.6. Whether the application was filed with malicious intent for purposes other than resolution of insolvency.Detailed Analysis:1. Default in Paying Financial Debt:The Appellant contended that it lent Rs. 25,00,000 to the Corporate Debtor for 90 days with interest @ 15% per annum, secured by a post-dated cheque which was dishonored. The Corporate Debtor argued that the debt was squared off through multiple transactions and claimed no default. The Adjudicating Authority rejected the application, noting the Financial Creditor failed to produce required documents to show a loan application from the Corporate Debtor and a certificate from the Information Utility as per Section 7(3)(a) of the Code.2. Adequate Evidence of Financial Debt:The Financial Creditor submitted various documents including a bank transaction statement, balance confirmation letters, TDS certificates, and a dishonored cheque to prove the loan and default. Despite these, the Adjudicating Authority expressed doubts about the bank statement's authenticity, as it did not clearly indicate the Financial Creditor's name. The Financial Creditor also submitted a balance confirmation letter acknowledging the loan and interest payments, and Form 26AS showing interest payment and TDS deduction. The Tribunal found these documents sufficient to prove the financial debt and default.3. Solvency of the Corporate Debtor:The Adjudicating Authority noted the Corporate Debtor's financial statement showing a balance of more than Rs. 25,00,000 and revenue from operations, suggesting solvency. However, the Tribunal emphasized that solvency does not preclude the possibility of default. The inability to pay debts and committing default are distinct, and the focus should be on the occurrence of default rather than the company's solvency.4. Pendency of Civil Suit:The Adjudicating Authority cited the pendency of a civil suit and an interim prohibitory order against the Financial Creditor. The Tribunal clarified that Section 238 of the IBC has an overriding effect over other laws, and the civil court was not competent to issue an injunction affecting proceedings under the IBC. The pendency of a civil suit does not bar the initiation of CIRP.5. Forum for Recovery of Dues:The Adjudicating Authority rejected the application, stating it is not a forum for recovery of dues but to see if default occurred. The Tribunal agreed that the purpose of CIRP is not debt recovery but emphasized that the application under Section 7 should be admitted if a default is proven, regardless of the intent for recovery.6. Malicious Intent:The Adjudicating Authority suggested the application might be for recovery rather than resolution of insolvency. Section 65 of the IBC penalizes fraudulent or malicious initiation of proceedings, but the Tribunal noted that intent is difficult to determine in summary proceedings unless explicitly shown. The application should be admitted if it meets the criteria under Section 7, without presuming malicious intent.Conclusion:The Tribunal concluded that the Financial Creditor proved the Corporate Debtor's default, and the application under Section 7 was complete. The Adjudicating Authority's rejection based on solvency, pendency of civil suit, and forum for recovery was unfounded. The appeal was allowed, and the Adjudicating Authority was directed to admit the application within 7 days.