2022 (8) TMI 235 - AT - Insolvency and Bankruptcy

IBC: Solvent Companies Protected from Insolvency Proceedings

The Tribunal held that initiating insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code for debt recovery purposes against a ... Scope of IBC - dishonor of cheque - compounding of offences - Recovery of the dues - whether the Section 7 Application admitted against a Solvent Company, in the background where the Company has issued two cheques as security for the amount lent, and one cheque amount has been paid, (pursuant to the Order of the Trial Court under Section 138 of the NI Act, 1881, to compound one of the cases), and for the balance second cheque amount, does the initiation of Insolvency Proceedings fall within the ambit of the scope, objective and spirit of the Code which is ‘Resolution’ and not ‘Recovery’? - Whether the Adjudicating Authority while admitting a Section 7 Application, as in this case, examine only if there is a ‘Debt’ and ‘Default’ but also assess if the intent of the Applicant is primarily only ‘Recovery of the dues’? HELD THAT:- From the particulars of ‘Financial Debt’, it is clear that the amount claimed as ‘default’ is Rs.87,50,000/- which is inclusive of cheque amount of Rs.57,00,000/- issued on 01.09.2016 and against which the ‘Corporate Debtor’ paid an amount of Rs.67,90,000/- vide a Demand Draft dated 09.09.2019 before the Trial Court to compound one of the cases. It is an admitted fact that the said payment led to the closure of Case No. 1505 of 2017 which was filed for the dishonour of the cheque of Rs.57,00,000/- - In Part IV of the Application, the debt amount is claimed to be Rs.87,50,000/-. It is pertinent to mention that the said Application was filed on 30.11.2018 while there were parallel proceedings for recovery of the amount under Section 138 of the NI Act, 1881 before the District Court, Gurgaon. The amounts claimed pertain to the period prior to the date of Notification. We also do not wish to delve into the other submissions of the Appellant regarding the nature of transactions, absence of Financial Contract, non-registration of debt with the information utility whether interest at 18% per annum was ever concluded between the parties except for reference in the legal Notice issued by the second Respondent. The Preamble of IBC is carefully worded to describe the spirit and objective of the Code to be ‘Reorganisation’ and ‘Insolvency Resolution’, specifically omitting the word ‘Recovery’. The Parliament has made a conscious effort to ensure that there is a significant difference between ‘Resolution’ and ‘Recovery’ - Section 65(1) of the Code does not expressly mention ‘Debt Recovery Action’ under ‘for any purpose other than resolution of insolvency..’, keeping in view the factual occurrence of the events of this particular matter, we hold that the ‘intent’ may not be a ‘malafide intent’, but is nevertheless a fundamental attempt to obtain an edge/ advantage / an upper hand in ‘recovering their dues’. ‘A Recovery Proceeding’ of this nature does fall within the scope and ambit of the words ‘for any purpose other than Resolution’, as defined under Section 65 (1) of the Code - this Appeal is allowed and the Order of the Adjudicating Authority is set aside. 1. ISSUES PRESENTED and CONSIDEREDThe primary issue considered by the Tribunal was whether the Section 7 Application under the Insolvency and Bankruptcy Code, 2016, admitted against a solvent company, was appropriate given the circumstances that the company had issued cheques as security for a loan, and one cheque amount had already been paid following a court order. The Tribunal also examined whether the initiation of insolvency proceedings was aligned with the Code's objective of 'Resolution' rather than 'Recovery'.2. ISSUE-WISE DETAILED ANALYSISRelevant legal framework and precedents: The Tribunal examined Section 7 of the Insolvency and Bankruptcy Code, 2016, which provides the framework for initiating insolvency proceedings against a corporate debtor. The Tribunal also considered precedents set by the Supreme Court, including the interpretation of Section 7(5)(a) of the Code, as discussed in the case of Vidarbha Industries Power Limited v. Axis Bank Limited, and the distinction between 'Resolution' and 'Recovery' as emphasized in various judgments.Court's interpretation and reasoning: The Tribunal emphasized that the purpose of the Insolvency and Bankruptcy Code is to facilitate the resolution of insolvent debtors rather than to serve as a tool for debt recovery. The Tribunal noted that the Code's objective is to reorganize and resolve insolvency, not to penalize solvent companies for non-payment of dues. The Tribunal highlighted that the use of insolvency proceedings for debt recovery contradicts the spirit of the Code.Key evidence and findings: The Tribunal noted that the corporate debtor had issued two cheques as security for a loan, one of which had been paid following a court order. The Tribunal found that the second respondent had accepted a payment with interest at 6% per annum, which led to the closure of one of the cases under Section 138 of the Negotiable Instruments Act. The Tribunal also considered the financial health and viability of the corporate debtor, which was described as a going concern with commercial prospects.Application of law to facts: The Tribunal applied the legal principles established in the Vidarbha Industries case, emphasizing that the initiation of insolvency proceedings should not be used as a substitute for debt recovery actions. The Tribunal concluded that the intent behind the Section 7 Application was primarily for recovery rather than resolution, which is contrary to the Code's objectives.Treatment of competing arguments: The Tribunal considered the arguments of both parties. The appellant argued that the Section 7 Application was filed as a pressure tactic and that the amount in question was not a financial debt. The second respondent contended that the debt was acknowledged in the corporate debtor's books and that the Section 7 Application was rightly admitted. The Tribunal found merit in the appellant's argument that the proceedings were intended for recovery rather than resolution.Conclusions: The Tribunal concluded that the Section 7 Application was filed with the intent of recovering dues rather than resolving insolvency. The Tribunal held that such use of insolvency proceedings is inappropriate and contrary to the Code's objectives.3. SIGNIFICANT HOLDINGSThe Tribunal held that the initiation of insolvency proceedings under Section 7 of the Code should not be used for debt recovery purposes. The Tribunal emphasized that the Code is designed for the resolution of insolvent debtors and not for penalizing solvent companies. The Tribunal set aside the order of the Adjudicating Authority admitting the Section 7 Application, thereby releasing the corporate debtor from the proceedings.The Tribunal preserved the following crucial legal reasoning: 'The Hon'ble Supreme Court in a catena of Judgements has held that IBC tackles 'Insolvency and Bankruptcy' and that it is not the objective of the IBC that CIRP should be initiated to penalise a Solvent Company for non-payment of dues. The scope and objective of IBC is to bring about 'Resolution' of an Insolvent Debtor and is definitely not a 'Recovery Proceeding'.'The Tribunal concluded that the proceedings were initiated with the intent of recovery, which falls outside the scope of the Code's objectives. The Tribunal allowed the appeal, set aside the order of the Adjudicating Authority, and released the corporate debtor from the rigors of insolvency proceedings.