2023 (2) TMI 73 - AT - Insolvency and Bankruptcy

Tribunal Upholds Financial Creditor's Section 7 Application under I&B Code

The appeal was dismissed by the Tribunal, upholding the order admitting the Section 7 Application by the Financial Creditor under the I&B Code, 2016. ... Maintainability of Section 7 application - nature of financial debt versus settlement/consent terms - effect of breach of consent terms on character of debt - revival of company petition - entitlement of an individual financial creditor to initiate insolvency proceedingsMaintainability of Section 7 application - revival of company petition - Section 7 application filed by the Financial Creditor was maintainable and rightly admitted despite prior consent terms and withdrawal of the earlier company petition. - HELD THAT: - The Tribunal found that the fresh Section 7 petition was founded on the original financial debt advanced by the Financial Creditor and not solely on default of the consent terms. Clause 9 of the consent terms expressly preserved the Financial Creditor's right to claim the entire outstanding amount and to revive Company Petition No. 45 of 2020 on default; filing a fresh petition instead of reviving the earlier petition did not render the Section 7 petition untenable. The Adjudicating Authority therefore did not err in admitting the Section 7 application which pleaded the original financial debt in Part IV of the application and relied upon the default events as giving rise to enforcement of that debt. [Paras 11, 13]Admission of the Section 7 petition was upheld.Nature of financial debt versus settlement/consent terms - effect of breach of consent terms on character of debt - Breach of the consent/settlement terms does not automatically convert or extinguish the original financial debt; default under the consent does not per se mean the debt ceases to be a financial debt. - HELD THAT: - The Tribunal distinguished precedents relied upon by the Appellant where petitions were based solely on settlement agreements, noting those cases held that a default of a settlement alone may not constitute a financial debt. In the present case the Section 7 petition was based on the original financial accommodation extended to the Corporate Debtor as pleaded in the application. The court reasoned that permitting the contention that breach of consent wipes out or alters the character of the original financial debt would unfairly benefit a Corporate Debtor in breach of agreed terms and is not warranted on these facts. [Paras 12]The plea that breach of consent terms negates financial debt was rejected on the facts; the debt retained its character as financial debt.Entitlement of an individual financial creditor to initiate insolvency proceedings - A Financial Creditor who has extended financial benefits is entitled to initiate proceedings under Section 7 on its own right notwithstanding that it is not a majority debenture holder. - HELD THAT: - The Tribunal held there was no bar to the Financial Creditor filing the Section 7 petition merely because a majority of debenture holders had not initiated proceedings. The individual Financial Creditor's right to enforce its claim through insolvency proceedings remains intact, subject to available remedies such as settlement under Section 12 A if the parties subsequently agree. [Paras 14]The contention that lack of consensus among debenture holders precluded the petition was repelled.Final Conclusion: The Adjudicating Authority's admission of the Section 7 petition was affirmed and the appeal dismissed; the appellant remains free to pursue a settlement under Section 12 A if parties agree. Issues:Admission of Section 7 Application based on breach of consent terms, maintainability of Section 7 application due to breach of consent terms, nature of debt claimed in Section 7 Application, reliance on previous judgments, entitlement of financial creditor to initiate Section 7 application.Analysis:The appeal was filed against the order admitting a Section 7 Application by the Financial Creditor under the I&B Code, 2016, based on a breach of consent terms. The Financial Creditor had initially filed an application under Section 7, but a consent terms agreement was reached, leading to the withdrawal of the original Company Petition. However, when the consent terms were breached by the Corporate Debtor, instead of reviving the earlier petition, a fresh one was filed, which was admitted by the Adjudicating Authority, leading to the appeal.The Appellant argued that the breach of consent terms did not give the right to initiate a Section 7 Application as it does not constitute financial debt. They relied on previous judgments to support their position. The Respondent contended that the nature of debt claimed remained financial, and the fresh application was valid, given the terms of the consent agreement.The Tribunal examined the consent terms and the details of the financial debt claimed in the Section 7 Application. It noted that the application was based on the original financial debt extended by the Financial Creditor, not just the breach of consent terms. The Tribunal distinguished the present case from the judgments relied upon by the Appellant, emphasizing that the nature of the financial debt was not altered by the breach of consent terms.Regarding the entitlement of the Financial Creditor to file the Section 7 Application, the Tribunal held that the majority debenture holders' inaction did not preclude the Financial Creditor from initiating the application independently. The Tribunal dismissed the appeal, stating that if a settlement was reached, the parties could file an application under Section 12-A of the I&B Code. The impugned order admitting the Section 7 Application was upheld, finding no error in the decision.