NCLAT sets aside Section 7 petition admission order for violating natural justice principles in insolvency proceedings

NCLAT set aside the Section 7 petition admission order due to violation of natural justice principles. The appellant was not provided adequate opportunity to examine or rebut financial statements filed by the CA before the Adjudicating Authority. The tribunal held that adherence to natural justice is essential for fair adjudication, requiring parties to have real and effective opportunity to peruse all material relied upon against them. The CIRP initiation order, appointment of Interim Resolution Professional, and all subsequent orders were set aside. Appeal allowed.

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Issues Involved:
1. Whether the debt was time-barred.
2. Whether the unsigned financial statements could be relied upon for acknowledging the debt.
3. Whether principles of natural justice were adhered to by the Adjudicating Authority.

Summary:

Issue 1: Whether the debt was time-barred.

The Appellant argued that the Section 7 application filed by the Respondent No. 2 (UCO Bank) was time-barred since the date of default was 31.05.2014 and no written or signed acknowledgment of the outstanding debt was provided after 2015. However, the Respondent No. 2 contended that the Corporate Debtor acknowledged their debt in the balance sheet as on 31.03.2022, and the Adjudicating Authority correctly applied Section 18 of the Limitation Act, which allows for a fresh period of limitation from the time an acknowledgment of liability is signed.

Issue 2: Whether the unsigned financial statements could be relied upon for acknowledging the debt.

The Appellant asserted that the unsigned financial statements could not be relied upon to acknowledge the debt, referencing the Supreme Court's decision in Asset Reconstruction Company (India) Ltd. Vs. Bishal Jaiswal & Ors. (2021) 6 SCC 366, which requires such entries to be signed by authorized signatories. The Respondent No. 2, however, provided signed financial statements for the years 2020-21 and 2021-22, which were verified by a Chartered Accountant (CA) and submitted to the Adjudicating Authority.

Issue 3: Whether principles of natural justice were adhered to by the Adjudicating Authority.

The Appellant contended that the Adjudicating Authority violated principles of natural justice by not providing them an opportunity to respond to the financial statements submitted by the CA. The Tribunal noted that the Adjudicating Authority should have ensured that the balance sheets produced by the CA were shared with the Appellant, allowing them the opportunity to rebut and present their views. The Tribunal emphasized that adherence to principles of natural justice is essential for fair adjudication.

Conclusion:

The Tribunal allowed the appeal, set aside the impugned order, and remanded the matter back to the Adjudicating Authority to decide afresh in accordance with the law after hearing all parties with respect to the financial statements submitted by the CA. The Tribunal directed the parties to appear before the Adjudicating Authority within ten days from the date of the order and expected the hearing to be completed within two months. No costs were awarded.

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