2024 (9) TMI 1421 - AT - IBC

NCLAT overturns Section 7 admission due to improper service and insufficient evidence of financial debt

Subhash Chander Chauhan Versus M/s. Kaliber Associates Pvt. Ltd., West Star Constructions Pvt. Ltd.

NCLAT set aside the Adjudicating Authority's order admitting a Section 7 application filed ex-parte against the corporate debtor. The tribunal found that ... Admission of Section 7 Application - financial debt or not - Notices were never served on the Corporate Debtor and the Adjudicating Authority on second date of hearing proceeded Ex-Parte against the Corporate Debtor - HELD THAT:- In the facts of the present case, the Adjudicating Authority in the Impugned Order has relied on record of default by NeSL and held that Report is sufficient evidence to arrive at the conclusion to an amount of debt. There can be no dispute that report of NeSL is an important piece of evidence, but in the facts of the present case where the Corporate Debtor has no opportunity to place its defence, it cannot be said that reliance on NeSL Certificate was conclusive evidence to come to the conclusion that there was a Financial Debt. Adjudicating Authority in Paragraph 3 of the Order has noticed the Balance Sheets maintained by the Corporate Debtor. Although the Balance Sheets have been noticed, but the Adjudicating Authority failed to notice that long-term borrowing and long-term liabilities have been mentioned under two different heads. Hence, non-mention of the amount of ₹1,00,00,000/- under the heading long-term borrowing has to be given some meaning and purpose. Long-term liabilities can be different kind of liabilities which may be an Operational Debt, Financial Debt or any other nature of debt. However, the real nature of transaction between the parties needs to be examined and adjudicated by the Adjudicating Authority before admitting Section 7 Application. In the present case, the Corporate Debtor unfortunately could not appear before the Adjudicating Authority to raise his defence, hence in the facts of the present case, the ends of justice be served in remitting the matter before the Adjudicating Authority for fresh consideration with liberty to the Appellant to file its Reply within three weeks. There is no appropriate consideration of the real nature of transaction on basis of which Section 7 Application was filed by the Adjudicating Authority. The ends of justice be served in remitting the matter for fresh consideration before the Adjudicating Authority, with liberty to the Appellant to file a Reply within 3 weeks from today - Appellant is allowed three weeks time to file a Reply to Section 7 Application before the Adjudicating Authority - appeal allowed. Issues Involved:1. Jurisdiction of the Liquidator to file the Section 7 Application.2. Nature of the debt as Financial Debt.3. Ex-Parte Order by the Adjudicating Authority.4. Reliance on NeSL Report as evidence.5. Real nature of the transaction.Detailed Analysis:1. Jurisdiction of the Liquidator to file the Section 7 Application:The Appellant argued that the Liquidator of M/s. Kalibre Associates Pvt. Ltd. had no jurisdiction to file a Section 7 Application, as the leave granted by the Adjudicating Authority was only for recovery of dues. However, the Tribunal found that the Adjudicating Authority's order dated 21.02.2022 explicitly permitted the Liquidator to file applications under Section 7 of the Insolvency and Bankruptcy Code (IBC). The Tribunal accepted the submission of the Respondent that the Liquidator was authorized to file the Section 7 Application.2. Nature of the debt as Financial Debt:The Appellant contended that the amount of Rs. 1,00,00,000/- was advanced as a security deposit for consultancy services and not as a loan. The Tribunal noted that the Financial Statements of the Financial Creditor and the Corporate Debtor reflected the amount under different headings, such as 'loans and advances' and 'other long-term liabilities'. The Tribunal emphasized that for a debt to be classified as a Financial Debt under Section 5(8) of the IBC, it must be disbursed for the time value of money. The Tribunal found that there was no material evidence, such as a Loan Agreement, to substantiate that the amount was a loan. The Tribunal concluded that the real nature of the transaction needed to be examined by the Adjudicating Authority.3. Ex-Parte Order by the Adjudicating Authority:The Appellant argued that the Order admitting the Section 7 Application was passed Ex-Parte, as notices were not served on the Corporate Debtor. The Tribunal acknowledged that the Order was indeed Ex-Parte and emphasized the importance of providing the Corporate Debtor an opportunity to present its defense. The Tribunal decided to remit the matter back to the Adjudicating Authority for fresh consideration, allowing the Appellant to file a reply.4. Reliance on NeSL Report as evidence:The Tribunal observed that while the NeSL Report is an important piece of evidence, it is not conclusive proof of the nature of the transaction. The Tribunal referred to previous judgments, including `Dheeraj Wadhawan Vs. Yes Bank Ltd. & Anr.`, which held that the record of the Information Utility is relevant but not conclusive. The Tribunal found that in this case, reliance on the NeSL Certificate alone was insufficient to establish the debt as a Financial Debt, especially when the Corporate Debtor had no opportunity to contest it.5. Real nature of the transaction:The Tribunal highlighted the necessity of determining the real nature of the transaction to ascertain whether the debt qualifies as a Financial Debt. The Tribunal referred to the Supreme Court judgment in `Global Credit Capital Ltd. & Anr. Vs. Sach Marketing Pvt. Ltd. & Anr.`, which emphasized examining the true nature of the transaction. The Tribunal found that the Adjudicating Authority had not adequately considered the nature of the transaction and directed it to do so upon remand.Conclusion:The Tribunal set aside the Order dated 06.03.2024 and remitted the matter back to the Adjudicating Authority for fresh consideration. The Appellant was allowed three weeks to file a reply to the Section 7 Application, and the Respondent was granted two weeks to file a rejoinder. The Tribunal clarified that its observations were made solely for deciding the Appeal and should not influence the Adjudicating Authority's fresh consideration of the Section 7 Application.