NCLAT allows appeal, remands Section 7 application for fresh consideration after finding clear debt and default

The NCLAT allowed the appeal and remanded the case back to the Adjudicating Authority for fresh consideration. The appellant's Section 7 application under the Insolvency and Bankruptcy Code was originally dismissed by the Adjudicating Authority. The NCLAT found that there was clear debt and default by the respondent corporate debtor, with outstanding debt of Rs. 646.38 crores acknowledged by the respondent in various statements and books of accounts. The tribunal held that the Adjudicating Authority incorrectly applied the Vidarbha Industries ratio and failed to conduct meaningful analysis of the debt and default issues. The NCLAT rejected the respondent's frivolous grounds including res-judicata claims and confirmed the appellant's right to file the Section 7 application without being bound to assign debts to EARC.

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Issues Involved:

1. Whether there was a debt and default which could trigger Section 7 application filed by the Appellant.
2. Whether the ratio of Vidarbha Industries was applicable in the present case, and whether there was judicious application of mind by the Adjudicating Authority while rejecting the application of the Appellant under Section 7 of the Code.
3. Whether the Adjudicating Authority ignored the acknowledgements of debt and default by the Respondent.
4. Whether the Appellant is permitted to raise any disputed issues of facts before this Appellate Tribunal through the Rejoinder.
5. Whether the Appellant was duty bound to agree with the majority of the lenders to assign its debts to EARC.

Detailed Analysis:

Issue 1: Debt and Default

The Appellant filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, claiming a default amount of Rs. 646,38,06,271/- as of 01.07.2011. The financial distress of the Corporate Debtor led to the classification of the account as Non-Performing Asset (NPA) on 17.06.2016. Subsequent restructuring attempts, including Corporate Debt Restructuring (CDR) and Strategic Debt Restructuring (SDR), failed, leading to further defaults. The Appellant presented evidence of debt and default through various financial statements and acknowledgments by the Respondent, which were not disputed. The Appellate Tribunal found clear evidence of debt and default, entitling the Appellant to file the application under Section 7 of the Code.

Issue 2: Applicability of Vidarbha Industries Ratio

The Adjudicating Authority based its decision on the Vidarbha Industries case, which allows discretion in admitting Section 7 applications. However, the Appellate Tribunal noted that the circumstances in Vidarbha Industries involved a clear award in favor of the debtor, which was not the case here. The Respondent's claims of recovering Rs. 1271 Crores were speculative and not comparable to the concrete award in Vidarbha Industries. The Tribunal also referred to the Innoventive Industries case, which mandates the admission of Section 7 applications upon establishing debt and default. The Tribunal concluded that the Adjudicating Authority misapplied the Vidarbha Industries ratio, as the Respondent's financial situation did not justify discretion against admitting the application.

Issue 3: Ignoring Acknowledgements of Debt and Default

The Appellant provided multiple acknowledgments of debt and default by the Respondent, including statements of accounts, annual reports, and utility reports. The Adjudicating Authority's decision lacked detailed analysis of these acknowledgments. The Tribunal found that the Adjudicating Authority ignored clear evidence of debt and default, which should have led to the admission of the Section 7 application.

Issue 4: Raising Disputed Issues in Rejoinder

The Respondent argued that the Appellant could not raise new issues in the Rejoinder. The Tribunal noted that the primary issue was the applicability of the Vidarbha Industries ratio, which was central to the appeal. The Tribunal determined that the Rejoinder did not introduce new issues but addressed the applicability of the Vidarbha Industries ratio, which was already part of the proceedings.

Issue 5: Duty to Agree with Majority Lenders

The Respondent claimed that the Appellant was bound to assign its debts to EARC, as per RBI guidelines, because the majority of lenders had done so. However, the Bombay High Court and the Supreme Court clarified that these guidelines are not mandatory and each lender retains discretion. The Tribunal upheld that the Appellant was not obligated to follow the majority and could pursue its legal remedies independently.

Conclusion:

The Appellate Tribunal allowed the appeal, set aside the Impugned Order, and remanded the case back to the Adjudicating Authority for fresh consideration, directing both parties to appear before the Adjudicating Authority on 11.11.2024. The Tribunal emphasized the need for expeditious disposal of the matter, given its prolonged pendency.

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