2025 (5) TMI 859 - AT - IBC

NCLAT upholds CIRP initiation despite no written loan agreement, rules audited statements prove financial debt

NCLAT dismissed appeal challenging CIRP initiation against corporate debtor. Tribunal held that Rs. 2.5 crores reflected in audited financial statements ... Seeking initiation of CIRP - default committed by the Corporate Debtor in repayment of a 'financial debt' - default falls within restricted period under Section 10A of IBC - record of default of in the records of the information utility - conclusive proof of the debt and default - liquidator of the alleged financial creditor has filed a petition for recovery of the amount and not for resolution of the Corporate Debtor against the regulations of the Code. Financial debt - Appellant conceded that Rs. 2.5 Crores might has been disbursed but not as loans and advances, since there is no contract or written document/ agreement for the same - HELD THAT:- The loans and advances have been clearly reflected in the audited financial statement of the Corporate Debtor which is adequate to establish that the money disbursed was indeed given as a loan. There is no law or provisions in the Code which requires that there has to be written contract or documentation to establish the loan. The reflection of the same in audited financial statements as well reflection in information utility i.e., National E-Governance Services Ltd., is good enough proof of financial debt. Hence, on this account, the arguments of the Appellant is rejected. The money disbursed of Rs. 2.5 Crores to the Respondent No.1 by Respondent No.2 indeed was a financial debt. Alleged default falls within restricted period under Section 10A of the Code - HELD THAT:- As regard, the alleged default falling in 10A exempted period of the Code, since one of the legal notice was issued by the Counsel of the Respondent No. 2 to the Corporate Debtor on 20.07.2020 and as such, as per the Appellant the same falls within the exempted period of 25.03.2020 to 25.03.2021 in terms of Section 10A of the Code - it is noted that in Part IV of Form I, filed along with application under Section 7 of the Code, under which default of Rs. 2.5 Crores was reflected as on 31.01.2019. It is a fact that other demand letter/ legal notice was issued on 20.07.2020, however, the original debt of default as reflected in Part IV is 31.01.2019 which is not covered under the exempted period in terms of Section 10A of the Code. Record of default of in the records of the information utility is a conclusive proof of the debt and default or not - HELD THAT:- The Rs. 2.5 Crores has been categorically reflected in the audited financial statements of the Corporate Debtor in the balance sheet as on 31.03.2020 as well as on 31.03.2022. This is good enough evidence of establishing the fact of debt payable to the Financial Creditor. The mere fact that the same was also been reflected in the record of the information utility (NESL) will not dilute the debt granted by the Financial Creditor to the Corporate Debtor and this recorded transaction of loan with the information utility is only as additional evidence of debt and default. In fact, the additional information as evident by the record of the information utility establishes the claims of the Financial Creditor. Thus, the contention of the Appellant in this regard stands rejected. Liquidator of the alleged financial creditor has filed a petition for recovery of the amount and not for resolution of the Corporate Debtor against the regulations of the Code - HELD THAT:- The Appellant pleaded that the role of the liquidator is limited in settling the assets available with entity under liquidator and should have taken action for the timely conclusion of liquidation process including selling non readily realizable assets including book debts through auctions based on valuation reports. It is the case of the Appellant that the alleged claims of Rs. 2.5 Crores payable by the Corporate Debtor should have been auctioned by the Respondent No. 2 rather than initiating CIRP proceeding against Corporate Debtor/ Respondent No. 1. In this connection, it is noted that the Respondent No. 2 / Liquidator had specifically taken approval of the Adjudicating Authority for instituting legal proceedings on behalf of the Respondent No. 2 including filing an application under Section 7 of the Code. Conclusion - The Respondent No. 2 is well within his rights to take any legal action including filing Section 7 application for recovering the recoverable dues from any entity like the Respondent No. 1 herein. It cannot be the case of the Appellant that the Respondent/ Liquidator should not have taken legal recourse for clear default by the Respondent No. 1. The Respondent No. 2 / Liquidator was within his right and was rather obligated under the Code and relevant regulations to do so. Appeal dismissed. 1. ISSUES PRESENTED and CONSIDERED Whether the amount claimed by the financial creditor in liquidation qualifies as a 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (Code), despite absence of a written contract or agreement. Whether the alleged default falls within the restricted/prohibited period under Section 10A of the Code, thus barring initiation of Corporate Insolvency Resolution Process (CIRP). Whether the record of default maintained by the Information Utility constitutes conclusive proof of debt and default for purposes of admission of a Section 7 application. Whether the liquidator of a company in liquidation is empowered to initiate CIRP proceedings under Section 7 of the Code against a third-party corporate debtor to recover dues, or whether such action constitutes overreach beyond the statutory mandate and contravenes the liquidation framework. 2. ISSUE-WISE DETAILED ANALYSIS Issue I: Nature of the Claimed Amount as Financial Debt The appellant contested that the Rs. 2.5 Crores disbursed was not a financial debt due to absence of any written contract or agreement evidencing a loan or advance. The appellant argued that without documentation demonstrating a commercial effect of borrowing and consideration for time value of money, the debt cannot qualify as financial debt under Section 5(8) of the Code. The Court noted that the amount was disbursed in two tranches (Rs. 2 Crores on 18.10.2013 and Rs. 50 Lakhs on 09.11.2013), as evidenced by bank statements produced on record. Further, audited financial statements of the corporate debtor as of 31.03.2020 and 31.03.2022 reflected the amount as 'Unsecured Loans' under 'Other Long Term Liabilities' and 'Short Term Borrowings,' respectively. The Court held that such reflection in audited financial statements constitutes sufficient proof of a financial debt, and no statutory requirement mandates a written contract to establish the nature of the debt. The Court rejected the appellant's contention, holding that the disbursed amount qualifies as a financial debt under the Code. The Court emphasized that the presence of the debt in audited financial statements and its recording with the Information Utility (NESL) are adequate to establish the existence of financial debt. Issue II: Applicability of Section 10A Restricted Period to the Alleged Default The appellant contended that the default occurred within the restricted period under Section 10A of the Code (25.03.2020 to 25.03.2021), which bars initiation of CIRP. The Court observed that the Section 7 application filed by the financial creditor reflected the date of default as 31.01.2019, which predates the restricted period. Although a legal notice was issued on 20.07.2020, the Court held that the original default date as per the application is determinative and is not covered by the Section 10A exemption. Accordingly, the Court rejected the appellant's argument that the default falls within the prohibited period and held that the initiation of CIRP was not barred on this ground. Issue III: Evidentiary Value of Information Utility Records The appellant argued that records of default maintained by the Information Utility are only prima facie evidence and not conclusive proof of debt and default, and that the corporate debtor is entitled to rebut such records. The Court acknowledged that the Information Utility's records are relevant but not conclusive evidence. However, the Court found that the debt and default were independently established by the audited financial statements reflecting the liability. The Information Utility record served as corroborative evidence supporting the financial creditor's claim. The Court held that the appellant's contention regarding the non-conclusive nature of Information Utility records did not undermine the established existence of debt and default. Issue IV: Authority of Liquidator of a Company in Liquidation to Initiate CIRP Proceedings Against a Third-Party Corporate Debtor The appellant contended that the liquidator of the financial creditor company, which is under liquidation, exceeded statutory powers by filing a Section 7 application to initiate CIRP against the corporate debtor. The appellant argued that the liquidator's role is confined to realization and distribution of assets of the company in liquidation, and that initiating CIRP proceedings against third parties is contrary to the Code's liquidation framework and objectives. The Court examined the relevant provisions of the Code and the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, including Regulations 37A (assignment of not readily realizable assets), 38 (distribution of unsold assets), 39 (recovery of monies due), and 44 (completion of liquidation). The Court noted that the liquidator had obtained prior approval from the Adjudicating Authority by order dated 21.02.2022, expressly permitting the liquidator to institute suits or legal proceedings on behalf of the company in liquidation, including filing applications under Section 7 of the Code against defaulting borrowers for recovery of dues. The Court held that the liquidator was within his statutory rights and obligations to initiate CIRP proceedings against the corporate debtor as a recovery mechanism, given the approval granted and the mandate to maximize value for stakeholders through recovery actions. The Court rejected the appellant's argument that the liquidator should have resorted only to auction or assignment of book debts and non-readily realizable assets, noting that the Code and Regulations empower the liquidator to take necessary legal steps to recover dues in a time-bound manner. The Court further observed that the liquidator's action did not contravene the Code's objectives but was consistent with the liquidation framework and the statutory mandate to recover dues for the company in liquidation. Additional Observations and Conclusions The Court rejected the appellant's challenge to the date of default, holding that the date recorded in the Section 7 application (31.01.2019) is operative and not the later demand notice date. The Court affirmed that the presence of the debt in audited financial statements and its recording with the Information Utility suffices to establish financial debt and default for initiating CIRP. The Court held that the liquidator's filing of a Section 7 application against the corporate debtor was authorized by the Adjudicating Authority and within the statutory framework, and not an abuse of process or jurisdictional overreach. The Court found no merit in the appellant's contention that the CIRP admission was erroneous or contrary to the Code's objectives of resolution and revival. The appeal was dismissed as devoid of merit with no order as to costs.