2025 (6) TMI 24 - AT - IBC

NCLAT upholds Section 7 application admission rejecting Corporate Debtor's viability defense under IBC 2016

Rajendra Kumar Versus IndusInd Bank Ltd., Hacienda Projects Private Limited, Lotus 300 Apartment Owners’ Association

NCLAT dismissed appeal challenging Section 7 application admission under IBC 2016. Corporate Debtor argued viability to avoid CIRP initiation, citing ... Admissibility of a Section 7 application under the Insolvency and Bankruptcy Code, 2016 against a Corporate Debtor - case of appellant is that Corporate Debtor is a viable company and should not have been initiated into CIRP - whether the Corporate Debtor is a viable company which entitles the Corporate Debtor to be covered under the ratio of Vidarbha Industries Power Ltd. - HELD THAT:- After going through all the facts of the case, especially the financial status of the Appellant as Promoters of the Corporate debtor and the reason the Appellant sought invoking protection of Vidarbha Industries Power Ltd. case, it is not convinced with the same. There are no adequate resources available with the Appellant, which could have been utilised by the Appellant as Promoters of the Corporate Debtor to settle the Financial Creditors including the Respondent No. 1 & 3. It is also worthwhile to note that the project was to be completed in the year 2014 and even in the current year of 2025, the towers are yet to be completed along with other facilities and dues of NOIDA Authority are still to be paid. The contesting Respondent i.e., IndusInd Bank Limited/ Respondent No. 1 herein as well as Intervenor Homebuyers who constitute the CoC have also refuted the claims of the Appellant. Conclusion - The Corporate Debtor is not financially viable or solvent to avoid CIRP initiation; The Adjudicating Authority rightly admitted the Section 7 petition; The Appellant's reliance on Vidarbha Industries Power Ltd. is misplaced. There are no error in the Impugned Order - appeal dismissed. The core legal questions considered in this judgment revolve around the admissibility of a Section 7 application under the Insolvency and Bankruptcy Code, 2016 ('Code') against a Corporate Debtor, specifically whether the Corporate Debtor is a financially viable entity entitled to protection from initiation of Corporate Insolvency Resolution Process ('CIRP') under the precedent set by the Supreme Court in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. The issues include:1. Whether the Corporate Debtor is a solvent and financially viable company, thereby precluding initiation of CIRP under Section 7 of the Code.2. The applicability and interpretation of the Supreme Court's ruling in Vidarbha Industries Power Ltd. regarding temporary defaults and solvency in the context of CIRP initiation.3. The validity and sufficiency of the financial creditor's claim of default and overdue payments, considering the Corporate Debtor's repayments and financial commitments.4. The relevance and viability of alleged settlement offers and third-party financial support proposed to resolve outstanding dues.5. The impact of the initiation of CIRP on stakeholders, particularly homebuyers, and the consideration of their interests in the insolvency proceedings.6. Whether the Adjudicating Authority properly exercised its discretion under the Code and considered all relevant facts and legal principles before admitting the Section 7 petition.Issue-wise Detailed Analysis:1. Viability and Solvency of the Corporate Debtor and CIRP InitiationThe legal framework governing this issue is Section 7 of the Code, which allows a financial creditor to initiate CIRP upon default by the Corporate Debtor. The Supreme Court's decision in Vidarbha Industries Power Ltd. (2022) provides a critical precedent, holding that CIRP should not be initiated against solvent companies facing temporary financial distress.The Appellant argued that the Corporate Debtor was solvent and financially viable, having repaid a substantial portion of the loan (Rs. 33 Crores out of Rs. 64.5 Crores), having receivables from sales, and ongoing efforts to settle dues, including a proposed Rs. 35 Crores settlement offer. The Appellant contended that the Adjudicating Authority erred in admitting the Section 7 petition without adequately considering these facts and the Vidarbha precedent.The Respondent Financial Creditor disputed these claims, highlighting that the account had been classified as a Non-Performing Asset since December 2020 with no significant repayments thereafter, and the default was prolonged beyond two years. The Financial Creditor emphasized that despite selling 301 of 330 units, the Corporate Debtor failed to clear dues, undermining its claim of solvency.The Court analyzed the facts and noted that the Adjudicating Authority had rightly observed that project completion alone is not determinative of financial health. The Adjudicating Authority's reasoning underscored that the Corporate Debtor's failure to repay dues despite substantial sales and the speculative nature of the third-party comfort letter (Rs. 20 Crores) did not constitute exceptional circumstances to withhold CIRP initiation.The Court distinguished the present case from Vidarbha Industries Power Ltd., noting that in Vidarbha, the debtor had a realistic prospect of repayment backed by pending adjudications and substantial funds exceeding dues. In contrast, here, no material evidence demonstrated the Corporate Debtor's ability to repay outstanding debts or complete the project.Thus, the Court concluded that the Corporate Debtor was not a viable company entitled to protection under the Vidarbha ratio, and the initiation of CIRP was justified.2. Evaluation of Settlement Offers and Third-Party SupportThe Appellant relied on a Memorandum of Understanding with the Lotus 300 Buyers Association, promoter infusions of funds, and a settlement proposal by Ace Infracity Developers Pvt. Ltd. to pay Rs. 35 Crores over 18 months. Additionally, a Rs. 20 Crores comfort letter from Three C Residency Pvt. Ltd. was cited as evidence of financial support.The Financial Creditor refuted these claims, stating no concrete settlement offer existed, and the Rs. 20 Crores comfort letter was speculative and not relied upon. The Court noted that the Adjudicating Authority had considered these submissions and found no credible evidence that these proposals were viable or would materialize to clear dues.The Court observed that the absence of materialization of these offers and the Financial Creditor's rejection of settlement proposals negated the Appellant's argument for withholding CIRP.3. Impact on Homebuyers and Stakeholders' InterestsThe Lotus 300 Apartment Owners' Association intervened, opposing the Appellant's contentions and highlighting alleged misappropriation of funds by promoters, unauthorized sale of project land, and substantial investments made by homebuyers to complete the project. They argued that the project was nearly complete, and CIRP initiation threatened homebuyers' interests and delayed project completion.The Association contended that the project was fully funded by homebuyers and the external loan was collusive, aimed at siphoning funds. They sought protective measures, including restraining the Resolution Professional and directing recovery of misappropriated funds.The Court acknowledged these submissions but clarified that the present appeal's scope was limited to the question of admitting the Section 7 petition and initiating CIRP, and not to adjudicate on alleged fraud or misappropriation claims.The Court noted that the Adjudicating Authority had not erred in admitting CIRP despite homebuyers' interests and that the Code's objective is to resolve the Corporate Debtor's financial distress, which ultimately serves the interests of all creditors including homebuyers.4. Exercise of Discretion by the Adjudicating AuthorityThe Appellant challenged the Impugned Order as mechanically passed without due consideration of financial viability and ongoing efforts to resolve dues.The Court reviewed the Adjudicating Authority's reasoning, which explicitly addressed the Appellant's submissions, including the project's near completion, the speculative nature of third-party undertakings, and the failure to repay dues despite sales.The Adjudicating Authority emphasized that CIRP initiation does not equate to liquidation and is aimed at resolution. It rejected the argument that project completion alone should prevent CIRP.The Court found no error or misapplication of law in the Adjudicating Authority's exercise of discretion and upheld the Impugned Order.5. Subsequent Developments and Compliance with Interim OrdersThe Appellate Tribunal had earlier granted interim relief by staying constitution of the Committee of Creditors and allowing the project to continue with due oversight. However, the project remained incomplete after nearly three years, and the Appellant failed to demonstrate steps taken to complete the project or satisfy financial dues.This failure further undermined the Appellant's claim of solvency and ability to resolve financial distress without CIRP.Significant Holdings:'Had the company been a financially sound entity, it would not have defaulted in payment of its dues to the Applicant Bank. Hence, in our view, the completion of a Project cannot be the sole parameter to judge the overall health and viability of a company.''Any company which is admitted into the CIRP is attempted to be revived/ resolved first and mere admission of a company into CIRP does not directly result in its instant liquidation or dissolution under the Scheme of IBC.''Despite the claim of selling the most of the units (301 out of the 330 units as pleaded by the Respondent in its Reply) in the Project, the Respondent has failed to repay its financial debt, therefore, there is no exceptional case made out whereby despite default, the CIRP shall not be initiated against the Respondent.'Core principles established include that CIRP initiation under Section 7 is justified where default is proved and the Corporate Debtor fails to demonstrate solvency or exceptional circumstances to withhold proceedings. Project completion status is not determinative of financial viability. Speculative or unmaterialized settlement proposals do not preclude CIRP. The Code's objective is resolution, not liquidation, and the Adjudicating Authority's discretion must be exercised considering all relevant facts.Final determinations on the issues are that the Corporate Debtor was not financially viable or solvent to avoid CIRP initiation; the Adjudicating Authority rightly admitted the Section 7 petition; the Appellant's reliance on Vidarbha Industries Power Ltd. was misplaced; and the appeal was devoid of merit and rejected.