2025 (8) TMI 1230 - AT - IBC

Section 7 petition vacated: applicant lacked standing after unauthorized assignment to Cooperative Bank withdrawn; admission set aside

Rajesh Vilasrao Patil Versus Savannah Lifestyle Pvt. Ltd. & Anr. And Vasantdada Shetkart Shakara Bank Ltd. Versus Savannah Lifestyle Pvt. Ltd. & Anr.

NCLAT held the Section 7 application inadmissible and set aside the impugned admission. The purported assignment by the Cooperative Bank to the applicant ... Maintainability of section 7 application - initiation of CIRP against Corporate Detor - assignment of financial debt - right of Respondent No.1 to enter into any OTS with Cooperative Bank to get the assignment of debt of the CD - HELD THAT:- The Cooperative Bank has made an assignment in favour of Respondent No.1 as recorded in the Minutes dated 20.12.2022, which assignment was withdrawn by the Cooperative Bank informing Respondent No.1 and returning the amount received. Respondent No.1 aggrieved by the cancellation of the OTS also filed Writ Petition in the Bombay High Court. The CD was, thus, challenging the very eligibility of action of the Cooperative Bank entering into OTS with Respondent No.1. The Adjudicating Authority did not advert to the said issues and by the impugned order has admitted Section 7 application, relying on claim of assignment of Respondent No.1 on the basis of Minutes of the proceedings dated 20.10.2022. The Adjudicating Authority without considering the application filed by the Cooperative Bank, from whom Respondent No.1 claimed assignment, passed the impugned order. The Cooperative Bank having brought on record all relevant facts, it was incumbent on the Adjudicating Authority to take note of the averments of the Cooperative Bank and keeping the application pending and admitting Section 7 application itself becomes unsustainable. Section 7 application filed by Respondent No.1 did not merit admission. Reference made to judgment of this Tribunal in Gp. Capt Atul Jain vs. Tripathi Hospital Pvt. Ltd. and Ors. [2023 (7) TMI 1242 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI], which was relied by learned Counsel for Respondent No.1 itself, where it was held that for application under Section 7, sub-section (1), claiming to be Applicant on behalf of default of another Financial Creditor, the non-negotiable requirement is to establish himself as a Financial Creditor of the CD. Respondent No.1 has been conducting its business from the Club premises under the Conducting Agreement. Respondent No.1 is not a Financial Creditor of the CD, so as to maintain an application as Financial Creditor under Section 7, sub-section (1). Moreso, the entire transaction culminating into the Minutes dated 20.10.2022 of the Cooperative Bank entering into an OTS with Respondent No.1 was held to be unauthorized and unlawful, on the basis of which, no right can be claimed by Respondent No.1 against the CD. Respondent No.1 illegally attempted to take the possession of the CD, on the basis of illegal assignment obtained from Cooperative Bank, which assignment came to be declared as illegal and withdrawn by the Cooperative Bank on 18.11.2022 itself - the Cooperative Bank itself has filed an application in the Bombay High Court, praying for review of the judgment dated 21.10.2022, which was ultimately allowed. The very basis of the claim of Respondent No.1 has become non-existent - the impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an application under Section 7 of the Insolvency and Bankruptcy Code (IBC) founded solely on an alleged assignment of a financial debt is maintainable when the assignment is recorded only in minutes of settlement before a High Court and no separate assignment documentation exists. 2. Whether the Adjudicating Authority could admit a Section 7 application relying on the aforesaid recorded assignment when the asserted assignor (the Bank) had contested the assignment, sought intervention before the Adjudicating Authority and returned amounts paid under the settlement. 3. Whether a party conducting business from corporate debtor's premises can invoke the Explanation to Section 7(1) (i.e., file on behalf of another financial creditor) without establishing independent status as a financial creditor by way of a disbursement giving rise to a financial debt. 4. What is the legal effect of a subsequent recall/setting aside by the High Court of the minutes/order on which a Section 7 application was founded, and whether that vitiates the basis of the Section 7 claim. ISSUE-WISE DETAILED ANALYSIS Issue 1: Maintainability of Section 7 application founded solely on minutes of settlement recording assignment Legal framework: Section 7 requires that the applicant be a 'financial creditor' as defined under the IBC; an application founded on assignment must be supported by cogent documentation evidencing assignment and rights transferred. The Explanation to Section 7 allows an application by a person on behalf of a financial creditor but does not obviate the requirement that the applicant itself be a financial creditor when invoking the provision. Precedent Treatment: This Tribunal's earlier decision (referred to in the judgment) establishes that the applicant must first establish itself as a financial creditor before taking shelter under the Explanation to Section 7. Interpretation and reasoning: The Section 7 pleading expressly relied on the Minutes of Order (20.10.2022) and the High Court order adopting those minutes as the sole basis of assignment. There was no separate assignment instrument executed by the Bank in favour of the applicant. Where the application is founded only on such minutes, and there is no independent evidence of assignment or disbursement by the applicant to the corporate debtor, the applicant cannot be treated as a financial creditor entitled to maintain Section 7. Ratio vs. Obiter: Ratio - A Section 7 applicant founded solely on a recorded settlement/minutes that purports assignment must produce independent documentary evidence of assignment or otherwise establish financial creditor status; reliance solely on minutes adopted by a court order is insufficient. Conclusion: Section 7 application based only on the minutes-recorded assignment, without separate assignment documentation or independent disbursement establishing applicant as financial creditor, is not maintainable. Issue 2: Adjudicating Authority's duty to consider contested assignment and Bank's intervention before admitting Section 7 Legal framework: Adjudicating Authority must consider material brought on record and adversarial pleadings before admitting CIRP; where third party asserts that the basis of the applicant's claim (assignment) is contested or withdrawn, those facts must be adjudicated or properly examined before admission. Precedent Treatment: The Tribunal emphasized the need to heed interventions and material that negate the assignment relied upon by the applicant. Interpretation and reasoning: The Bank filed an intervention and communicated that the applicant was ineligible, withdrew the OTS, and returned payments. These facts were on record and an intervention application by the Bank awaited adjudication. The Adjudicating Authority admitted the Section 7 application relying on the High Court order approving minutes, without deciding the Bank's intervention or addressing the Bank's contention that assignment was withdrawn and unlawful. Admission despite pending contested material was held unsustainable. Ratio vs. Obiter: Ratio - Admission of CIRP cannot proceed by reliance on contested recorded minutes where the assignor has repudiated/withdrawn the assignment and has sought intervention; the Adjudicating Authority must consider such contested material before admission. Conclusion: The Adjudicating Authority erred in admitting the Section 7 application without adjudicating the Bank's intervention and the contested/withdrawn nature of the assignment. Issue 3: Applicability and limits of the Explanation to Section 7(1) where applicant claims to act on behalf of another financial creditor Legal framework: Explanation to Section 7(1) permits an application by any other person on behalf of a financial creditor as may be notified, but the applicant invoking default owed to another financial creditor must itself qualify as a financial creditor if the applicant seeks to rely on the Explanation to assert defaults owed to other financial creditors; Section 7(1) requires the applicant to be a financial creditor in the first instance. Precedent Treatment: The Tribunal reiterated its prior ruling that the applicant must first establish itself as a financial creditor before invoking the Explanation to assert defaults owed to other financial creditors. Interpretation and reasoning: The applicant had not made any disbursement to the corporate debtor that would constitute a financial debt (payments made were for protection of possession in writ proceedings, not disbursement to the corporate debtor for value). Therefore, the applicant could not be treated as a financial creditor and could not maintain Section 7 on the basis of defaults owed to the Bank. Ratio vs. Obiter: Ratio - The Explanation to Section 7 does not permit an entity that is not itself a financial creditor to file a Section 7 application predicated on the default of another creditor unless it has, on its own facts, established financial creditor status. Conclusion: The applicant was not a financial creditor and could not rely on the Explanation to Section 7 to maintain the application for the Bank's debt. Issue 4: Consequence of High Court's subsequent recall/setting aside of the minutes/order on which Section 7 was based Legal framework: Where a Section 7 application is premised on a settlement/minutes which are subsequently recalled/declared unlawful by the court that earlier recorded them, that foundational basis is extinguished; an adjudicatory forum must assess the effect of such recall on any proceedings founded on those minutes. Precedent Treatment: The High Court's recall was analyzed and adopted as determinative of the illegality of the assignment and compromise; the Tribunal gave effect to that recall in evaluating maintainability of the Section 7 application. Interpretation and reasoning: The High Court, after detailed consideration, held that the transfer/assignment was unlawful under applicable RBI Directions and that the compromise affected rights of the corporate debtor without its consent; the High Court recalled its earlier order and minutes. The recalled order removed the only legal imprimatur supporting the applicant's claim. Consequently, the applicant no longer possessed any right to claim to be a financial creditor based on that assignment; the Section 7 petition's foundation was thereby knocked out. Ratio vs. Obiter: Ratio - A court's recall of an order/minutes that was the sole basis for an assignment negates the legal foundation of any insolvency petition predicated on that assignment; such insolvency petitions cannot stand where the underlying assignment is held unlawful and recalled. Conclusion: The High Court's recall of the minutes/order deprived the applicant of any valid assignment-based entitlement; admission of Section 7 on that erased basis was unsustainable and deserved to be set aside. Overall Conclusion and Disposition Admission of the Section 7 application was impermissible: the petition was founded solely on a minutes-recorded assignment without separate assignment documentation; the assignor (Bank) had contested and withdrawn the OTS and returned payments; the applicant was not a financial creditor by way of any disbursement; and the High Court subsequently recalled the minutes/order as unlawful under RBI Directions. The Adjudicating Authority erred in admitting the petition without resolving the Bank's intervention and contested facts. Consequently, the admission was set aside and the Section 7 application dismissed.