Section 7 IBC insolvency admission upheld; shareholder-guarantor may pursue Section 65 misuse plea over alleged collusion

The NCLAT upheld admission of a Section 7 IBC application against the corporate debtor, dismissing the shareholder-appellant's challenge. It held the appellant had locus standi as he had been allowed to participate before the NCLT and was also a personal guarantor for the financial facilities forming the basis of the Section 7 claim. On merits, the Tribunal found undisputed financial debt, valid assignment to the financial creditor, acknowledgment of debt and default through an OTS proposal, NeSL records, and the corporate debtor's balance sheet. The NCLAT declined to interfere with admission but granted liberty to the appellant to move a Section 65 IBC application before the NCLT.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the appellant had locus standi as an "aggrieved person" to maintain an appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC) against an order admitting an application under Section 7.

1.2 Whether the order admitting the application under Section 7 of the IBC was valid in light of the evidence of debt, default, assignment of debt, acknowledgements, and limitation.

1.3 Whether the application under Section 7 was a malicious or fraudulent initiation of the corporate insolvency resolution process attracting Section 65 of the IBC, and the manner in which such allegations ought to be dealt with.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Locus standi of the appellant to maintain the appeal under Section 61 IBC

Legal framework (as discussed by the Court)

2.1 The Court referred to Sections 61 and 62 of the IBC and the phrase "any person aggrieved" used therein. It relied on the judgments of the Supreme Court in "GLAS Trust Company LLC v. BYJUS Raveenderan & Ors." and "Independent Sugar Corporation Ltd. v. Girish Shriram Juneja & Ors." which interpreted "any person aggrieved" under the IBC.

2.2 The Supreme Court held that the phrase "any person aggrieved" in Sections 61 and 62 IBC indicates that there is no rigid locus requirement, and that proceedings under the IBC, once CIRP is initiated, are in rem, involving all stakeholders. Any person who is affected by the order and whose interests are directly impacted may fall within this expression.

Interpretation and reasoning

2.3 The respondent objected to the appellant's locus on the basis that the appellant was neither a current shareholder nor a director of the corporate debtor at the time of filing of the Section 7 application, and that an appeal by a shareholder is not maintainable as per earlier decisions of the Appellate Tribunal.

2.4 The Court found it unnecessary, for purposes of this case, to go into the broader question whether an appeal can or cannot be maintained by a shareholder in the abstract. Instead, it examined the appellant's locus "dehors" (independent of) his claim as a shareholder.

2.5 The Court relied on two factual foundations to recognise locus:

(i) The adjudicating authority (NCLT) had permitted the appellant to participate in the Section 7 proceedings by filing a reply on behalf of the corporate debtor in his capacity as ex-director. This participation was expressly noticed in the NCLT order (para 17 of the impugned order).

(ii) The appellant had admittedly executed a Deed of Guarantee as personal guarantor securing the financial facilities extended to the corporate debtor by Indian Bank, those very facilities forming the basis of the Section 7 proceedings. The NCLT had also recorded this fact (para 10 of the impugned order).

2.6 Applying the Supreme Court's interpretation of "any person aggrieved", the Court held that a personal guarantor, whose financial exposure is directly impacted by initiation of CIRP and whose participation had been recognised by the adjudicating authority, falls within the expression "any person aggrieved" under Section 61.

Conclusions

2.7 The objection to locus standi was rejected.

2.8 The appellant, being a personal guarantor and having been permitted to participate before the adjudicating authority by filing a reply on behalf of the corporate debtor, was held competent to maintain the appeal under Section 61 IBC.

Issue 2: Validity of the admission of the application under Section 7 IBC (debt, default, assignment, and limitation)

Legal framework (as reflected in the judgment)

2.9 The Court proceeded on the settled parameters for admission of a Section 7 application: existence of a "financial debt", occurrence of "default", and the application being within limitation. It also noted the relevance of acknowledgements of debt for extending limitation and relied on the evidentiary value of NeSL records and corporate balance sheets.

Interpretation and reasoning

2.10 It was undisputed that the corporate debtor had availed financial facilities from Indian Bank, and that Indian Bank assigned its debt to the financial creditor through a Registered Deed of Assignment dated 13.07.2016. The assignment and corresponding modification of charge were produced before the adjudicating authority.

2.11 The corporate debtor had submitted an OTS proposal to the assignee financial creditor on 03.10.2016, which was accepted on 22.12.2016. Some payments were made under the OTS (last payment on 17.09.2018), but the instalment due on 10.01.2019 was not paid. The adjudicating authority treated 10.01.2019 as the date of default.

2.12 The Court noted that the OTS proposal itself amounted to a clear acknowledgment of the corporate debtor's liability. Subsequent acknowledgements were evidenced by:

(i) Acknowledgment of debt by letter dated 17.12.2020, as recorded by the adjudicating authority.

(ii) Admission and acknowledgment of liability in the audited balance sheet for F.Y. 2020-21.

(iii) Ledger confirmation by the corporate debtor, lastly on 01.04.2022.

2.13 An earlier Section 7 petition (CP(IB) 135 of 2023) had been dismissed for want of NeSL record (Form-D). The subsequent petition (filed on 16.05.2024) annexed the NeSL record of default showing a status of "Deemed to be Authenticated" and confirming the date of default as 10.01.2019. The Court treated the earlier dismissal as arising from a curable defect, which was duly rectified in the later filing.

2.14 In light of the above acknowledgements and the authenticated NeSL record, the adjudicating authority held that the application filed on 16.05.2024 was within limitation and that the financial creditor had successfully proved "debt" and "default".

2.15 The Court observed that acceptance of the loan and other facilities was not denied by the corporate debtor, and that the corporate debtor's own documents (OTS, balance sheet, ledger confirmation) supported the financial creditor's claim.

Conclusions

2.16 The existence of a financial debt, its valid assignment to the financial creditor, and the occurrence of default as on 10.01.2019 were established on the record.

2.17 Acknowledgements in the OTS proposal, balance sheet for F.Y. 2020-21, and ledger confirmations kept the claim within limitation on the date of filing of the Section 7 application on 16.05.2024.

2.18 The Court found no error in the adjudicating authority's conclusion that the requirements of Section 7 were fulfilled and upheld the order admitting the Section 7 application.

Issue 3: Allegations of malicious or fraudulent initiation of CIRP and the role of Section 65 IBC

Legal framework (as discussed by the Court)

2.19 The Court adverted to Section 65 of the IBC, which empowers the adjudicating authority to impose penalty where insolvency proceedings are initiated fraudulently or with malicious intent for purposes other than the resolution of insolvency.

2.20 The Court referred to the Appellate Tribunal's earlier decision in "Ashmeet Singh Bhatia v. Pragati Impex India (P) Ltd. & Anr." wherein it was held that:

(i) The adjudicating authority can exercise power under Section 65 upon being satisfied that proceedings are initiated fraudulently or with malicious intent.

(ii) While exercising jurisdiction under Section 65, the adjudicating authority can close the CIRP and pass all consequential orders.

(iii) The mere fact that a Section 7 application has been admitted does not denude the adjudicating authority of jurisdiction to examine a Section 65 application; such examination can occur even after admission.

Interpretation and reasoning

2.21 The appellant alleged that the Section 7 application was filed at the instance of the majority shareholder, that there had been round tripping of funds from the corporate debtor and group entities to purchase the debts from Indian Bank and SBI, and that the proceedings were malicious and not for resolution. It was also contended that the Section 7 proceedings were a counterblast to a pending oppression and mismanagement petition under Sections 241 and 242 of the Companies Act, 2013.

2.22 The appellant argued that these aspects had been pleaded in the reply before the adjudicating authority and in written submissions, including details of alleged round tripping, but were not adverted to by the adjudicating authority when admitting the Section 7 petition, and that the adjudicating authority ought to have invoked Section 65 and imposed penalty.

2.23 The respondent refuted the allegations of manipulation and round tripping and objected to reliance on documents brought on record only through an additional affidavit in appeal, which had not been before the adjudicating authority.

2.24 The Court expressly declined to adjudicate on the merits of the appellant's allegations that the Section 7 application was filed fraudulently or maliciously. It recorded that:

(i) Jurisdiction under Section 65 can be invoked by the adjudicating authority at any stage of the insolvency proceedings.

(ii) If the adjudicating authority is satisfied that the Section 7 application has been filed for a fraudulent or malicious purpose other than resolution, it may exercise power under Section 65 in accordance with law.

2.25 Instead of examining the factual matrix of alleged round tripping and mala fides at the appellate stage, the Court considered it appropriate, in the interest of justice, to grant liberty to the appellant to move an application under Section 65 before the adjudicating authority along with all relevant material.

Conclusions

2.26 The Court did not make any finding on whether the Section 7 application was, in fact, malicious or fraudulent.

2.27 It affirmed that the adjudicating authority retains jurisdiction under Section 65 even after admission of a Section 7 application to examine allegations of fraud or mala fides.

2.28 Liberty was granted to the appellant to file an application under Section 65 IBC before the adjudicating authority, to be decided on its own merits and in accordance with law, after giving opportunity to the concerned parties.

2.29 In the absence of any established ground to interfere with the admission of the Section 7 application, the appeal was dismissed, subject to the above liberty under Section 65.

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