2026 (1) TMI 794 - AT - IBC

Existence of financial debt and default upheld based on audit reports and communications; CIRP initiation sustained; rejoinder documents admitted

Dominant issue: Whether a financial debt and default existed. Reasoning: Appellant failed to adduce evidence establishing alleged fraud; mere allegation ... Commencement of the CIRP against the Corporate Debtor - financial debt was due and payable and existence of default or not - Taking on record the rejoinder placed - HELD THAT:- The Appellant never attempted to pursue or establish the allegation of fraud through appreciation of evidence. Having failed to act upon his own rights, he cannot later resile from the stand already taken and adopt a contradictory position at the appellate stage by contending that the documents evidencing the financial liabilities of the Corporate Debtor were fraudulently executed, particularly when no proof to the contrary has been produced. Merely alleging that a document is fraudulent does not suffice for the adjudication of a dispute. Fraud is a fact that must be established by evidence, which the Appellant has failed to do, and hence he cannot take advantage of such a plea, especially while objecting to documents such as the Audit Report, the Balance Sheet, and his own One-Time Settlement proposals contained in the correspondence dated 16.06.2022 and 19.07.2025. In fact, a summary consideration of these documents clearly indicates a tacit admission by the Appellant of his financial liability, because unless such liability existed and was admitted, there would have been no occasion for him to explore the possibility of a One-Time Settlement. An attempt to enter into a One-Time Settlement constitutes an admission of financial debt payable to the Financial Creditor. As per the dictum of the Hon’ble Apex Court rendered in M/s Innoventive Industries Limited v. ICICI Bank Limited [2017 (9) TMI 58 - SUPREME COURT], it has been held that the definition of a ‘claim’ includes even a disputed right of payment, and that proceedings under the Code are triggered the moment the default exceeds the statutory threshold limit. Even otherwise, if the aforesaid principle as applied by the Ld. NCLT is considered in its entirety, the basic criterion is that only the existence of a claim is required to be prima facie established. Its quantification does not affect the maintainability of proceedings under Section 7 of the I & B Code, 2016; quantification becomes relevant only at a later stage, when the matter is adjudicated on its merits. Taking on record the rejoinder placed - documents filed with the Rejoinder can be read in evidence or not - HELD THAT:- Since a Rejoinder forms part of the pleadings, it is open to consideration by the Ld. Tribunal while deciding the case on merits, and no formal permission is required from the Ld. Adjudicating Authority prior to placing the Rejoinder on record to be read in evidence. Moreover, the documents filed with the Rejoinder, being public documents such as the Auditor’s Report and the balance sheet, are already in the public domain and clearly reflect the existence of a debt due from the Appellant to the Financial Creditor. Furthermore, the Appellant’s liability stands explicitly admitted in the communication dated 16.06.2022, as well as in his subsequent efforts to pursue a One-Time Settlement on 19.07.2025. A proposal for One-Time Settlement itself constitutes an admission of debt, once the Appellant initiates steps to settle the liability through payment. The Company Appeal lacks merit and the same is accordingly dismissed. Issues: (i) Whether a financial debt was due and payable and there was default such as to sustain initiation of CIRP under Section 7 of the IBC; (ii) Whether the Rejoinder and the documents filed with it (including Auditor's Report, balance sheet and OTS correspondence) could be taken on record and read in evidence.Issue (i): Whether the financial creditor established existence of a financial debt and default so as to justify admission of CIRP under Section 7 of the IBC.Analysis: The issue was examined by reference to documentary records on file, including an independent Auditor's Report and provisional balance sheet reflecting long-term borrowings, correspondence indicating proposals for One-Time Settlement and admissions of liability, and settled principles from Supreme Court authority that entries in the balance sheet and accompanying documents may constitute an acknowledgment of debt. The appellate forum considered the nature of a 'claim' under the Code and the standard for admission under Section 7, namely prima facie satisfaction from records of default and existence of debt, without requiring precise quantification at the admission stage.Conclusion: In favour of Respondent.Issue (ii): Whether the Rejoinder and documents annexed thereto were admissible and properly considered in deciding the Section 7 application.Analysis: The scope of pleadings under Rule 2(19) of the NCLT Rules was applied to conclude that a Rejoinder falls within the definition of pleadings and that documents annexed thereto, particularly public documents such as the Auditor's Report and balance sheet, may be read in evidence. The appellate jurisdiction as a continuation of original proceedings was invoked to permit examination of such documents; further, evidentiary principles including the burden under the statute for challenging execution of documents were applied to assess the absence of any satisfactory discharge of the burden to prove fraud or forgery.Conclusion: In favour of Respondent.Final Conclusion: The appellate forum, after re-examining the pleaded documents and evidence, found the financial creditor's prima facie case of debt and default established and upheld the admissibility of the Rejoinder and annexed public documents, resulting in dismissal of the appeal.Ratio Decidendi: Entries in a corporate debtor's audited financial statements and an independent auditor's report reflecting borrowings can constitute an acknowledgment of debt for purposes of determining existence of a financial debt under Section 7 of the IBC, and a rejoinder forming part of pleadings under Rule 2(19) NCLT Rules may be considered by the adjudicating or appellate forum along with public documents annexed thereto.