2026 (2) TMI 34 - AT - IBC

Admission of Section 7 insolvency petition upheld where debtor's refusal to permit stock audit and cooperate scuttled MSME restructuring; appeal dismissed.

Adjudicating Authority's sole task in a Section 7 petition is to verify whether a financial default occurred; here the financial creditor's Part-IV ... Debt and default for purposes of admission of insolvency proceedings - admission of a Section 7 application under Insolvency and Bankruptcy Code, 2016 - MSME restructuring under the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises - obligation to cooperate with stock and book audit for restructuring - Section 7 of the Insolvency and Bankruptcy Code, 2016 - Whether the Adjudicating Authority has rightly returned the finding that debt and default on the part of the Appellant-Corporate Debtor in the repayment of dues of the Respondent No.1-Financial Creditor is fully established and basis this finding to have admitted the Section 7 application. - HELD THAT:- It is a well settled legal proposition that the Adjudicating Authority while adjudicating a Section 7 application is empowered only to verify whether a default has occurred or not and basis the findings thereon can admit or reject a Section 7 application. Having noted the guiding precepts for admission or rejection of Section 7 application, we now proceed to look at the Section 7 petition which was filed by the Respondent No.1 before the Adjudicating Authority. The foundation of any application under Section 7 is default committed by the Corporate Debtor in the repayment of its loan/facilities as depicted in Part-IV of the said application. In the present case, in Part-IV of the application under which the particulars of financial debt have been enumerated and explained by the Respondent No.1, it shows that the total amount of debt claimed was Rs. 39,19,52,518.04/- only which included the amount claimed to be in default arising out of the Cash Credit Facility and the Term Loan Agreement including charges, interest and penal interest. The date on which default occurred has been shown as 30.06.2023. There is no material on record to show that the Appellant had responded to the above e-mail of 11.03.2025. It is pertinent to notice that the above e-mail also states that even the Auditor of the Respondent No.1 had purportedly issued ten emails calling upon the Appellant to permit inspection and audit of stocks. The persistent lack of response from the Appellant clearly shows deliberate non- cooperation on their part. It is only after take-over of the Corporate Debtor by the IRP that the Appellant has now requested that stock audit can be conducted to enable restructuring by the Respondent No.1-Financial Creditor. It is therefore clearly borne out from material on record that the Corporate Debtor has yielded to the request for stock audit only after the management control has gone into the hands of the IRP. In such circumstances, we are inclined to agree with the Respondent No.1 that it is not open for the MSME’s to agitate their request for restructuring belatedly without having cooperated in the conduct of restructuring exercise when it was undertaken by the Financial Creditor in the first place. From the pattern of conduct of the Appellant it is amply borne out that far from being proactive in their effort at taking their restructuring proposal to its logical culmination, the Appellant was unwilling to budge inspite of repeated nudges of the Respondent No.1 and their auditors to facilitate stock audit and are now raising this bogey again as an opportunistic ploy which does not meet our countenance. Hence, this inordinate belated request for carrying out stock audit being made now cannot be a ground not to admit the Section 7 application. In sum, we hold that the Adjudicating Authority has considered all relevant factors which needed to have been considered in coming to the conclusion that the Section 7 application deserved to be admitted. We are satisfied that impugned order of Adjudicating Authority initiating CIRP against the Corporate Debtor cannot be faulted. The Appeal being devoid of merit is dismissed. Issues: (i) Whether the Adjudicating Authority correctly found existence of debt and default and rightly admitted the Section 7 application under the Insolvency and Bankruptcy Code, 2016; (ii) Whether the Appellant, as an MSME, was entitled to relief under the MSME restructuring framework (Notification dated 29-05-2015) and whether non-consideration of the restructuring request by the Financial Creditor precluded admission of the Section 7 application.Issue (i): Whether the Adjudicating Authority correctly found existence of debt and default and rightly admitted the Section 7 application under the Insolvency and Bankruptcy Code, 2016.Analysis: The financial creditor's Section 7 petition contained particulars of financial debt in Part-IV and accompanying records in Part-V, including loan and security documents, account statements and an authenticated NeSL record. The Corporate Debtor did not dispute obtaining the credit facilities and had itself, by a letter dated 02.09.2024, sought restructuring while acknowledging invocation of bank guarantees and non-payment. The Adjudicating Authority examined these records against the Innoventive framework for Section 7 admission and found that debt and default exceeding the statutory threshold were established.Conclusion: The Adjudicating Authority correctly concluded that debt and default were established and that the Section 7 application merited admission.Issue (ii): Whether the Appellant, as an MSME, was entitled to relief under the MSME restructuring framework and whether any failure by the Financial Creditor to consider the restructuring proposal precluded admission of the Section 7 application.Analysis: The MSME restructuring framework (Notification dated 29-05-2015 and related RBI/Master Directions) is binding on lending banks but also requires proactive compliance by the MSME to procedural steps such as permitting stock and book audits. Documentary record shows the Financial Creditor sought completion of stock audit (email dated 07.10.2024 and reminders including 11.03.2025) and requested co-operation; the Corporate Debtor did not permit or facilitate the audits and only sought cooperation after management custody passed to the IRP. The Supreme Court authority on the framework mandates reciprocal diligence by the MSME; material shows lack of timely cooperation by the Appellant, rendering the restructuring plea belated and unavailing to defeat Section 7 admission.Conclusion: The Appellant was not entitled to have admission of the Section 7 application withheld on the ground of alleged non-consideration of the restructuring proposal because the Appellant failed to comply with the procedural obligations necessary to avail the MSME framework.Final Conclusion: On the record, debt and default exceeding the statutory threshold were established and the Appellate Tribunal upholds the Adjudicating Authority's admission of the Section 7 petition and initiation of the CIRP; the MSME restructuring plea fails for lack of requisite cooperation by the MSME.Ratio Decidendi: Where a financial creditor proves debt and default supported by loan documents, account statements and an authenticated NeSL record, and the corporate debtor has not complied with procedural requirements under the MSME restructuring framework to avail that benefit, the Adjudicating Authority must admit a Section 7 application if statutory default is established.