NCLAT held that allegations of mismanagement or shareholding disputes cannot hinder the admission of a Section 7 application if debt acknowledgment and default are established.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Rakesh Kumar Jain (Judicial Member) and Technical Members Mr. Barun Mitra and Mr. Naresh Salecha, reviewed two appeals and held that insolvency proceedings under Section 7 of the IBC are determined solely by the existence of financial debt and default. Allegations of mismanagement, fraud, or shareholding disputes cannot bar its admission, particularly when debt acknowledgments are reflected in corporate records and default is established. The NCLAT reaffirmed that financial creditors retain independent rights under the IBC, even when they acquire shareholding through the invocation of pledged shares. It further held that challenges to the limitation period are unsustainable when debt acknowledgments are present.
The National Company Law Appellate Tribunal (NCLAT) adjudicated upon an appeal filed by Entegra Limited, challenging the order dated 27.09.2022 passed by the National Company Law Tribunal (NCLT), Kolkata Bench, admitting a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) against Shree Maheshwar Hydel Power Corporation Ltd. (SMHPCL). The financial creditor, Power Finance Corporation Ltd. (PFC), had initiated the insolvency proceedings, which the appellant, a promoter of SMHPCL, opposed on multiple grounds, including allegations of lender misconduct, unlawful debt-to-equity conversion, and mismanagement. The appellant contended that the financial distress of the 400 MW power project was attributable to external factors, including the Narmada Bachao Andolan, and that PFC’s actions, including the diversion of funds from the Trust and Retention Account (TRA), had exacerbated the project’s financial instability. He further argued that the amended Articles of Association had stripped him of control over the company and that the lenders’ interference led to the classification of SMHPCL’s accounts as non-performing assets (NPA). The appellant relied on findings by the Registrar of Companies (RoC) that purportedly supported allegations of mismanagement by PFC and challenged the validity of loan agreements, asserting that they were collusive, time-barred, and intended to revive extinguished claims.
PFC, in response, refuted the allegations and asserted that SMHPCL had been in default since 1995 despite multiple restructuring efforts. It argued that the appellant had failed to meet equity commitments, leading to delays and the project’s classification as an NPA in 2012. PFC maintained that the loan agreements were valid, that acknowledgments of debt existed in balance sheets and board resolutions, and that the appellant was barred by the doctrine of approbate and reprobate, having initially accepted the additional loan agreement. During the pendency of the insolvency proceedings, the Government of Madhya Pradesh constituted a Task Force, resulting in a Memorandum of Understanding (MoU) on 22.07.2019, requiring the appellant to settle lender dues. However, the appellant’s failure to infuse the requisite ₹10 crore led to the MoU’s termination, reinforcing PFC’s claim that the appellant lacked intent to implement a resolution plan. PFC also argued that the appellant’s belated Section 65 application, alleging malicious intent, was a deliberate attempt to derail the Corporate Insolvency Resolution Process (CIRP).
The NCLT had delivered a split verdict on the matter, necessitating a referral to the Kolkata Bench. The NCLAT examined the debt structure and found that the financial default was established, as reflected in board minutes and loan agreements. It observed that judicial forums had previously invalidated the conversion of pledged shares into equity but had not declared the underlying loan agreements fraudulent. The Tribunal rejected the appellant’s contention that the recall notice dated 17.01.2018 was issued with malafide intent and affirmed that the financial default amounted to ₹2,789.42 crores. It addressed the dissenting view of the NCLT’s Technical Member, who had suggested that the default was artificially created, clarifying that adjudicating authorities under the IBC are only required to ascertain the existence of debt and default, as upheld in precedents such as Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563, E.S. Krishnamurthy v. Bharath Hi Tech Builders, REEDLAW 2021 SC 12544, and Vistra ITCL (India) Limited and Others v. Dinkar Venkatasubramanian and Another, REEDLAW 2023 SC 05516.
On the issue of limitation, the NCLAT held that the debt had been consistently acknowledged in balance sheets and corporate records, making any challenge to its enforceability untenable. It also dismissed the argument that PFC, having been in control of SMHPCL from 2005 to 2018, should have proceeded under Section 10 of the IBC instead of Section 7, reiterating that financial creditors retain independent rights under the Code, even if they become shareholders through the invocation of pledged shares. Referring to India Power Corporate Ltd. v. Meenakshi Energy Ltd., the Tribunal emphasized that acquiring shareholding through a pledge does not extinguish a financial creditor’s claim. Conclusively, the NCLAT upheld the admission of the insolvency application, finding that the default was sufficiently established and that the appellant’s allegations of fraud and collusion did not warrant the dismissal of the CIRP. The appeal was accordingly dismissed.
Mr. Abhishek Puri, Ms. Surbhi Gupta and Mr. Sahil Grewal, Advocates, represented the Appellant.
Mr. Ramji Srinivasan, Sr. Advocate, with Mr. Deepak Khurana and Ms. Monalika, Advocates, appeared for the Respondent No.2.
Mr. Gajanad Krodhiwal, Mr. Aditya Rathee and Mr. Shivam Rajpal, Advocates, appeared for RP/Respondent No. 1.
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