NCLAT held that the mere assignment of trade receivables without underlying proof of debt and default is insufficient to file an application under Section 7 of the IBC.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra & Arun Baroka (Technical Members) was hearing an appeal and observed that for a Section 7 application under the IBC, a financial creditor must establish the existence of a financial debt disbursed against consideration for the time value of money, and prove default, emphasizing that mere assignment of trade receivables without underlying proof of debt and default does not suffice.
In the present case, the appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC) arose from the Adjudicating Authority's rejection of Appellant’s Petition seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the Respondent The dispute centred on a claimed financial debt owed by Sankalp to Metamorphosis, originally owed by the Respondent to Innovative Industries Ltd. (IIL), a holding company.
The appellant asserted that it acquired the debt through a Deed of Assignment with IIL's liquidator after IIL's admission into CIRP. The debt was allegedly confirmed through various correspondences, including an email and balance confirmation letters, amounting to Rs. 5.10 crore. Despite this, the Respondent disputed owing any such debt and contended that there was no formal financial contract or agreement establishing the alleged loan. Moreover, the Respondent argued that subsequent financial statements from 2017 onward showed no debt owed to IIL, and any amount referenced was part of general trade receivables, not a loan.
The Adjudicating Authority rejected Metamorphosis' application under Section 7 of the IBC, ruling that the evidence provided was insufficient to establish the existence of a financial debt owed by the Respondent to the Appellant. The NCLT highlighted discrepancies in the documentation provided, including inconsistent quantum claims and lack of confirmation from IIL or Respondent regarding the debt's existence as of March 31, 2017.
The appellant appealed the decision, arguing that as a legal assignee of IIL's debt, it was not required to independently prove the debt's existence beyond what was assigned to them through the Deed of Assignment. The appeal relied on the definition of financial debt under the IBC and the Supreme Court's interpretation in Innoventive Industries Limited v. ICICI Bank Limited and Another, REEDLAW 2017 SC 08563, emphasizing that once default on a financial debt is established, the CIRP process can be initiated.
The National Company Law Appellate Tribunal (NCLAT) upheld the Adjudicating Authority's decision, noting that while the Appellant had acquired IIL's alleged debt through assignment, it failed to sufficiently prove the debt's existence against the Respondent. The NCLAT reasoned that without clear and specific evidence of the debt and default, as mandated by Section 7 of the IBC, the appeal could not succeed. The Appellate Tribunal also highlighted that the burden of proof lay with the creditor to establish both the debt's existence and default, and that mere assignment of debts without robust evidence does not suffice under the IBC.
In conclusion, the NCLAT's judgment reaffirmed the stringent evidentiary requirements under the IBC for initiating CIRP proceedings, emphasizing the necessity for creditors to establish clear, precise, and specific proof of debt and default before seeking relief under the insolvency framework.
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