NCLAT held that the mere pendency of SARFAESI proceedings does not establish fraudulent intent under Section 65 of the IBC and sets aside the rejection of the Section 10 application.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan (Chairperson) and Technical Member Mr. Arun Baroka reviewed an appeal and held that mere existence of SARFAESI proceedings does not, by itself, establish fraudulent or malicious intent under Section 65 of the IBC, and a Corporate Applicant has the statutory right to file a Section 10 application upon proving debt and default unless substantive evidence demonstrates abuse of the insolvency process.
The National Company Law Appellate Tribunal (NCLAT) adjudicated upon an appeal filed by the Corporate Applicant against the order dated 30.09.2024, passed by the National Company Law Tribunal (NCLT), New Delhi Court III. The impugned order had rejected the Applicant’s petition under Section 10 of the Insolvency and Bankruptcy Code, 2016 (IBC), while allowing an application under Section 65 of the IBC, filed by the State Bank of India (SBI), and further imposed a penalty of Rs. 1,00,000/- on the Appellant. The dispute stemmed from the financial distress of M/s Shivpriya Cables Pvt. Ltd., which had availed substantial loan facilities from SBI and Northern ARC Capital Ltd., backed by corporate guarantees executed by the Appellant. Following the classification of the Principal Borrower’s account as a Non-Performing Asset (NPA) by SBI and the invocation of corporate guarantees by Northern ARC, SBI proceeded under the SARFAESI Act, leading to enforcement actions, including a possession notice over the mortgaged property. Meanwhile, the Appellant sought insolvency resolution under Section 10 of the IBC.
SBI opposed the Section 10 application, contending that it was filed with malicious intent to derail its recovery actions, particularly as the possession of mortgaged assets was imminent. SBI filed an application under Section 65 of the IBC, asserting that the Appellant's insolvency plea was a misuse of the IBC framework to frustrate legitimate enforcement measures. The Adjudicating Authority concurred with SBI’s arguments, finding that the Section 10 application was filed fraudulently to obstruct recovery proceedings, and consequently dismissed the same while imposing a penalty. Aggrieved, the Appellant challenged the decision before the NCLAT, arguing that the rejection of its Section 10 application was erroneous and that the essential ingredients of Section 65 had not been established. The Appellant maintained that a Corporate Applicant has a statutory right to seek insolvency resolution upon default, and the pendency of SARFAESI proceedings should not serve as a bar to such an application.
NCLAT, in its analysis, examined the interplay between insolvency proceedings and recovery actions under the SARFAESI Act. It noted that while an application under Section 10 of the IBC requires the satisfaction of debt and default criteria, an allegation of fraud or malice under Section 65 necessitates substantive proof of wrongful intent. The Tribunal referred to precedents such as Unigreen Global Private Limited v. Punjab National Bank, where it was held that pending SARFAESI proceedings could not be a ground for rejecting a Section 10 application if the statutory requirements were met. Similarly, the Tribunal cited decisions in Amar Vora v. City Union Bank Ltd. and Rakesh Kumar Gupta v. Mahesh Bansal & Anr., affirming that a Section 10 application should not be dismissed solely on account of concurrent SARFAESI proceedings unless mala fide intent was demonstrable. The Tribunal also distinguished the present case from Wave Megacity Centre Pvt. Ltd. v. Rakesh Taneja, where overwhelming evidence of siphoning of funds and multiple pending litigations justified rejection under Section 65.
The Tribunal held that there was no conclusive evidence to establish that the Appellant had filed the Section 10 application with fraudulent or malicious intent. It emphasized that the presence of SARFAESI proceedings alone did not constitute sufficient grounds to invoke Section 65 of the IBC. Since SBI had not furnished substantive material beyond the existence of recovery proceedings, the Tribunal concluded that the NCLT had erred in rejecting the Section 10 application and allowing the Section 65 plea. Accordingly, the NCLAT set aside the impugned order, dismissed SBI’s Section 65 application, and revived the Section 10 petition for fresh adjudication. It clarified that it had not expressed any opinion on the merits of the Section 10 application, which was left to the Adjudicating Authority to decide in accordance with law. No order as to costs was issued.
Mr. Krishnendu Datta Sr. Advocate with Ms. Udita Singh and Mr. Akhil Nene, Advocates represented the Appellant.
Mr. Harshit Khare and Mr. Prafful Sain, Advocates, appeared for the Respondent No.1.
Mr. Harshit Gupta, Advocate (Proxy Counsel), appeared for Respondent No.2.
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