NCLAT held that a Section 10 application had to be genuinely intended for insolvency resolution and not merely to obstruct debt recovery.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench of Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) observed that Section 10 application under the IBC must be made in good faith for genuine insolvency resolution; procedural compliance alone is insufficient if the application is intended to obstruct debt recovery rather than resolve insolvency.
In the present appeal filed under Section 61 of the Insolvency and Bankruptcy Code, 2016, the Appellant challenged the Order dated 22.08.2023 passed by the Adjudicating Authority (National Company Law Tribunal, Allahabad Bench, Prayagraj) in C.P. (IB) No. 72/ALD/2022. The Adjudicating Authority had dismissed the Section 10 application filed by the Corporate Applicant, Agroha Paper Industries Pvt. Ltd., seeking to initiate Corporate Insolvency Resolution Proceedings (CIRP) against itself. The Appellant contended that this dismissal was erroneous and has therefore appealed the decision.
The Appellant’s submissions revealed that Agroha Paper Industries Pvt. Ltd., having experienced fiscal distress and business losses due to the Covid pandemic, had sought initiation of CIRP. The company’s financial difficulties had led to its loan account with the Respondent-Bank of Maharashtra being declared non-performing on 28.10.2018, followed by a Demand Notice issued on 11.01.2019 under Section 13(2) of the SARFAESI Act, 2002. Despite the default and the bank’s refusal to provide additional loan facilities, the Appellant filed the Section 10 application, believing that the company had a fair chance of revival and that the application was complete in all respects. The Appellant argued that the Respondent Bank’s objections lacked merit, given that the twin requirements of debt and default were met and the Corporate Debtor was not disqualified under Section 11 of the IBC. The Appellant also cited previous judgments which stipulated that an Adjudicating Authority could not reject a Section 10 application on grounds other than those explicitly mentioned in the IBC.
The Respondent Bank, however, refuted these claims, asserting that the Corporate Debtor had defaulted on the loan and ignored repeated notices. The Bank had initiated SARFAESI proceedings, including taking possession of the mortgaged properties and conducting an auction. The Respondent Bank argued that the Section 10 application was a stratagem to avoid debt repayment and stall recovery proceedings. It contended that the application was made under false pretenses and that the Appellant’s actions demonstrated an abuse of the legal process.
Upon reviewing the case, it was noted that the Adjudicating Authority had considered the procedural correctness of the Section 10 application, including whether it met statutory requirements and was filed in good faith. Despite the Appellant's argument that procedural compliance was achieved and the application should have been admitted, the Authority found evidence of the Corporate Debtor’s attempt to obstruct recovery proceedings through multiple legal maneuvers. The Adjudicating Authority had observed that the Appellant's efforts to delay the auction and its concurrent litigation against the Respondent Bank indicated a lack of bona fides in the application. The proceedings under the SARFAESI Act were found to have progressed well before the Section 10 application was filed, further supporting the Authority’s decision to reject the application.
In conclusion, the NCLAT found no grounds to interfere with the Adjudicating Authority’s decision. The appeal was deemed without merit and dismissed, reinforcing the Authority’s stance that the Section 10 application was made for reasons other than genuine insolvency resolution. The costs were not awarded.
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