The NCLAT upheld the insolvency proceedings, affirming that financial disputes fall within the jurisdiction of insolvency laws, even in the face of civil court injunctions.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench led by Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member), ruled that an interim injunction from a Civil Court does not preclude a Financial Creditor from filing a Section 7 application under the Insolvency and Bankruptcy Code, even if the underlying assignment agreement has been deemed invalid due to non-performance, as long as the debt remains with the original debtor.
In this appeal, the Financial Creditor challenged the order dated 25.01.2024 passed by the National Company Law Tribunal (NCLT), Court No. II, Kolkata, which had rejected the Financial Creditor's Section 7 application. The Financial Creditor was aggrieved by the Tribunal's decision, prompting the present appeal.
The key facts of the case were as follows: Federal Bank had granted loans amounting to Rs.40.38 Crores to Howrah Mills Company Limited (the Corporate Debtor) in 2013. These loans were declared non-performing on 30.12.2015. Subsequently, on 30.03.2016, Federal Bank assigned the loans to the Appellant through a Registered Assignment Agreement. Due to continued defaults by the Corporate Debtor, the Appellant filed a Company Petition (C.P.(IB) No. 4/KB/2019) to initiate the Corporate Insolvency Resolution Process (CIRP). During the pendency of this petition, the Appellant entered into an Agreement to Assign with Respondent No.2, Abhinandan Holdings Pvt. Ltd., on 15.01.2020. According to this agreement, the Appellant agreed to assign the loan along with security interests to Respondent No.2 upon receipt of Rs.26.01 Crores. When Respondent No.2 failed to make a payment of Rs.4.50 Crores by the agreed deadline, the Appellant issued a letter on 02.03.2020 revoking the Agreement to Assign and forfeiting the amount paid by Respondent No.2. Despite certain correspondences and a partial payment made by Respondent No.2 thereafter, the Appellant filed an application for restoration of the Company Petition on 31.07.2020. This application was allowed by the Tribunal on 02.02.2021. Respondent No.2 filed an appeal against this order, which was dismissed by this Tribunal on 11.01.2023, directing the Tribunal to pass an order on the Section 7 application after hearing all parties.
Respondent No.2 had also impleaded itself as a party in the Company Petition and contended that an interim injunction had been granted by a Civil Court on 29.09.2021, restraining the Appellant from giving effect to the revocation letter dated 02.03.2020. Another interim order had been passed on 20.10.2020 in a separate suit, also restraining the Appellant. The Tribunal, in the impugned order, held that the Section 7 application could not proceed against Howrah Mills Company Limited because Respondent No.2 had acquired its financial assets. The Tribunal also noted that the interim injunctions still bound the Appellant and that the default concerning certain tranches fell under Section 10A, making the Section 7 application non-maintainable.
The Appellant's counsel argued that the Tribunal had misinterpreted the Agreement to Assign, asserting that it was not an assignment agreement but rather an agreement to assign, contingent upon full payment. The Appellant maintained that the Agreement had failed due to non-payment and that the debt remained with the Corporate Debtor. Therefore, the Appellant was entitled to proceed with the Section 7 application. It was also contended that the interim injunctions did not impact the maintainability of the Section 7 application, as they only restrained the Appellant from acting on the revocation letter, not from pursuing the insolvency petition.
On the other hand, Respondent No.2’s counsel supported the Tribunal's decision, arguing that the Agreement to Assign barred the Appellant from proceeding with the Section 7 application once 25% of the consideration was paid. The counsel relied on specific clauses of the Agreement and interim injunctions to support this position.
The Tribunal ultimately concluded that the Section 7 application was not maintainable due to the interim injunctions and the status of the Agreement to Assign. The Tribunal's decision was contested on grounds that it had improperly relied on interim orders and misunderstood the nature of the Agreement to Assign. The appeal sought to overturn the Tribunal's order, arguing that the Section 7 application should be admitted due to the ongoing debt and default by the Corporate Debtor.
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