The NCLAT upheld the NCLT's dismissal of the Corporate Insolvency Resolution Process (CIRP) application due to the lack of evidence supporting the existence of financial debt and default.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench led by Justice Rakesh Kumar Jain (Judicial Member) and Technical Members Mr. Naresh Salecha and Mr. Indevar Pandey reviewed an appeal and observed that the absence of a formal loan agreement, clear repayment terms, and proof of default precluded the claimed debt from qualifying as financial debt, reinforcing that the IBC is designed for insolvency resolution rather than debt recovery.
In the matter of Imdadali M Momin & Ors. (Financial Creditor) versus Pellucid Lifesciences Pvt. Ltd. (Corporate Debtor), the appeal arose from an order of the National Company Law Tribunal (NCLT) Ahmedabad Bench, which had rejected the application for initiating the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016. The order, dated April 25, 2024, prompted the financial creditors to challenge the decision, asserting that the tribunal erred in dismissing their application.
The tribunal noted that six financial creditors filed an application claiming a debt amounting to ₹1,25,44,997.25 with an interest rate of 12% per annum, with the date of default being cited as November 30, 2022. However, the application lacked sufficient evidence of default, as no record was submitted to the Information Utility. The Corporate Debtor countered by asserting that the loan was an unsecured advance, disputing both the existence of an agreement and the claimed interest. Additionally, they indicated that a significant portion of the claimed amount, ₹99,07,375.48, had been repaid prior to the petition, although the creditors maintained that the full amount remained unpaid.
Upon review, the tribunal found no clear agreement regarding the loan's terms, including the repayment schedule and interest rate, determining that without such clarity, the nature of the debt remained ambiguous. The NCLT emphasized that the IBC was intended for insolvency resolution rather than the recovery of disputed debts. Given the Corporate Debtor’s partial repayment and the existence of a legitimate dispute over the claimed interest, the NCLT dismissed the application, concluding that it was not suitable for the IBC framework.
The appellants challenged the dismissal on multiple grounds, arguing that the NCLT misinterpreted the IBC’s purpose and failed to adequately assess the existence of debt and default. They contended that the tribunal overlooked the core issues by focusing on whether the debt was fully settled rather than confirming its existence. The appellants also pointed to instances of alleged suppression of material facts by the Corporate Debtor, asserting that misrepresentations had affected the tribunal's understanding of the case.
The NCLT’s ruling was scrutinized further, particularly regarding the definitions of 'debt' and 'default' under the IBC. It was established that the lack of a formal loan agreement and the absence of clear terms for repayment and interest precluded the loans from being classified as financial debt as defined in Section 5(8) of the Code. Consequently, the NCLT concluded that there was no basis for the claim of default, affirming its decision to reject the application for initiating CIRP.
Ultimately, the appellate authority found that the case did not align with established judicial precedents requiring the admission of petitions under Section 7 of the IBC upon proving debt and default, as the debt in question did not qualify as financial debt. The appeal was thus dismissed, reinforcing the principle that the IBC serves as a framework for resolving insolvency rather than a mechanism for recovering debts.
Mr. Pavan Godiawala, Mr. M.S. Vishnu Sankar, Mr. Aditya Santosh, Ms. Athira G. Nair, Ms. Anjali Singh, Ms. Isha Singh, Advocates represented the Appellant.
Mr. Navin Pahwa, Sr. Advocate, Mr. Himanshu Satija, Ms. Neha Mehta, Mr. Harsh Saxena, Mr. Shevaaz Khan, Advocates appeared for the Respondent.
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