Allahabad Bank vs Link House Industries Ltd

'Allahabad Bank' against two different 'Corporate Debtors' primarily

assail the orders passed by the Adjudicating Authority (National

Company Law Tribunal), Mumbai Bench, Mumbai on 16th October,

2019 in MA 627/2019 & MA 3067/2019 in C.P.(IB)-3631(MB)/2018.

The impugned orders have been assailed through the medium of the

instant appeals by the 'Financial Creditor' contending that the

Adjudicating Authority has, apart from giving a go by to the provisions

of the Insolvency and Bankruptcy Code, 2016 ("I&B Code" for short),

also failed to follow the dictum of law laid down by the Hon'ble Apex

Court in "Innoventive Industries Limited v. ICICI Bank and Anr.-

(2018) 1 SCC 407".

2. Company Petition(IB)-3631(MB)/2018 and Company Petition(IB)-

3621(MB)/2018 are the applications filed under Section 7 by the

Appellant- 'Financial Creditor' against Respondents- 'Corporate Debtors'

in the two appeals praying for initiation of 'Corporate Insolvency

Resolution Process' on the ground that the 'Corporate Debtors' had

committed default qua the financial debt that was payable in law and in

fact to the 'Financial Creditor'. As some objections were raised on behalf

Company Appeal (AT) (Insolvency) Nos. 1303 & 1304 of 2019 3

of the 'Corporate Debtors' that the 'Corporate Insolvency Resolution

Process' had been initiated fraudulently and with a malicious intent to

drag a solvent corporate who was willing to pay amounts that were

actually due and payable legally, the Adjudicating Authority, being of

the view that during the entire loan process due diligence was not

carried out, appointed PWC Mr. Gaganpreet Singh Puri, Pricewater

House Coopers Services LLP as Forensic Auditor to examine allegations

raised by the 'Corporate Debtor' and submit an Independent Report

delineating some factual aspects bearing upon utilisation of the credit

facility extended by the 'Financial Creditor' to 'Corporate Debtor'. The

impugned orders appear to have been passed at the instance of

'Corporate Debtor' who had moved applications under Section 75 of the

'I&B Code' alleging false information having been furnished in the

applications.

3. The applications under Section 7 of the 'I&B Code' appear to have

been filed by the 'Financial Creditor' on 5th September, 2018 and the

matter was pending consideration before the Adjudicating Authority

since 18th September, 2019. However, instead of admitting or rejecting

the application, the Adjudicating Authority proceeded to pass the

impugned order which has been assailed through the medium of

instant appeals.

4. Heard learned counsel for the parties and perused the record.

Company Appeal (AT) (Insolvency) Nos. 1303 & 1304 of 2019 4

5. The question for consideration is whether the Adjudicating

Authority was justified in ignoring the time frame prescribed under

Section 7 of the 'I&B Code' and embarking upon an enquiry to

determine whether the applications filed under Section 7 contained

false information, when the matters were at the very threshold stage.

6. 'I&B Code' inter alia, consolidates and amends the law relating to

insolvency resolution of corporate persons in a time bound manner for

various objects sought to be achieved by the statute as specified in the

preamble. Section 7 of the 'I&B Code' deals with initiation of 'Corporate

Insolvency Resolution Process' by the 'Financial Creditor'. Sub-section

(4) thereof provides as under:

"7. Initiation of corporate insolvency

resolution process by financial creditor.─

.....................(4) The Adjudicating Authority shall,

within fourteen days of the receipt of the application

under sub-section (2), ascertain the existence of a

default from the records of an information utility or on

the basis of other evidence furnished by the financial

creditor under sub-section (3):

[PROVIDED that if the Adjudicating Authority has not

ascertained the existence of default and passed an

order under sub-section (5) within such time, it shall

record its reasons in writing for the same.]"

Company Appeal (AT) (Insolvency) Nos. 1303 & 1304 of 2019 5

7. The plain language of sub-section (4) of Section 7 leaves no room

for doubt that the Adjudicating Authority is required to ascertain

existence of default from records of an information utility. The

Adjudicating Authority can also ascertain the same from other evidence

furnished by the 'Financial Creditor'. This has to be done within 14

days of the receipt of application. The 'I&B Code' has specified time

frame for conclusion of 'Corporate Insolvency Resolution Process' within

180 days and the extended period prescribed is 270 days. With the

latest amendment, provision has been made for inclusion of period of

judicial intervention, thereby taking the total extended period upto 330

days. A mere glance at the legal framework governing 'Corporate

Insolvency Resolution Process' brings it to the fore that speed is the

password and all authorities under the 'I&B Code' have to adhere to the

prescribed timelines. It is apt to refer to the observations of the Hon'ble

Apex Court in "Innoventive Industries Limited v. ICICI Bank and

Anr.- (2018) 1 SCC 407":-

"28. When it comes to a financial creditor

triggering the process, Section 7 becomes relevant.

Under the explanation to Section 7(1), a default is

in respect of a financial debt owed to any financial

creditor of the corporate debtor- it need not be a

Company Appeal (AT) (Insolvency) Nos. 1303 & 1304 of 2019 6

debt owed to the applicant financial creditor.

Under Section 7(2), an application is to be made

under sub-section (1) in such form and manner as

is prescribed, which takes us to the Insolvency

and Bankruptcy (Application to Adjudicating

Authority) Rules, 2016. Under Rule 4, the

application is made by a financial creditor in Form

1 accompanied by documents and records

required therein. Form 1 is a detailed form in 5

parts, which requires particulars of the applicant

in Part I, particulars of the corporate debtor in Part

II, particulars of the proposed interim resolution

professional in part III, particulars of the financial

debt in part IV and documents, records and

evidence of default in part V. Under Rule 4(3), the

applicant is to dispatch a copy of the application

filed with the adjudicating authority by registered

post or speed post to the registered office of the

corporate debtor. The speed, within which the

adjudicating authority is to ascertain the

existence of a default from the records of the

information utility or on the basis of evidence

furnished by the financial creditor, is

important. This it must do within 14 days of

Company Appeal (AT) (Insolvency) Nos. 1303 & 1304 of 2019 7

the receipt of the application. It is at the stage

of Section 7(5), where the adjudicating authority is

to be satisfied that a default has occurred, that the

corporate debtor is entitled to point out that a

default has not occurred in the sense that the

"debt", which may also include a disputed claim,

is not due. A debt may not be due if it is not

payable in law or in fact. The moment the

adjudicating authority is satisfied that a default

has occurred, the application must be admitted

unless it is incomplete, in which case it may give

notice to the applicant to rectify the defect within 7

days of receipt of a notice from the adjudicating

authority. Under sub-section (7), the adjudicating

authority shall then communicate the order passed

to the financial creditor and corporate debtor

within 7 days of admission or rejection of such

application, as the case may be.

xxx xxx xxx

30. On the other hand, as we have seen, in the

case of a corporate debtor who commits a

default of a financial debt, the adjudicating

authority has merely to see the records of the

Company Appeal (AT) (Insolvency) Nos. 1303 & 1304 of 2019 8

information utility or other evidence

produced by the financial creditor to satisfy

itself that a default has occurred. It is of no

matter that the debt is disputed so long as

the debt is "due" i.e. payable unless

interdicted by some law or has not yet

become due in the sense that it is payable at

some future date. It is only when this is

proved to the satisfaction of the adjudicating

authority that the adjudicating authority

may reject an application and not otherwise."

(Emphasis added)

8. The dictum of law propounded by the Hon'ble Apex Court is loud

and clear. The Adjudicating Authority cannot travel beyond the letter of

law and the dictum of the Hon'ble Apex Court. The satisfaction in

regard to occurrence of default has to be drawn by the Adjudicating

Authority either from the records of the information utility or other

evidence provided by the 'Financial Creditor'. The Adjudicating

Authority cannot direct a forensic audit and engage in a long drawn

pre-admission exercise which will have the effect of defeating the object

of the 'I&B Code'. If the 'Financial Creditor' fails to provide evidence as

required, the Adjudicating Authority shall be at liberty to take an

appropriate decision. If the application is incomplete, it can return the

Company Appeal (AT) (Insolvency) Nos. 1303 & 1304 of 2019 9

same to the 'Financial Creditor' for rectifying the defect. This has to be

done within 7 days of the receipt of notice from the Adjudicating

Authority. However, the 'I&B Code' does not envisage a pre-admission

enquiry in regard to proof of default by directing a forensic audit of the

accounts of the 'Financial Creditor', 'Corporate Debtor' or any 'financial

institution'. Viewed thus, the impugned order cannot be supported.

Application under Section 75 of the 'I&B Code' on behalf of the

'Corporate Debtors' cannot be permitted to frustrate the provisions of

the 'I&B Code' when the matter is at the stage of admission. Section 75

is a penal provision which postulates an enquiry and recording of

finding in respect of culpability of the Applicant regarding commission

of an offence. The same cannot be allowed to thwart the initiation of

'Corporate Insolvency Resolution Process' unless in a given case forgery

or falsification of documents is patent and prima facie established.

9. The "common written submissions" filed on behalf of the

'Corporate Debtors' clearly admits liability to the extent of

Rs.44,60,09,790/- as regards 'Poonam Resorts Limited' and Rs.

6,52,03,922/- as regards 'Link House Industries Limited'. Therefore, it

is futile on the part of 'Corporate Debtors' to contend that the

applications under Section 7 filed by the 'Financial Creditor' must pass

the muster of Section 65 of the 'I&B Code' at the pre-admission stage.

The argument raised in this regard is repelled.

Company Appeal (AT) (Insolvency) Nos. 1303 & 1304 of 2019 10

10. In view of the foregoing discussion, we find that the impugned

orders suffer from grave legal infirmity and cannot be sustained. The

impugned orders in both appeals are set aside and the appeals are

allowed. The Adjudicating Authority is directed to address the issue

regarding admission of the applications filed by the 'Financial Creditors'

in the light of aforesaid observations without further loss of time.

However, before proceeding further, the Adjudicating Authority may

provide an opportunity to parties to settle the claims.

Both the appeals are allowed with aforesaid observations and

directions. However, in the facts and circumstances of the case, there

shall be no order as to costs.

[Justice Bansi Lal Bhat] Member (Judicial)

[V.P. Singh] Member (Technical)

[Shreesha Merla] Member (Technical)

NEW DELHI 22nd May, 2020

AR

Company Appeal (AT) (Insolvency) Nos. 1303 & 1304 of 2019