IBC Proceedings: No Foul Play in Sec. 7 Proceedings, Rules NCLT
In a significant ruling, the National Company Law Tribunal (NCLT) Ahmedabad Bench has put to rest the debate surrounding allegations of mala fide intent in Insolvency and Bankruptcy Code (IBC) proceedings. The bench held that unsubstantiated claims of foul play cannot be used to defeat the purpose of Sec. 7 IBC proceedings.
A Debt of ₹49.50 Crore: The Backstory
Varidhi Cotspin Private Limited, a company with a significant debt burden, found itself in a precarious situation when it defaulted on a loan of ₹49.50 crore granted by State Bank of India (SBI), a leading financial institution. The loan was part of a consortium arrangement, and the bank had advanced financial assistance to the company. However, when the company failed to repay the loan, SBI issued a loan recall notice and filed an application under Sec. 7 of the IBC.
A Legitimate Claim: The Bank’s Perspective
The bank relied on the loan documents, record of default, certified statements of account, and acknowledgments of debt to support its claim. It also submitted that the application was filed within the limitation period, as the date of default was July 1, 2024, and the account was classified as Non-Performing Asset (NPA) on September 28, 2024. The bank’s application was based on a thorough review of the loan agreement and the company’s financial records.
Challenging the Maintainability: The Corporate Debtor’s Plea
However, the Corporate Debtor, Varidhi Cotspin Private Limited, contested the maintainability of the application, alleging that the bank had suppressed material facts, including restructuring discussions and the misuse of the IBC as a recovery mechanism despite the pendency of proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. The company also submitted that it had made bona fide efforts to settle the dues through One-Time Settlement (OTS) proposals and had identified prospective purchasers.
Inspection of Assets: A Separate Plea
In a separate interlocutory application, the Corporate Debtor sought the rejection of the Section 7 petition and permission for prospective purchasers to inspect the factory premises, land, building, plant, and machinery to facilitate the settlement of outstanding dues. However, the NCLT bench ruled that this application fell outside the scope of proceedings under Sec. 7 of the Code.
A Clear Ruling: No Room for Mala Fide Allegations
In its ruling, the NCLT bench held that allegations of mala fide intent, coercive recovery, and suppression of facts unsupported by cogent evidence do not satisfy the requirements of Sec. 65 of the IBC. The bench made it clear that such unsubstantiated claims cannot be used to defeat the purpose of Sec. 7 IBC proceedings. This ruling is significant, as it sets a precedent for future IBC proceedings and provides clarity on the scope of Sec. 7 applications.
The Way Forward
The ruling has significant implications for companies facing insolvency proceedings and financial institutions seeking to recover their dues. It emphasizes the importance of substantiating claims with cogent evidence and highlights the need for companies to comply with the terms of their loan agreements. As the IBC continues to evolve, this ruling will serve as a guiding principle for NCLT benches across the country.