2018 (9) TMI 1612 - AT - Insolvency and Bankruptcy

Corporate Insolvency Resolution Process - proof of dispute in regard to raising of loan by the Corporate Debtor in the nature of a financial debt which was due and payable - Held that - Internal dispute of Directors of Corporate Debtor and pendency of application under Section 241 and 242 of Companies Act 2013 before NCLT New Delhi Bench for adjudication does not construed a valid defense to triggering of Insolvency Resolution Process. I&B Code is a special law having an overriding effect on any other law as mandated under Section 238 of I&B Code. Triggering of Insolvency Resolution Process cannot be defeated by taking resort to pendency of internal dispute between Directors of Corporate Debtor on allegations of oppression and mismanagement. The statutory right of a Financial Creditor satisfying the requirements of Section 7 of the I&B Code to trigger Insolvency Resolution Process cannot be made subservient to adjudication of an application under Section 241 and 242 of the Companies Act 2013. I&B Code is supreme so far as triggering of Insolvency Resolution Process is concerned and same cannot be eclipsed by taking resort to remedies available under ordinary law of the land. Thus we are of the firm opinion that the instant appeal is frivolous and the Appellant has encroached upon the precious time of this Appellate Tribunal on flimsy grounds. It lacks merit. Admission is accordingly refused and appeal is dismissed.

Summary

Issues:
1. Initiation of Corporate Insolvency Resolution Process under Section 7 of the Insolvency and Bankruptcy Code, 2016.
2. Dispute of oppression and mismanagement pending before the National Company Law Tribunal.
3. Validity of initiation of Corporate Insolvency Resolution Process based on financial debt default.

Issue 1: Initiation of Corporate Insolvency Resolution Process under Section 7 of the Insolvency and Bankruptcy Code, 2016:

The Appellant, a shareholder of the Corporate Debtor, contested the admission of a petition filed by a Financial Creditor triggering the Corporate Insolvency Resolution Process under Section 7 of the I&B Code. The Financial Creditor had provided a loan to the Corporate Debtor, which was not repaid, leading to the initiation of insolvency proceedings. The Adjudicating Authority admitted the application after ascertaining the default within the stipulated timeframe. The Appellant did not dispute the debt owed but challenged the process based on internal disputes among the Directors. However, the Tribunal emphasized that the existence of debt, default, and the Financial Creditor's right to initiate the insolvency process were not affected by internal disputes or pending legal actions.

Issue 2: Dispute of oppression and mismanagement pending before the National Company Law Tribunal:

The Appellant argued that a separate dispute of oppression and mismanagement was under consideration at the National Company Law Tribunal, New Delhi, and therefore, the initiation of the Corporate Insolvency Resolution Process was unjust. The Financial Creditor contended that the debt default and completeness of the application under Section 7 of the I&B Code were the primary considerations for initiating the insolvency process. The Tribunal held that the pending dispute of oppression and mismanagement did not invalidate the Financial Creditor's right to trigger the insolvency process based on the debt default, as per the provisions of the I&B Code.

Issue 3: Validity of initiation of Corporate Insolvency Resolution Process based on financial debt default:

The Tribunal reiterated the provisions of Section 7 of the I&B Code, emphasizing that the initiation of the insolvency resolution process by a Financial Creditor is permissible upon default in payment of a debt. The Adjudicating Authority must ascertain the default within 14 days of receiving the application. In this case, the Corporate Debtor did not dispute the debt owed but raised objections based on internal disputes among Directors. The Tribunal ruled that the I&B Code's provisions override other laws and that the Financial Creditor's right to initiate insolvency proceedings based on debt default cannot be obstructed by pending disputes or legal actions unrelated to the debt default.

In conclusion, the Tribunal dismissed the appeal, stating that it lacked merit and imposed costs on the Appellant. The judgment reaffirmed the supremacy of the Insolvency and Bankruptcy Code in matters of initiating insolvency resolution processes based on debt defaults, emphasizing the importance of adhering to the statutory requirements outlined in the Code.