2022 (12) TMI 58 - AT - Insolvency and Bankruptcy

Maintainability of petition - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditors - existence of debt and dispute or not - non-application of mind while passing the order - principles of natural justice - HELD THAT - The Adjudicating Authority, has apparently committed an error in not deciding the issue as to whether there was actually a default on the part of the Appellant. It should have given the reason as to why the contention of the Corporate Debtor that there was an understanding that money shall be paid after the sale of assets only has no substance in it and how it has come to the conclusion that various financial statements shows acknowledgement of the money/loan by the Corporate Debtor. There is no discussion at all by the Adjudicating Authority about these material facts. Not only that, it appears that the Adjudicating Authority has not looked into the fact that no one had appeared on behalf of the Corporate Debtor before it when the matter was argued and reserved and still it is recorded in its order that it had heard the arguments of the Corporate Debtor. All these facts cumulatively shows that there was no application of mind much less judicious in passing of the impugned order which has been apparently passed in a most mechanical manner. The Adjudicating Authority has to take into consideration the fact that the proceedings of CIRP, initiated after the admission of the application, has an immense adverse effect upon the Corporate Debtor, therefore, such application should not be admitted as a matter of routine and that too in a mechanical manner. The impugned order suffers from non-application of mind and is not a reasoned/speaking order, therefore, the same is hereby set aside and the matter is remanded back to the concerned Adjudicating Authority to decide the lis again by passing a speaking order.

Summary

Issues Involved:
Admission of application under Section 7 of the Insolvency and Bankruptcy Code, 2016 based on debt and default.

Analysis:

1. Admission of Application under Section 7:
The appeal was filed by a former Director of the Corporate Debtor against the order admitting an application under Section 7 of the Insolvency and Bankruptcy Code, 2016. The Financial Creditors, legal heirs of a deceased member of the Corporate Debtor, alleged non-payment of a loan amount, triggering the Corporate Insolvency Resolution Process (CIRP). The Corporate Debtor contested the application, arguing that there was no proof of debt and default. The Appellant contended that the order was passed without proper consideration of evidence, highlighting discrepancies in financial statements regarding the loan amount.

2. Debt and Default Allegations:
The Financial Creditors claimed that the loan amount, along with interest, was due and payable, leading to default. They served a notice demanding payment, followed by the application under Section 7. However, the Corporate Debtor argued that there was no formal agreement for interest payment, and the loan was to be repaid from asset sale proceeds, which were under arbitration. The Appellant emphasized the legal definitions of financial debt and default under the Code, asserting that the debt must be due and payable for a default to occur, necessitating proof of both elements for a valid Section 7 application.

3. Judicial Review and Order Validity:
The Appellate Tribunal scrutinized the Adjudicating Authority's order, emphasizing the importance of a reasoned and speaking order for natural justice. It noted that the order lacked discussion on crucial contentions raised by the Corporate Debtor, indicating a lack of application of mind. The Tribunal highlighted errors in the order, such as overlooking the absence of the Corporate Debtor's representation during arguments. Citing a Supreme Court decision, the Tribunal emphasized the need for proving debt and default for Section 7 petitions. Consequently, the Tribunal set aside the impugned order, directing a reevaluation by the Adjudicating Authority to ensure a comprehensive and reasoned decision, emphasizing the significant impact of CIRP initiation on the Corporate Debtor.

In conclusion, the Tribunal's detailed analysis focused on the necessity of establishing debt and default for admitting applications under Section 7 of the Insolvency and Bankruptcy Code, emphasizing the importance of a judicious and well-reasoned order by the Adjudicating Authority to safeguard the interests of all parties involved.