Litigation News

IBC does not envisage a pre-admission enquiry into proof of default by directing a forensic audit: NCLAT

Aditi Singh

The National Company Law Appellate Tribunal (NCLAT) has held that the Insolvency & Bankruptcy Code does not envisage a pre-admission enquiry into the proof of default by directing a forensic audit.

Section 75 cannot be allowed to thwart the initiation of corporate insolvency resolution process unless forgery or falsification of documents is patent and prima facie established, the NCLAT has held.

The Judgment was passed by a three-member Bench headed by Acting Chairperson, Justice Bansi Lal Bhat.

Financial Creditor, Allahabad Bank, moved two applications filed under Section 7 against Corporate Debtors, Poonam Resorts and Link House Industries, for defaults qua a financial debt.

The Corporate Debtors contended that the applications were 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, into insolvency.

The Corporate Debtor moved applications under Section 75 IBC, alleging that false information was furnished in the applications.

Being of the view that due diligence was not carried out during the loan process, the Adjudicating Authority i.e NCLT Mumbai appointed a Forensic Auditor to examine the allegations raised by the Corporate Debtor.

NCLT directed the Forensic Auditor to submit an Independent Report delineating some factual aspects with respect to the utilisation of the credit facility extended by the Financial Creditor to the Corporate Debtors.

Aggrievd by the order, the Financial Creditor moved NCLAT in appeal.

The NCLAT stated that the question for consideration was whether at the pre-admission stage, the Adjudicating Authority was justified in embarking upon an enquiry with regards the applications filed under Section 7.

The NCLAT observed that IBC, inter alia, consolidated and amended the law relating to insolvency resolution of corporate persons in a time bound manner.

It added that the plain language of Section 7(4) left no room for doubt that the Adjudicating Authority was required to ascertain the existence of default within 14 days of the receipt of the application, from records of an information utility or other evidence furnished by the Financial Creditor.

Referring to the specified time frame for conclusion of corporate insolvency resolution process, which can go up to a maximum of 330 days, the NCLAT stated,

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 also referred to Supreme Court's decision in Innoventive Industries Limited v. ICICI Bank & Anr (2018), and reiterated that the Adjudicating Authority has to merely see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred.

It thus concluded,

The Adjudicating Authority cannot travel beyond the letter of law and the dictum of the Hon’ble Apex Court.. 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’.

The NCLAT explained that if a financial creditor fails to provide evidence as required, the Adjudicating Authority is at liberty to take an appropriate decision or if the application is incomplete, it can return the 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, the NCLAT added.

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’.
NCLAT ruled.

Holding that an application under Section 75 IBC on behalf of the Corporate Debtors could not be permitted to frustrate the provisions of IBC when the matter is at the stage of admission, the NCLAT stated,

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.

The NCLAT recorded that the Corporate Debtors have clearly admitted their liability to a certain extent; therefore, it was 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 IBC at the pre-admission stage.

In view of the above, the NCLAT concluded that the orders suffered from grave legal infirmity and could not be sustained.

Senior Advocate Debal Kr Banerjee with Advocates Reema Khorana, Kartik Rathi appeared for Allahabad Bank.

Senior Advocate Dr UK Chaudhary with Advocates Manisha Chaudhary, Anupam Sanghi, Dhruv Gupta, Anurag Mehta appeared for Corporate Debtors.

Read Order:

Allahabad Bank vs Poonam Resorts.pdf
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