IBC | Settlement In Section 7 Or Dropping Of Sec. 66 Proceedings Does Not Automatically End Proceedings Under Section 43: NCLT Mumbai
The National Company Law Tribunal (“NCLT”), Mumbai Bench, comprising of Shri Kuldip Kumar Kareer (Judicial Member) and Shri Anil Raj Chellan (Technical Member), has held that the proceedings under Section 43 of IBC would not automatically end against a party, if the parties enter settlement in Section 7 of IBC proceedings or proceedings under Section 66 of...
The National Company Law Tribunal (“NCLT”), Mumbai Bench, comprising of Shri Kuldip Kumar Kareer (Judicial Member) and Shri Anil Raj Chellan (Technical Member), has held that the proceedings under Section 43 of IBC would not automatically end against a party, if the parties enter settlement in Section 7 of IBC proceedings or proceedings under Section 66 of IBC are dropped.
“We again wish to reiterate that merely because the Applicant has settled the matter with regard to the said loan does not ipso facto absolve it of the insinuations or allegations made in the application u/s 43 of the Code. We are further of the view that it would be untimely and inopportune to exonerate the Applicant of the allegations made against it in the said application which is yet to be heard and decided on merits. Besides, settlement with the Respondent in proceedings u/s 7 of the Code does not or cannot have the effect of drawing curtains over the proceedings u/s 43 of the Code which are altogether different and distinct.”
Background Facts
M/s. Dewan Housing Finance Corporation Ltd. ('DHFL/Corporate Debtor') was admitted under Corporate Insolvency Resolution Process (“CIRP”) by the NCLT.
The NCLT confirmed appointment of the erstwhile Administrator to perform functions of the Resolution Professional under IBC.
The Administrator filed the avoidance application under Sections 43 and 66 of IBC, alleging that the Corporate Debtor fraudulently disbursed loans to Black Rock Financial Services Private Limited (“Applicant”), who in turn transferred the loan amounts to other parties for purchase of non-convertible debentures of DHFL.
On 07.06.2021, the NCLT approved the resolution plan of erstwhile Piramal Capital & Housing Finance Limited (“Piramal”) for the Corporate Debtor, pursuant to which Piramal merged with DHFL. Thereafter, on 03.11.2021, the name of DHFL was changed to Piramal Capital & Housing Finance Limited (“PCHFL”).
On 09.02.2023, the NCLT permitted PCHFL to be substituted in place of the erstwhile Administrator and pursue the avoidance applications.
Thereafter, PCHFL filed a petition under Section 7 of IBC against the Applicant, seeking initiation of CIRP on alleged failure to comply with obligations under loan agreements. During the pendency of the said petition, PCHFL and Applicant entered settlement and the petition was withdrawn.
The Applicant was deleted from the array of Respondent parties in the avoidance application for transaction classified under Section 66 of IBC, but not from applications under Section 43 of IBC.
The Applicant filed an application before NCLT seeking deletion of its name as a respondent in avoidance application under Section 43 of IBC. It was argued that since the loan has been repaid, the Avoidance Application against the Applicant has become infructuous.
NCLT Verdict
The Bench opined that mere dropping of proceedings under Section 66 of IBC against the Applicant is not sufficient reason to drop proceedings under Section 43 of IBC as well. Further, the import of Section 43 differs from that of Section 7 of IBC.
“In our considered view, merely because the proceedings u/s 66 of the IB Code has been dropped against the Applicant, it would not by itself be sufficient to relieve the Applicant from the rigours of Section 43 of the Code. Further, merely because the Applicant has settled the matter with the Respondent with regard to the loan transaction in proceedings u/s 7 of the Code, this by itself would not be sufficient to drop the proceedings u/s 43 of the Code. The import and domain of section 43 of the Code is altogether different and distinct from the proceedings u/s 7 of the Code. In the proceedings u/s 43 of the Code, it has yet to be determined as to whether the transaction in question, when effected, was preferential in nature or not. Since the Applicant was a party to the said transaction, it's presence would be utmost necessary at the time when the application u/s 43 is heard and adjudicated upon.”
The Bench held that for deciding an avoidance application under Section 43, the presence of party is necessary.
“In our considered view, the controversy involved in the application u/s 43 of the Code cannot be efficaciously adjudicated in the absence of the applicant as it was a party to the transaction and the alleged loan, which is being claimed as preferential transaction, was advanced to the Applicant.”
The Bench dismissed the application while holding that settlement of loan would not automatically absolve the allegations made under Section 43 of IBC. Settlement between parties under Section 7 of IBC proceedings does not end the proceedings under Section 43 of IBC.
Case Title: Reserve Bank of India v Dewan Housing Finance Corporation Limited
Case No.: COMPANY PETITION (IB) NO. 4258/MB/2019
Counsel for Applicant: Adv. Nikhil Sakhardande a/w Rishika Harish a/w Adv. Ashish Venugopal and Adv. Riya.
Counsel for Respondent: Sr. Counsel Mr. Vikram Nankani a/w Chitra Rentala and Adv. Manikanda Prabhu.