Quantum Of Debt Not To Be Decided At The Stage Of Admission Of A Section 7 Petition Under IBC: NCLAT,Delhi

Facts Of The Case

UTI had advanced financial assistance to Ajanta Paper and General Products Ltd. ("Corporate Debtor") in the form of subscription of 5 Lakh Secured Redeemable Non-Convertible Debentures of face value of Rs. 100/- each, along with interest and charges payable under the financial facility. On 10.10.2002, UTI had issued a recall notice for default of debentures claiming a sum of Rs. 8,35,74,382/- and subsequently, the personal guarantees of the Corporate Debtor were also invoked. In 2003, UTI had filed an original application before the Debt Recovery Tribunal for recovery of its dues.

Thereafter, UTI had accepted a proposal on 20.10.2014 to settle the claims at an amount of Rs. 3,30,00,00,000/-. However, on 04.12.2014 UTI assigned its debt to Phoenix ARC Pvt. Ltd. ("Financial Creditor/Respondent No. 1"). The Respondent No. 1 issued a Demand Notice dated 09.02.2016 to the Corporate Debtor under Section 13(2) of the SARFAESI Act, 2002, demanding an amount of Rs. 79,80,00,00,000/- and also took possession of the immovable property of the Corporate Debtor.

On 06.11.2018, the Respondent No. 1 had filed a petition under Section 7 of IBC before the National Company Law Tribunal, Mumbai (NCLT, Mumbai/Adjudicating Authority) Bench, seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against the Corporate Debtor. NCLT, Mumbai Bench vide an order dated 07.10.2021 had initiated CIRP against the Corporate Debtor. The said order also recorded the following observations:

"23. Again, in the balance sheet for the year ended 31st March, 2017, there is a mention of the outstanding non-convertible debentures of Rs. 5,00,000 having face value of Rs. 100 each outstanding at the end of the year."

"24. Similarly, for the financial year 1st April, 2018 to 31st March, 2019, the details of debentures issued by UTI is mentioned along with the fact that the same was recalled in the Financial Year 2002-2003…"

"27. In view of the above facts and the judgements of Hon'ble Supreme Court, it is clear that there has been acknowledgement of debt as per the financial filings of the Corporate Debtor with RoC regularly and year after year and thus it would fairly constitute as the acknowledgement under Section 18 of the Limitation Act, 1963."

One of the suspended directors of the Corporate Debtor filed an appeal against the order dated 07.10.2021 before the NCLAT under Section 61 of the IBC.

Contentions Of The Appellant

The Appellant contended that adjudicating Authority failed to consider that the only 'acknowledgement of debt' by the Corporate Debtor is to the tune of Rs. 10,62,92,521/- as per the Balance Sheet for the year ending 2017 and Rs. 7,77,39,275/- as per the Balance Sheet for the year ending 2021. It was further submitted that there being no acknowledgement of any 'interest' as claimed from 2002, the claim for the interest stands completely time barred. Thus, the Adjudicating Authority had failed to consider that the Respondent No. 1's claim was exaggerated and barred by limitation.

The Appellant further contended that the actual debentures for the Corporate Debtor were only for Rs. 5,00,00,000/- and the Respondent No. 1 had received an assignment of debt for Rs. 3,30,00,00,000/-. Nonetheless, the Respondent No. 1 made an exaggerated claim of Rs. 96,01,00,00,000/- including excessive interest, which was barred by limitation. This fraudulent act was done only to force the Corporate Debtor into CIRP and due to such inflated claims, the Corporate Debtor could not pay/settle the actual dues of Rs. 7,77,39,275/-.

Contentions Of The Respondents

Respondent No. 1/Financial Creditor contended that the Corporate Debtor had consistently acknowledged the dues which evidences the jural relationship between them and satisfies the essentials of 'debt' and 'default' as required under Section 7 of IBC. It was further submitted that the Statement of Account filed by the Respondent No. 1 in its Reply shows 'interest' element alongwith 'penal interest dues' which compounded to Rs. 96,00,00,000/-.

Decision Of The NCLAT

The Bench observed that the primary issue before them was whether the Adjudicating Authority was justified in admitting the Section 7 Application against the Appellant or not.

The Bench opined that it is not within the domain of the Adjudicating Authority to decide the 'amount of debt' at the stage of admission of an application under Section 7 of IBC. Reliance was placed on the Supreme Court judgment in M/s. Innoventive Industries Ltd. v ICICI & Anr., (2018) 1 SCC 407, wherein while observing the definition of 'Claim', it was held that even if right of payment is disputed, the IBC gets triggered the moment, the default exceeds the threshold amount.

The Bench observed that the Appellant's contention that the debt amount is exaggerated, cannot be a ground for rejection of an application under Section 7 of the IBC. The only requirement for admission is that the minimum outstanding debt should be more than the threshold amount provided for under the IBC. The actual amount of 'Claim' is to be ascertained by the Resolution Professional after collating the 'Claims' and their verification, which comes at a later stage.

The Bench upheld the order dated 07.10.2021 passed by the Adjudicating Authority by observing that it does not suffer from any illegality or infirmity. Accordingly, the appeal was dismissed.

Case title: Rajesh Kedia v Phoenix ARC Private Limited, Company Appeal (AT) (Insolvency) No. 996 of 2021 (11.04.2022).

Counsel for Appellant: Mr. Vishesh Kalra and Mr. Ayush Puri, Advocates.

Counsel for Respondent No. 1: Mr. Manaswi Agrawal & Mr. Mahesh Dube, Advocates.

Counsel for Respondent No. 2 (IRP): Adv. Gunjan Chaubey.

Click Here To Read/Download Order