The 'Adjudicating Authority' Is Not A 'Court Of Law' And 'CIRP' Is Not Synonymous To 'Litigation': NCLAT

The Appellant/ Financial Creditor granted an export finance facility to the Respondent / Corporate Debtor as per the Receivables Purchase Factoring Agreement and an irrevocable Undertaking for Recourse against the Corporate Debtor.

Pursuant to the agreement between the Respondent and Appellant, the Appellant remitted payment of USD 36,532 to the Corporate Debtor in respect of purchase and consequent assignment of invoices.

Despite repeated requests for repayment of the said amount under the 'Recourse Undertaking' and issuance of a Letter of Demand, the Corporate Debtor failed to reply to the Demand Notice or repay the Financial Debt amount.

Proceedings Before The Adjudicating Authority-

In this regard, the Appellant approached the Adjudicating Authority to initiate CIRP against the Corporate Debtor under Section 7 of the I&B Code, 2016 read with Rule 4 of I&B (AAA) Rules, 2016) on account of default in payment of its admitted liability. Section 7 allows the financial creditor, either by itself or jointly with other financial creditors or any other person on behalf of the financial creditor, to file an application to initiate the corporate insolvency resolution process against the corporate debtor before the Adjudicating Authority when a default has occurred, which shall, within 14 days of the receipt of the application, ascertain the existence of a default.

However, the Adjudicating Authority refused to entertain the application under Section 7, IBC on the grounds that the Respondent company could not be termed as being 'insolvent' based on its tangible assets of Rs. 4.46 crore, growth rate, net revenue of Rs. 77 lakhs and positive return to equity ratio.

The Adjudicating Authority relied on the Apex Court judgment in Mobilox Innovations Private Limitedv. Kirusa Software Private Limited and noted that the IBC was not intended to be a substitute to a recovery forum and cannot be used to push an otherwise solvent company into insolvency.

It also relied on K.Kishan v. Vijay Nirman CompanyPrivate Limited to note that the IBC cannot be used prematurely or for extraneous considerations.

The Adjudicating Authority noted the impact of the financial distress caused due to the global pandemic and consequent amendments made to the IBC in light of COVID-19, which were brought in with the object of supporting financially distressed companies, rather than pushing them into CIRP. The Central Government, through notification no. SO 1205(E) increased the minimum amount of default to initiate CIRP under IBC from Rs. 1,00,000 to Rs. 1,00,00,000. This was done to provide relief to the industries and MSMEs from economic hardship caused by COVID-19.

Despite noting that the present case is one fit for admission, the Adjudicating Authority refused to admit the same due to the financial status of the company and the current economic scenario. The Adjudicating Authority directed the Respondent to repay the debt within a period of 6 months, failing which, the Petitioner would have liberty to file a fresh petition for admission to CIRP under Section 7.

Appeal To NCLAT-

Against this order, the Appellant filed an appeal in NCLAT, Chennai Bench. The order of the Adjudicating Authority which observed that the Respondent was not insolvent and that the application under Section 7 should be filed again after giving time for repayment was inconsistent with the Apex Court judgment in Innovative Industries Ltd. Vs.ICICI Bank (Para 30), thereby allowing the appeal and consequently setting aside the order passed by the Adjudicating Authority on the ground that it suffered from patent legal infirmities and exceeded its jurisdiction, especially when the Corporate Debtor had not filed any reply or objections before the Authority.

It held that the Adjudicating Authority need not look into any other factors to admit an application under Section 7 of the Code. It must only subjectively satisfy itself that:

i) the application is complete and;

ii) that no disciplinary proceedings are pending against the proposed Resolution Applicant.

The Bench directed the restoration and admission of the application under Section 7 and directed the Adjudicating Authority to proceed further in accordance with law.

Case Title: Drip Capital Inc. v. Concord Creations (India) P. Ltd.

Citation: Company Appeal (AT)(CH) (Ins.) No. 167 of 2021

Counsel for the Appellant: Mr. Chandrashekhar Chakalabbi, Advocate for Mr. Dharmaprabhas, Advocate

Counsel for the Respondent: Notice served (No Appearance)

Click Here To Read/Download The Order