Section 10 Shouldn't Be Exploited And Abused By Corporate Debtor, Application After SARFAESI Proceedings Invalid: NCLAT Principle Bench

The bench noted that the SARFAESI proceedings initiated by the bank begun well before the filing of the Section 10 application by the Corporate Debtor. Thus, it noted that the application under Section 10 was a tactical maneuver rather than a genuine effort for insolvency resolution.

Brief Facts:

The matter pertained to an order issued by the National Company Law Tribunal, Allahabad Bench. This order dismissed a Section 10 application filed by Agroha Paper Industries Pvt. Ltd (Appellant). The application sought to initiate Corporate Insolvency Resolution Proceedings (CIRP) against the Corporate Applicant itself. Agroha Paper Industries Pvt. Ltd. argued that it was facing fiscal distress due to business losses from the Covid pandemic. The company's net worth eroded which led to an inability to repay a loan from the Bank of Maharashtra which resulted in the bank declaring the account as a Non-Performing Asset (NPA). Subsequently, the bank issued a demand notice under the SARFAESI Act, 2002. The Corporate Debtor sought an additional loan which was rejected by the bank. Despite the default in loan repayment, the Appellant believed in its potential for revival and thus filed the Section 10 application. The Appellant contended that the application was complete and that the bank had no valid grounds for objection. It argued that the Adjudicating Authority must admit a Section 10 application if it meets the requirements of Section 10 and Form-6.

In response, the bank argued that the Appellant defaulted on its loan and was repeatedly notified before being declared a wilful defaulter. The bank invoked Sections 13(2) and (4) of the SARFAESI Act and took possession of the mortgaged properties. The sale was confirmed to a successful bidder before the Section 10 application was filed. The bank argued that Appellant recognizing that attempts to settle the debt were failing and with recovery proceedings imminent filed the Section 10 application to take advantage of IBC's moratorium provisions and stall recovery.

Observations by the NCLAT:

The NCLAT noted that the Appellant met the procedural requirements for filing the Section 10 application and the conditions under Section 11 of the IBC were not applicable to it.

However, it noted that before the Section 10 application was filed, the bank already issued notices to the Appellant and declared it a willful defaulter. The Adjudicating Authority observed that the Appellant ignored multiple notices from the bank and didn't respond to them. The NCLAT noted that while the Appellant was seeking a settlement with the Bank, it was simultaneously avoiding proceedings related to its status as a willful defaulter.

The NCLAT further examined the SARFAESI proceedings initiated by the bank and found that these proceedings begun well before the filing of the Section 10 application. It noted that the bank followed due procedure for auctioning the assets of the Appellant which already been completed by the time of the Section 10 application. The NCLAT agreed with the Adjudicating Authority's finding that the pendency of SARFAESI proceedings did not invalidate the decision to reject the Section 10 application.

Therefore, the NCALT held that the Appellant didn't file the Section 10 application in good faith. The Appellant's conduct, including their efforts to delay and obstruct recovery actions, suggested that the application was a tactical maneuver rather than a genuine effort for insolvency resolution. Therefore, the appeal was dismissed.

Case Title: M/s Agroha Paper Industries Private Limited vs Bank of Maharashtra

Case Number: Company Appeal (AT) (Insolvency) No. 1342 of 2023

For Appellant : Ms. Divya Jagga, Mr. Neeraj Kant Singh and Mr. Narendra Kumar, Advocates.

For Respondent : Mr. Sameer Kumar and Ms. Somi Sharma, Advocates.

Date of Judgment: 25.07.2024

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