Filing Petition U/S 10 Of IBC Subsequent To Action Taken Under SARFAESI Act Cannot Be Termed Malicious Or Fraudulent: NCLAT

The NCLAT New Delhi bench of Justice Ashok Bhushan (Chairperson) and Arun Baroka (Technical Member) has held that merely because proceeding under Section 13, sub-section (2) and (4) of the SARFAESI Act has been initiated by the creditor prior to filing of Section 10 application, cannot be a ground to hold that Section 10 application is filed with malicious and fraudulent intent to be rejected under section 65 of the IBC.

Brief Facts

This Appeal has been filed by a Corporate Applicant, challenging order dated 30.09.2024 passed by National Company Law Tribunal, New Delhi Court III rejecting application filed by the Appellant under Section 10 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “IBC”) and allowing application under Section 65 of the IBC being IA No.1955 of 2024 filed by the State Bank of India (“SBI”).

M/s Shivpriya Cables Pvt. Ltd. (Principal Borrower) availed fund based and non-fund-based loan facilities to the tune of Rs.19,77,00,000/- from the SBI, wherein the Appellant executed a Corporate Guarantee in favour of the SBI. A credit facility of Rs.1,64,59,163/- was also availed by the Principal Borrower from M/s Northern ARC Capital Ltd. A Corporate Guarantee was also executed by the Appellant in favour of Northern ARC Capital Ltd. (“Northern ARC”) on 30.07.2019.

On 04.08.2022, the loan account of Shivpriya Cables Pvt. Ltd. (“Shivpriya Cables”) was classified as Non-Performing Asset (“NPA”) by the SBI. Northern ARC issued notice invoking Corporate Guarantee on 23.01.2023 and demanded payment of outstanding amount of Rs.1,64,59,163/-.

On 22.06.2023, SBI issued possession notice, conveying the Principal Borrower and the Applicant about taking possession of the immovable mortgaged property. A Section 10 application being CP(IB) No.749/ND/2023 was filed by the Applicant on 02.11.2023 before the Adjudicating Authority. An order under Section 14 of the SARFAESI Act was also passed by the District Magistrate, Tijara, State of Rajasthan on 05.12.2023, directing the SBI to take physical possession of the immovable assets at City Bhiwadi, Rajasthan.

On an application filed by Northern ARC under Section 7, Corporate Insolvency Resolution Process (“CIRP”) against the Principal Borrower commenced on 07.12.2023.

In application filed under Section 10, an IA No.1955 of 2024 was filed by the SBI under Section 65 of the IBC, praying for dismissal of Section 10 petition. The Adjudicating Authority heard petition under Section 10 as well as Section 65 application filed by the SBI and by the impugned order, held that Section 10 petition has been filed by the Applicant/ Appellant with malicious and fraudulent intent to delay and halt the recovery proceedings initiated by the Respondent Bank.

Contentions

The appellant submitted that mere initiation of proceedings under SARFAESI Act by the SBI cannot be the basis for coming to a finding that Section 10 application is filed with malicious and fraudulent intent and that section 10 application of the Appellant has been rejected by the Adjudicating Authority invoking Section 65 of the IBC, whereas ingredients of Section 65 application were neither pleaded nor proved by the SBI.

That Section 10 of the IBC is a statutory provision, giving entitlement to a Corporate Applicant to file an application for initiation of CIRP, when a Corporate Debtor has committed a default. The right under Section 10 given to a Corporate Debtor, cannot be taken away only on the ground that proceedings under Section 13, sub-section (2) of SARFAESI Act has been initiated prior to filing of application under Section 10.

That Section 65 is to be invoked when a person initiate an insolvency resolution process fraudulently or with malicious intent or for any purpose other than for the resolution of insolvency. Section 65 application filed by the SBI was founded only on initiation of Section 13(2) proceedings under SARFAESI Act against the Appellant prior to filing Section 10 application, which cannot be a ground to invoke Section 65 of the IBC.

Per contra, the respondents submitted that the intent and purpose of the Appellant was to stall the proceedings initiated by the SBI under Section 13, sub-section (2), which was initiated by issuing notice dated 24.02.2023. The SARFAESI proceedings were initiated with respect to mortgaged assets of the Appellant, which were on the verge of completion when Section 10 application was filed by the Appellant, which is nothing but an attempt to stall and delay the recovery proceedings.

NCLAT's Analysis

The question before the tribunal was whether filing of an application by the Appellant under Section 10, can be termed as initiation of proceedings with fraudulent and malicious intent.

The tribunal referred to its own judgment in Unigreen Global Private Limited vs. Punjab National Bank and Ors.,(2017) wherein factors to be considered while deciding petition under section 10 of the IBC were laid down. It was held that the Adjudicating Authority on hearing the parties and on perusal of record, if satisfied that there is a debt and default has occurred and the Corporate Applicant is not ineligible under Section 11, the Adjudicating Authority has no option but to admit the application, unless it is incomplete, in which case the Corporate Applicant is to be granted time to rectify the defects.

The tribunal in the above case further observed that if any action has been taken by a 'Financial Creditor' under Section 13(4) of the SARFAESI Act, 2002 against the Corporate Debtor or a suit is pending against Corporate Debtor under Section 19 of DRT Act, 1993 before a Debt Recovery Tribunal or appeal pending before the Debt Recovery Appellate Tribunal cannot be a ground to reject an application under Section 10, if the application is complete.

Similarly, in Rakesh Kumar Gupta vs. Mahesh Bansal and Anr. – (2020),this Tribunal again reiterated that pendency of actions under the SARFAESI Act does not create obstruction for filing an application under Section 7. The same principle will also apply to with regard to Section 10 Application, the tribunal noted.

The tribunal while distinguishing the present case from the case in M/s Agroha Paper Industries Pvt. Ltd. vs. Bank of Maharashtra, 2023 on which reliance was placed by the respondent, noted that the facts which come out in M/s Agroha Paper Industries Pvt. Ltd. contained sufficient material to come to the conclusion that CD was trying to embroil the Bank in multiple layers of litigation and the application under Section 10 was filed with the unclean hands, this fact was taken note by the Adjudicating Authority, which orders were confirmed by this Tribunal.

Based on the above, the tribunal while culling out the principe from the judgments discussed above observed that initiation of proceedings under Section 13, sub-section (2) of the SARFAESI Act, is not a ground to reject Section 10 Application.

The tribunal further noted that the present is a case where Adjudicating Authority has allowed Section 65 application filed by the SBI principally based on the foundation of the SBI that Section 10 application filed at the time when proceedings under Section 13, sub-section (2) were on the verge of completion. Whether Section 10 application deserve to be admitted or not, is a decision, which has to be taken by the Adjudicating Authority on facts of each case.

The tribunal while adverting to the facts of the present case observed that there are no other facts and ground pleaded to prove any fraudulent and malicious intent by the CD in filing Section 10 application. For allowing Section 65 application, fraudulent and malicious intent of CD has to be proved from some materials on record.

The tribunal further observed that merely because proceeding under Section 13, sub-section (2) and (4) has been initiated by the creditor prior to filing of Section 10 application, cannot be a ground to hold that Section 10 application is filed with malicious and fraudulent intent. For proving fraudulent and malicious intent, something more is required to be pleaded and proved apart from initiation of proceedings under Section 13, sub-section (2) and (4) by the creditor against the Corporate Applicant.

The tribunal concluded that Adjudicating Authority committed error in allowing Section 65 application filed by the SBI and rejecting Section 10 application. In event a proposition of law is accepted that when a creditor has initiated proceedings under Section 13, sub-section (2) against the CD, he is precluded to file Section 10 application, that proposition will be clearly against the intent and purpose of Section 10 of the IBC.

There mere fact that application is filed, consequent of which the recovery proceedings may be halted, cannot lead to conclusion that intent and purpose of the application is malicious and fraudulent, the tribunal noted.

The tribunal further clarified that however, in appropriate cases, where it is proved that initiation of Section 10 application is for purpose other than resolution of the Corporate Debtor and has been initiated with malicious and fraudulent intent, the Adjudicating Authority is fully justified in rejecting Section 10 application.

Accordingly, the present appeal was allowed and the petition under section 10 was revived.

Case Title: Getz Cables Private Limited Versus State Bank of India and Anr.

Case Reference: Company Appeal (AT) (Insolvency) No.1953 of 2024

Judgment Date: 21/11/2024

For Appellant : Mr. Krishnendu Datta Sr. Advocate with Ms. Udita Singh, Mr. Akhil Nene, Advocates.

For Respondent : Mr. Harshit Khare and Mr. Prafful Sain, Advocates for R1. Mr. Harshit Gupta proxy counsel for R2.

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