Status Report Submitted In Criminal Proceeding Can Have No Bearing While Deciding Application U/S 7 Of IBC: NCLAT

Brief Facts

These appeals have been filed by the Suspended Directors of Mist Direct Sales Pvt. Ltd., Anand Infoedge Pvt. Ltd., and Mist Avenue Pvt. Ltd., challenging the decision passed by the NCLT by which an application under section 7 was admitted. The application was filed by 115 allottees of the Festival City Project against the three Corporate Debtors (CDs) collectively.

The NCLT admitted their section 7 application and dismissed the interlocutory applications filed by the suspended management in which they opposed the admission of the application and also proposed 70% of the total outstanding amount as settlement. The application was admitted despite contentions and efforts made by the CDs to settle the matter.

Contentions

Counsel appearing for the Mist Developer submitted that among affidavits, which were filed along with Section 7 Application, some were forged and fabricated and an FIR No.102/2024 was also registered on a complaint filed by the Developer. A Status Report has also been filed in the FIR that 20 affidavits in the Application are forged affidavits.

It was also submitted that objective of IBC is not to send a Company to CIRP, rather to resolve it. There are 1500 homebuyers and only 115 have initiated CIRP.

It was also argued that on account of there being title dispute, the Project could not be completed and Adjudicating Authority committed error in initiating Section 7 Application. There is no question of timeline when title of the land itself is defective and that land owning Company has no Company privity of contract with Financial Creditors in a class who have filed Section 7 Application.

Per contra, the respondent submitted that the debt and default being fully proved, Section 7 Application ought to have been admitted, which could not be admitted on account of various dilatory tactics adopted by the Corporate Debtors and that the FIR No.102/2024 and Status Report are wholly irrelevant to decide Section 7 Application, where debt and default has to be looked into.

Counsel for Intervenors submitted that no pleadings have been filed by the Respondents and the threshold issue has never been decided. Out of 115 affidavit of the Financial Creditors, 20 affidavits are forged and fabricated, hence, threshold limit is not fulfilled. Section 230 proceedings has not yet been decided.

Observations:

The tribunal observed that reliance on Status Report submitted by Appellant(s) in a criminal proceeding can have no bearing while deciding Section 7 Application. The said Status Report is not an evidence on which it can be pronounced that threshold of 100 allottees was not complete in filing of Section 7 Application.

It further added that the unit holders have been waiting for their units for last more than a decade and the amount, was paid in the year 2012 by the allottees, the Appellant cannot be absolved by permitting them to deposit the amount with meagre interest, which was received in the year 2012. The findings recorded by the Adjudicating Authority regarding debt and default and Application filed by the Corporate Debtors itself being IA Nos. 293 and 2497 of 2024 proves beyond doubt that debt and default is admitted on the part of the Corporate Debtor.

In M. Suresh Kumar Reddy v. Canara Bank (2023) the Supreme Court has held that “once NCLT is satisfied that the default has occurred, there is hardly a discretion left with NCLT to refuse admission of the application under Section 7.”

The tribunal further opined that litigations filed by the Corporate Debtor for resolution of the issue with respect to title of land are pending, cannot be a ground to reject Section 7 Application, which was filed by the Financial Creditors in a class for initiating CIRP against the Corporate Debtor.

The tribunal said that “all the three Corporate Debtors had joined hands to develop the Project. The Corporate Debtors being closely connected with the construction and implementation of the Project, it is not open for the land owning Company to say that there is no financial debt. We, thus, do not find any substance in submission of the learned Counsel for the Appellant that there being no privity of contract between the land owning Company and the allottees, there is no liability on the land owning Company towards the Project.”

The tribunal while distinguishing the present case from the judgment of the Supreme Court in Anand Murthi vs. Soni Infratech pvt. Ltd. and Ors.(2022) observed that the proposal submitted by the Developers, have not been accepted by the Financial Creditors in a class, who are the Respondents herein, who had initiated proceedings under Section 7, both before Adjudicating Authority as before this Tribunal.

It further added that when the proposal submitted by the Appellant(s) have not been accepted by the Respondents, who are Financial Creditors in a class, we in this Appeal, in the facts of the present case, cannot direct for proposal submitted by the Appellant(s) be implemented.

The tribunal concluded that “the challenge in the Appeal is order of the Adjudicating Authority passed in Section 7 Application, which was initiated by allottees of the Corporate Debtors, we do not find any sufficient ground to interfere with the order passed by Adjudicating Authority under Section 7.”

Case Title: Dinesh Kumar Versus Narendra Kumar Sharma & Ors.

Case Number: Company Appeal (AT) (Insolvency) No. 1422 of 2024

Judgment Date: 23/12/2024

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