IBC | Inappropriate For NCLAT To Direct NCLT To Admit Petition Under Section 7 Without Evaluating Rival Contentions On Merits: Supreme Court

The Supreme Court has set aside an order passed by the National Company Law Appellate Tribunal (“NCLAT”) whereby the National Company Law Tribunal (“NCLT”) was directed to admit a petition under Section 7 of Insolvency and Bankruptcy Code, 2016 (“IBC”).

The Bench comprising Chief Justice of India Dr. Dhananjaya Y Chandrachud, Justice J B Pardiwala and Justice Manoj Misra, has held that it was inappropriate for the NCLAT to direct the NCLT to admit the application under Section 7 of IBC straightaway without an evaluation of the rival contentions on merits. The Bench has directed the NCLT to determine whether the petition under Section 7 of IBC is liable to be admitted, after hearing the parties.

BACKGROUND FACTS

Export Import Bank of India (“Financial Creditor/Respondent No. 1”) filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against Maneesh Pharmaceuticals Ltd. (“Corporate Debtor/Appellant”).

On 25.03.2022 the NCLT dismissed the Section 7 petition on the ground of being barred by limitation. The NCLT also made the following observations:

“It is clear to the Bench that there is a 'debt' in terms of section 3(11) and there is a 'default' in terms of Section 3(12) of the IBC. However, keeping in view that the date of NPA in respect of all the four loans are between 26.06.2011 to 31.07.2011 and the Petition has been filed only on 30th August, 2019, the limitation issue is very pertinent in the matter. The Bench has to take a call whether the debt is time-barred or not, in terms of provisions of the Limitation Act, 1963. The Bench before proceeding further would like to mention certain dates and events subsequent to the invocation of guarantee which will help in deciding the matter.”

The Respondents challenged the NCLT order before the NCLAT. On 09.05.2023 the NCLAT set aside the NCLT order and held that the finding regarding debt being barred by limitation was “patently illegal”. However, while doing so, the NCLAT also observed that “there is no dispute raised regarding the liability of the Corporate Debtor towards the Financial Creditors and the guarantee by the Respondent”.

The NCLAT order was challenged before the Supreme Court, however, the appeal was dismissed on 04.07.2023.

The Respondents filed an Interlocutory Application before NCLT seeking restoration of the Section 7 petition and initiation of CIRP. The NCLT allowed the restoration application on 05.07.2023. A review petition was filed before the Supreme Court seeking a review of the order dated 04.07.2023, which is pending.

On 25.10.2023, the NCLT declined to adjourn the proceedings on the ground of the pendency of the review petition and recorded the request of the counsel for the appellant who sought time to file a further affidavit. No specific leave for filing an affidavit was granted by the NCLT. The Respondents filed an appeal against NCLT order dated 25.10.2023, wherein the NCLAT on 06.12.2023 directed the NCLT to admit the Section 7 petition.

The Corporate Debtor filed an appeal before the Supreme Court against the NCLAT order dated 06.12.2023.

SUPREME COURT VERDICT

The Bench noted that Section 7 petition was originally dismissed by NCLT on the ground that the debt was barred by limitation. When the order of the NCLT was questioned in appeal, the NCLAT set aside the order of the NCLT as being “patently illegal”.

It was observed that once the order of NCLT has been set aside such order and the observations therein would cease to exist.

“The order of the NCLAT, properly construed, dealt with the issue as to whether the debt was barred by limitation. A passing reference in the order of the NCLAT to whether the debt was in dispute must be read in the context of the nature of the appeal which arose from an order of the NCLT that the debt was barred by limitation. Hence, it would be inappropriate to read the order of the NCLAT as concluding the issue in regard to whether the application under Section 7 was or was not liable to be admitted. A stray observation in the order of the NCLAT cannot be regarded as a conclusive determination on merits. That apart, the order of the NCLT which contained an observation that the debt was not in dispute was set aside in appeal by the NCLAT in its entirety. Consequently, we are of the view that it was inappropriate for the NCLAT to direct the NCLT to admit the application under Section 7 straightaway without an evaluation of the rival contentions on merits.”

The appeal has been allowed and the NCLAT order dated 06.12.2023 has been set aside. The NCLT has been directed to determine whether Section 7 petition is liable to be admitted after hearing the parties. All the rights and contentions of the parties in that regard are kept open.

Case Title: Maneesh Pharmaceuticals Ltd v Export Import Bank of India and Ors.

Citation:  2023 LiveLaw (SC) 1073

Counsel for Appellant: Dr. Abhishek Manu Singhvi, Sr. Adv. Mr. Dhruv Mehta, Sr. Adv. Mr. Ashok Kumar Singh, Adv. Mr. Awanish Sinha, AOR Mr. Milan Singh Negi, Adv. Mr. Parth Shekhar, Adv. Mr. Gauransh Singh Chauhan, Adv. Mr. Shubham Singh, Adv. Mr. Richik Harikant, Adv. Mr. Prem Ranjan Kumar, Adv.

Counsel for Respondent: Mr. Krishnendu Datta, Sr. Adv. Ms. Palak Nenwani, Adv. Mr. Hafeez Patanwala, Adv. Ms. Riya Hotchandani, Adv. For M/S. Juris Corp., AOR.

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