Status as on: 16/07/2021
Brief Facts of the case
The Appellant had filed the Section 7 Application against the Respondent on account of default committed by the Respondent (Corporate Debtor) in repaying loan amount advanced by the Appellant. The Respondent acknowledged receipt of the unsecured loan amount and also issued a demand promissory note. However, the Respondent Corporate Debtor defaulted to repay the dues. Despite finding and ascertaining that there was indeed the existence of default and that the Section 7 Application was complete in all respects, the Adjudicating Authority proceeded to dismiss the Section 7 Application. Accordingly, being aggrieved by the order, an appeal to the NCLAT was filed.
The Hon’ble NCLAT ruled as follows:
- The petition filed under Section 7 of the Code meets all the requirements under the Insolvency and Bankruptcy Code, 2016. The Adjudicating Authority has also observed that “the Application is complete in all respects as required by law and the Application clearly showed that the Corporate Debtor is in default of a debt due and payable and that the default amount is more than the minimum threshold.
- It is clear that even if the Application filed under Section 7 meets all the requirements, then also the Adjudicating Authority has to exercise discretion carefully to prevent and protect the Corporate Debtor from being dragged into the Corporate Insolvency Resolution Process mala fide.
- The Adjudicating Authority should be very cautious in admitting the Application so that Corporate Debtor cannot be dragged into Corporate Insolvency Resolution Process with mala fide for any purpose other than the resolution of the Insolvency. Therefore, to protect the Corporate Debtor from the mala fide Initiation of CIRP, the law has provided a penalty under sections 65 and 75 of the Code. Before admitting the Application, every precaution is necessary to be exercised so that the insolvency process is not misused for any other purposes other than the resolution of Insolvency.
- “We believe that even if the petition complies with all requirements of Section 7 of the Insolvency and Bankruptcy Code, 2016, it is filed collusively, not with the intention of Resolution of Insolvency but otherwise. Therefore, it is not mandatory to admit the Application to save the Corporate Debtor from being dragged into Corporate Insolvency Resolution Process with mala fide”
The NCLAT referred to the Supreme Court judgement in the case of Swiss ribbons (P) Ltd v Union of India and held that it is clear that even if the Application filed under Section 7 meets all the requirements, then also the Adjudicating Authority has to exercise discretion carefully to prevent and protect the Corporate Debtor from being dragged into the Corporate Insolvency Resolution Process mala fide.
While Talking about the doctrine of “piercing the corporate veil” and the concept of the “corporate entity” the NCLAT said that it was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people.
Disclaimer – The above article is based on the personal interpretation of the related orders and laws. The readers are expected to take expert opinion before relying upon the article. For more information, please contact us at firstname.lastname@example.org or contact at 8383011629