NCLT can Proceed with CIRP Based on Evidence of Default without Investigating Reasons

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  • Last Updated on 2 July, 2023

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Section 7 application for insolvency resolution

Case Details: State Bank of India v. N.S. Engineering Projects (P.) Ltd. - [2023] 151 taxmann.com 185 (NCLAT-New Delhi)

Judiciary and Counsel Details

    • Justice Ashok Bhushan, Chairperson & Barun Mitra, Technical Member
    • Krishnan Venugopal, Sr. Adv. Sanjay Kapur, Ms. Megha Karnwal, Surya Prakash, Arjun Bhatia & Suray Prakash, Advs. for the Appellant.
    • Ramji Srinivasan, Sr. Adv. Zeeshan Haq, Animesh Kumar, Ram Maroo, Tanay Agarwal, Ms Shruti Pandey & Ms Megha Dugar, Advs. for the Respondent.

Facts of the Case

In the instant case, the appellant (i.e. a financial creditor) had extended certain credit facilities to the respondent-corporate debtor. Thereafter, the corporate debtor applied for debt restructuring and in consideration of the corporate debtor’s commitment to improve its operation, a master restructuring agreement (MRA) was executed.

However, the corporate debtor defaulted in making repayment and consequently, the account of the corporate debtor was classified as a non-performing asset (NPA). The appellant then issued a demand notice u/s 8 of IBC demanding a due amount with interest and filed an application u/s 7 against the corporate debtor.

The Adjudicating Authority (NCLT) dismissed the said application by holding that due to the non-disbursement of part of the financial assistance sanction by the appellant, there was contributory negligence committed by the appellant. Thereafter, an appeal was made to the National Company Law Appellate Tribunal (NCLAT) against the order passed by the NCLT.

NCLAT Held

The NCLAT observed that the fact that a certain portion of the sanctioned amount of financial facilities could not be disbursed by the financial creditor could not be ground for rejecting the Section 7 application.

The NCLAT held that when an application under section 7 is filed by a financial creditor and, there is ample material that the corporate debtor is unable to pay its due debt and had committed a default, the NCLT is not required to go into reasons of default and ignore the real status of the corporate debtor and close its eyes to the fact that corporate debtor needs insolvency resolution.

Therefore, the order passed by the NCLT rejecting the Section 7 application was unsustainable and the same was to be set aside.

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