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Pre-existing dispute is not a bar for rejecting application filed by a financial creditor under Section 7 rules NCLAT - (01 Oct 2019)


In a recent Judgment rendered by National Company Law Appellate Tribunal (NCLAT), it has been held that, the pendency of a suit in relating to a dispute connected with a default, cannot be a ground for rejection of an Application filed by a financial creditor under Section 7 of the Insolvency and Bankruptcy Code, 2016. Section 7 of the IBC gives power to financial creditor to file an application against corporate debtor for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority, when a default has occurred.

A three-member Bench of the Appellate Tribunal headed by Justice S.J. Mukhopadhaya as Chairman ruled that, merely because a suit has been field by an Appellant and pending cannot be a ground to reject an application under Section 7 of the IBC Code and therefore, a pre-existing dispute cannot be a subject matter of Section 7 IBC, though it may be relevant under Section 9 of IBC. The Appellate Tribunal while rendering the aforesaid decision, has relied upon the Judgment of Innovative Industries Vs. ICICI Bank and Anr. wherein the Supreme Court has held that, once the Adjudicating Authority is satisfied on the basis of records that the debt is payable and there is default, then the said Adjudicating Authority is required to admit the Application.

Briefly, the facts of the case are that, the National Company Law Tribunal admitted an application under Section 7 of the IBC preferred by Pashupati Jewellers being financial creditor. The sum involved in the dispute is of Rs.2,60,00,000 which was taken by one Mr. Bal Karan Singh Bhullar from Sumedha Kanodia and an agreement was executed on 7th April 2017 in this regard. The ‘Corporate Guarantee and Undertaking’ for the loan was given by the Corporate Debtor, Marigold Overseas Limited. The Appellant submitted before the Appellate tribunal that, the Agreement of 'Corporate Guarantee and Undertaking' was executed in violation of Section 185 of the Companies Act, 2013 and that the Agreement was a result of a fraud played by one of the erstwhile Directors and the Agreement was not even reflected in the records of the ‘Corporate Debtor’ available with the Registrar of Companies and therefore, no ‘Corporate Guarantee’ was given by the Corporate Debtor in the eyes of law.

However, the Appellate Tribunal was of the view that, even if the Corporate Guarantee and Undertaking’ Agreement is not referred to Registrar of Companies and this fact is suppressed, the Appellant or the subsequent Director, cannot take a plea that, the ‘Corporate Guarantee and Undertaking’ Agreement was obtained by fraud and is not reflected in the records of the Registrar of Companies. This judgment rendered by the NCLAT will paved the way for adjudication of all such cases where the plea of fraud being taken for non maintainability of application Section 7 of the IBC.


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