Pending Suits Against Either of The Parties Is No Basis Of Halting The Insolvency Proceedings U/S 7 OF THE IBC

The National Company Law Appellate Tribunal (NCLAT) has yet again come out with an elemental judgment concerning the initiation of proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). 

IBC Proceedings

 

This time the judgment revolves around the corporate debtor (CD) and the Financial Creditor (FC) and the crux of it remains that a suit pending against the FC by the CD cannot bar the FC from initiating the insolvency proceedings u/s 7 of the IBC. 

FACTS – 

A loan was extended to Marigold Overseas (CD) by Pashupati Jewellers (FC) of Rs. 2Lakhs, 60 thousand against a ‘Corporate Guarantee and Undertaking’ Agreement, that was executed between the two parties in 2017. On the commission of Marigold for default in payment, the application was filed by the FC for initiating insolvency proceedings against the CD.

Karan Goel, the promoter of Marigold, however, objected to this proceeding in the National Company Law Appellate Tribunal (NCLAT) and he contended that the loan was advanced in violation of Section 185 of the Companies Act, 2013. This section prohibits any company from advancing loans or giving any guarantee or security, in connection with a loan taken by the directors of such a company. 

END RESULT OF THE CASE –

One of the directors of Marigold played fraud and the agreement was not recorded with the Registrar of Companies. Therefore, there wasn’t any ‘Corporate Guarantee’ that was given by the CD, hence the application for initiating the insolvency proceedings wasn’t tenable at any cost, according to Karan Goel.

The contention by Karan Goel was found as a misfit to the situations which arose after having found the ‘e-stamp’ issued by the Government of National Capital Territory of Delhi was indeed purchased by Marigold Overseas Ltd for Loan Agreement. 

On finding this out, the Appellate Tribunal believed that the plea of fraud cannot be taken now when back then, it is pretty evident that the CD had entered into an agreement with the FC. Relying on Innoventive Industries Ltd. Vs. ICICI Bank and Anr. (2018), the NCLAT emphasized the fact that once the Adjudicating Authority believes based on records that the debt is payable and there is a commission of default, they are required to admit the application. 

Keeping the facts and circumstances of this present case, the NCLAT, therefore, declared that a suit filed by the Appellant which is pending, this cannot be taken into consideration to reject an application u/s 7 of the IBC. This in short means that the application of insolvency proceedings u/s 7 of the Act will not be stayed or hampered just based on a few pending suits against either of the parties.   

This judgment seems like an essential thing in today’s time when default payments are at peak and a few companies could take the opportunity to distract the course of insolvency proceedings by bringing in unnecessary suits. This tactic happens to sidetrack the initial proceedings, however, this judgment seems to bring a halt to the attempts at diverting the court. 

 

 

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