The National Company Law Appellate Tribunal (NCLAT) has held that the pendency of a suit with respect to a dispute associated with a default cannot be a ground to reject an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code) by a Financial Creditor. A pre-existing dispute cannot be a subject matter of Section 7 of the I&B Code, though it may be relevant under Section 9 of IBC, the NCLAT has held.
An appeal was preferred by a Promoter of the Corporate Debtor, Marigold Overseas Limited (appellant) against an Order 20.09.2019 passed by the Adjudicating Authority i.e. National Company Law Tribunal, Special Bench, New Delhi (NCLT).
A loan amount of Rs. 2,60,00,000 was given by M/s Pashupati Jewellers, Financial Creditor, to one Bal Karan Singh Bhullar from Sumedha Kanodia on the basis of an agreement executed in April 2017.
The ‘Corporate Guarantee and Undertaking’ for the loan was given by the Corporate Debtor, Marigold Overseas Limited.
Subsequently, on default, an Application under Section 7 of the I&B Code was preferred by the Financial Creditor against the Corporate Debtor. The same was admitted by NCLT and the appeal was preferred before the NCLAT.
Before the NCLAT, the Appellant argued that the Agreement of 'Corporate Guarantee and Undertaking' was executed in violation of Section 185 of the Companies Act, 2013.
It was alleged 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. Therefore, according to the Appellant, in the eyes of law, no ‘Corporate Guarantee’ was given by the Corporate Debtor and the application under Section 7 of the I&B Code was not maintainable.
OBSERVATIONS OF NCLAT
After hearing the counsel, the NCLAT recorded that the ‘Corporate Guarantee and Undertaking’ Agreement was on record and it was on Indian Non-Judicial “e-Stamp” issued by the Government of National Capital Territory of Delhi. In the said e-Stamp, it was clearly mentioned that the e-Stamp was purchased by Marigold Overseas Ltd. for the purpose of the Loan Agreement.
Therefore, the Appellate Tribunal remarked that merely because the Appellant entered the company as Director in May 2017, a plea of fraud cannot be taken now as it was the Management of the ‘Corporate Debtor’, i.e., Marigold Overseas Limited which had entered into the Agreement at the relevant time.
“If for one or the other reason, they have not referred the ‘Corporate Guarantee and Undertaking’ Agreement to Registrar of Companies and suppressed the fact, the Appellant or the subsequent Director, cannot take a plea that the ‘Corporate Guarantee and Undertaking’ Agreement was obtained by fraud on 7th April 2017 and is not reflected in the records of the Registrar of Companies.”, the Appellate Tribunal stated.
Referring to the Supreme Court’s decision in Innoventive Industries Ltd. Vs. ICICI Bank and Anr., the NCLAT stated that once the Adjudicating Authority is satisfied on the basis of records that debt is payable and there is a default, the Adjudicating Authority is required to admit the application. In view of the ‘Corporate Guarantee and Undertaking’ Agreement instituted on e-Stamp, issued by the Government of National Capital Territory of Delhi, it was not open to the Adjudicating Authority to deliberate on the issue of whether e-Stamp was a forged document or not, the NCLAT said. The NCLAT added that merely because a suit has been filed by the Appellant and is pending, it cannot be a ground to reject the application under Section 7 of the I&B Code.
The NCLAT held that
“Pre-existing dispute cannot be a subject matter of Section 7, though it may be relevant under Section 9 of the I&B Code.”, it said.
In view of the above, the appeal was dismissed with the observation that the orders passed by the NCLT and the NCLAT would not be relied upon for deciding the merit of any pending suit in relation to the issue if any.
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By: EasyLegalTax Team