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An estimated 3-minute read

NCLAT Defines the Scope and Extent of the Corporate Debtor’s Right to Contest Admission of Insolvency Applications Filed by Financial Creditors

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In a landmark judgment recently delivered by the National Company Law Appellate Tribunal (NCLAT) in the case of Innoventive Industries Limited v. ICICI Bank Limited, the NCLAT has held that the National Company Law Tribunal (NCLT) is bound to issue only a limited notice to the corporate debtor before admitting a case under Section 7 of the Insolvency and Bankruptcy Code, 2016 (Insolvency Code).

Whilst dismissing the appeal filed by Innoventive Industries Limited against an order passed by NCLT, Mumbai admitting the insolvency petition filed by ICICI Bank Limited, the NCLAT has clarified that adherence to principles of natural justice would not mean that in every situation the NCLT is required to afford reasonable opportunity of hearing to the corporate debtor before passing its order.

The controversy arose in the background of an insolvency application filed by ICICI Bank Limited, which incidentally was the very first application filed under Section 7 of the Insolvency Code against Innoventive Industries Limited (Company) (Insolvency Application). At the stage of admission of the Insolvency Application, various issues were raised by the Company before the NCLT including that: (i) the NCLT is bound to issue notice to and hear the corporate debtor on whether there is a default; (ii) the Company is notified as a “Relief Undertaking” under the provisions of Maharashtra Relief Undertaking Act (MRU Act) and hence the Insolvency Application is maintainable; and (iii) ICICI Bank had not taken the consent of the Joint Lenders Forum (JLF) before filing the Insolvency Application. After hearing the parties, the NCLT, vide its Order dated 17 January, 2017 as modified by the order dated 23 January, 2017 (collectively called NCLT Order), was pleased to admit the Insolvency Application and rejected all the contentions raised by the Company.

The Judgment makes it clear that:

  • Under Section 7(5) of the Insolvency Code, the NCLT is only required to be satisfied on whether:
    • The corporate debtor has defaulted.
    • An application filed by the financial creditor is complete.
    • Disciplinary proceeding is pending against the insolvency resolution professional, proposed by the financial creditor.
  • Beyond the abovementioned issues, the NCLT is not required to look into any other factor, including the question of whether permission or consent has been obtained from one or other authority, including the JLF. The corporate debtor cannot insist on a trial and/or an adjudication of debt by the NCLT before an insolvency application is admitted.
  • If the NCLT is satisfied that it is required to admit the application but the application is incomplete, the financial creditor should be granted seven days’ time to complete the application. However, in a case where there is no default or the defects in the application cannot be rectified or the record enclosed by the financial creditor is misleading, the application should be rejected.
  • As an order of admission of the insolvency application has serious civil consequences for the corporate debtor, its directors and shareholders, the NCLT is bound to issue a limited notice to the corporate debtor before admitting a case for: (i) ascertaining whether a default has occurred based on material submitted by the financial creditor; and (ii) to find out whether the application is complete and/or there is any other defect required to be removed.

Applying the aforesaid legal findings to the facts of the case before the NCLAT, although no notice was issued by the NCLT to the Company before admitting the case, the Company had intervened before the admission of the case and all the objections raised by the Company were noticed, discussed and considered by the NCLT before passing the NCLT Order. In light of the above, the NCLT Order was not illegal.

As regards the question of whether the MRU Act would prevail over the provisions of the Insolvency Code, the NCLAT held that the non-obstante provision contained in the Insolvency Code (which is a subsequent Union Law) shall prevail over the provisions of the MRU Act and any instrument issued under the MRU Act. This would include the notification issued therein bringing the Company within its fold.

Lastly, the NCLAT rejected the Company’s contention that ICICI Bank’s insolvency application is liable to be rejected as ICICI Bank had not obtained permission or consent of JLF before filing the insolvency application by holding that the NCLT is not required to look into this factor before admitting the application.

The judgment provides much needed clarity with regard to the scope and extent of the corporate debtor’s right to contest admission of insolvency applications filed by financial creditors and will provide guidance to the NCLTs across the country in deciding insolvency applications filed by financial creditors.

Author: L. Viswanathan and Indranil Deshmukh
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Cyril Amarchand Mangaldas was founded in May 2015 to continue the legacy of the 97-year old Amarchand & Mangaldas & Suresh A. Shroff & Co., whose pre-eminence, experience and reputation of almost a century has been unparalleled in the Indian legal fraternity. With a long and illustrious history that began in 1917, the Firm is the largest full-service law firm in India, with over 600 lawyers, including 91 partners, and offices in Mumbai, New Delhi, Bengaluru, Hyderabad, Ahmedabad and Chennai. Several of our professionals are cited as leading practitioners by global publications like Chambers and Partners, International Financial Law Review, Asia Legal 500 and Euromoney.

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