CIRP APPLICATION CAN BE ADMITTED EX-PARTE

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According to Section 7 of the code, application for initiation of CIRP is admitted after ascertaining the existence of default in respect of debt owed. In this case, the CD has acknowledged the existence of default but neither repaid it nor filed any reply-affidavit to the notices which clearly indicates that there is no violation of principles of natural justice by the Adjudicating Authority. Accordingly, the NCLAT dismissed the appeal.

CIRP APPLICATION CAN BE ADMITTED EX-PARTE
IF CD FAILS TO FILE REPLY AFFIDAVIT

CASE SUMMARY

SUNIL SANGHAVI – APPELLANT

(Shareholder of Corporate Debtor – ‘Ess Dee Aluminium Limited’)

Vs

STATE BANK OF INDIA – RESPONDENT

(Financial Creditor)

Company Appeal (AT) (Insolvency) No. 487 of 2020

Judgement dated 22.05.2020

By Justice Bansi Lal Bhat

1.   Issue in Consideration:

 

Whether the order passed by the Adjudicating Authority (“NCLT”) admitting the CIRP application filed u/s 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) is preceded ex parte and thereby violating the principles of natural justice on part of Corporate Debtor?

2.   Brief facts of the case:

  • SBI (“Financial Creditor”) had extended cash credit facility and disbursed term loan to the Corporate debtor (“CD”).
  • Proceedings were initiated before DRT, Kolkata against the CD for its default in payment. A notice was served u/s 13(2) of SARFAESI Act, 2002. Subsequently, CIRP was initiated against the CD before the Kolkata Bench of NCLT.
  • The Adjudicating Authority passed an order admitting the application u/s 7 of IBC leading to consequential orders of IRP appointment and moratorium on the assets of CD.

3.   Arguments

 

Appellant:

 

  • Adjudicating Authority passed the order without giving any opportunity to CD for settling accounts with the financial creditor.
  • CD did not feel the necessity of filing reply to application since it was still undergoing negotiation with financial creditor.
  • Settlement plea submitted to the Adjudicating Authority from time to time was not recorded by the Adjudicating authority.

 

Respondent:

 

  • Referring to the minutes of proceedings recorded by Adjudicating Authority, it is clear that ample opportunity was provided to the CD to file a reply affidavit. Failure to file reply-affidavit by the CD left the application of financial creditor to proceed uncontested.
  • Also, order dated 03.02.2020 makes it clear that the adjudicating authority heard learned counsel for both the parties notwithstanding the fact that CD had not filed its reply affidavit. Hence, it cannot be said that principles of natural justice are not adhered to.

4.   Case Analysis

The NCLAT in Innoventive Industries Ltd.[1] held that:


the Adjudicating Authority is bound to issue a limited notice to the corporate debtor before admitting a case for ascertainment of existence of default based on material submitted by the corporate debtor and to find out whether the application is complete and or there is any other defect required to be removed.

From this order we can infer that providing an opportunity to file reply affidavit forms part of the principles of natural justice. The CD shall file its objections by way of a reply affidavit and that too for the limited purpose of challenging the existence of default or to highlight any defects in the application filed by the financial creditor.

The Adjudicating Authority is not empowered by the code to exercise any discretion while admitting an application filed under the Code. When all the conditions for admission of a CIRP application are satisfied, the Adjudicating Authority shall admit such application. In case there are any settlement talks initiated by the CD, the same may take place even after admission and if the financial creditors are willing for such settlement, they may withdraw the application u/s 12A of the Code.

5.   Conclusion:

According to Section 7 of the code, application for initiation of CIRP is admitted after ascertaining the existence of default in respect of debt owed. In this case, the CD has acknowledged the existence of default but neither repaid it nor filed any reply-affidavit to the notices which clearly indicates that there is no violation of principles of natural justice by the Adjudicating Authority. Accordingly, the NCLAT dismissed the appeal.

Foot Note(s):


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