Pre-Admission Enquiry Under IBC: An Analysis

Author: Aaksha Sajnani United World School of Law, Ahmedabad

INTRODUCTION:

The Insolvency and Bankruptcy Code, 2016 was introduced in India to provide a consolidated legal framework that deals with insolvency and bankruptcy of corporates, individuals, and partnerships. It aims to control the increase in NPA (Non-Performing Assets) or bad loans in India and establish a time-bound mechanism for resolution and liquidation of a company when it becomes insolvent. The code contains 255 sections and 11 schedules. The Corporate Insolvency and Resolution Process (CIRP) laid down in the code ensures revival of the company before it gets liquidated. To begin with, under Section 7 of the Insolvency and Bankruptcy Code, a financial creditor can file an application against the corporate debtor if the company had defaulted in repayment of a debt exceeding Rs 1 crore. The Adjudicating Authority (AA) has the power to admit/reject the application within 14 days of the receipt of application based on three conditions which are as follows-

1) There shall be an occurrence of default by the company; 2) The application submitted before the AA must be complete; 3) The proposed resolution professional should not be undergoing a disciplinary proceeding.

On satisfaction of the above-stated conditions, the AA appoints an Interim resolution professional (IRP) within 14 days. The IRP makes a public announcement regarding the initiation of the resolution proceedings and constitutes a Committee of Creditors (COC) within 30 days of his appointment. The first meeting of the COC is scheduled after 7 days of the constitution of the COC. The COC appoints an Insolvency Professional (IP) who aids the resolution applicant in the formulation of a resolution plan that helps the company to survive and ensure the debt recovery of the creditors. During the resolution process, the company is managed by the Insolvency Professional (IP) instead of the directors of the company. However, in case the resolution plan decided by the Committee of Creditors (COC) is not successful, the Adjudicating Authority passes an order for the liquidation of the company. Section 12 of the code states that the duration for the CIRP process should not exceed 180 days. The extension of 90 days can be granted by the AA if 66% majority of COC demands it. The Section further provides that the CIRP process should be completed within 330 days from the day when the insolvency proceedings were initiated. The extension is granted only once.

Be that as it may, the corporate debtor can only reject the application if he proves that there is no debt outstanding and the contentions of the resolution applicant are false on the face of it. This principle has been reiterated by the National Company Law Appellate Tribunal (NCLAT) in its recent judgment of Allahabad Bank v. Link House Industries Limited and Allahabad Bank v. Poonam Resort Ltd. [1].

Allahabad Bank v. Link House Industries Limited

The present case was a twin appeal before the NCLAT by the same financial creditor i.e. Allahabad Bank, against two corporate debtors viz Linking House Industries (Respondent No.1) and Poonam Resort Ltd (Respondent No.2) against the order of NCLT Mumbai passed on 16th October 2019. The grounds for filing the present appeal were that the NCLT has gone beyond the provisions of IBC and ignored the precedent laid down by the Supreme Court of India in Innoventive Industries Limited v. ICICI Bank and Anr.[2]

Facts of the Case:

The Appellant filed an application under Section 7 of IBC against the Respondent no. 1 and Respondent no.2 to initiate the corporate insolvency and resolution process before the NCLT Mumbai. In response to the said application, the respondents filed a counter application under Section 75 of the code[3], contending that the CIRP is being initiated with false allegations and with a malicious intention. The Respondents have no intention to default the payment due to the appellant and are willing to adhere to the stipulated time of repayment. The NCLT was of the opinion that proper due diligence has not been abided during the entire loan procedure. Therefore, the bench appointed a Forensic Audit Committee to conduct a pre-admission enquiry so as to investigate the allegations made by the corporate debtor and submit an independent report on the equivalent. However, as per Section 7(4) of the code, the Adjudicating Authority has to either accept or reject the application within 14 days of the filing of the application. But in the present case, with the appointment of such committee, the tribunal has defeated the purpose of Section 7 of IBC and has completely ignored the time frame of 14 days.

Aggrieved by the order of NCLT regarding the pre-admission enquiry, the Allahabad bank filed an appeal before the Appellate tribunal.

The Question raised before NCLAT:

Whether the Adjudicating Authority can order to conduct pre-admission enquiry ignoring the time period mentioned in Section 7 of IBC?

Judgment:

The Insolvency and Bankruptcy code is a consolidated legal framework to deal with the insolvency and bankruptcy of a company in a time-bound manner. On the plain reading of Section 7(4), it can be stated that the AA is bound to accept or reject the application within 14 days. The AA has to ascertain the default of the parties on the face of it through the evidence provided by the financial creditor or the corporate debtor. Emphasizing on the speedy adjudication and strict time frame, the NCLAT held that the appointment of the pre-admission enquiry defeats the purpose of Section 7 of the code because all the provisions of the code are time-bound and the AA cannot go beyond the provisions of it. Further, the corporate debtor cannot use Section 75 to delay in proceedings and shall submit prima facie evidence in support of his allegation. The maximum time frame for CIRP can go up to 330 days. The NCLAT further referred to the Supreme Court’s Judgment, Innoventive Industries Limited v. ICICI Bank, and Anr[4] wherein the Hon’ble Court has reiterated the said principle that the AA has to identify the default by the parties merely on the basis of the records and evidence produced before it.

Conclusion:

The insolvency proceedings are time-bound proceedings. The NCLAT has rightly held that the order issued by NCLT Mumbai of conducting a pre-admission enquiry was in violation of Section 7 of the Insolvency and Bankruptcy Code, 2016. The Adjudicating Authority cannot involve itself in a long pre-admission enquiry raised under Section 75 and defeat the purpose of Section 7. Section 75 of the code protects the corporate debtor from the false allegations made by the creditors. However, it is the duty of the creditor to approach the Adjudicating Authority with clean hands and good intentions. At the same time, it is the duty of the corporate debtor to prima facie satisfy the AA in regards to the allegations made under Section 75 with reasonable evidence. For ensuring the effective implementation of IBC, the Adjudicating Authorities shall ensure that the time frames mentioned in the code are given significant importance.

[1] [Company Appeal (AT) (Insolvency) Nos. 1303 and 1304 of 2019] [decided on 22.05.2020]

[2] [2018] 1 SCC 407

[3] IBC Section 75-Punishment for false information furnished in the application: Where any person furnishes information in the application made under section 7, which is false in material particulars, knowing it to be false or omits any material fact, knowing it to be material, such person shall be punishable with fine which shall not be less than one lakh rupees but may extend to one crore rupees.

[4] Supra 2.

7 views