NCLT Dismisses Section 7 Application Due to Complexity of Allegations and Multiple Proceedings

NCLT Dismisses Section 7 Application Due to Complexity of Allegations and Multiple Proceedings

Introduction

The National Company Law Tribunal (NCLT), New Delhi Bench, comprising Shri Manni Sankariah Shanmuga Sundaram (Member-Judicial) and Shri Atul Chaturvedi (Member-Technical), has held that a deeper inquiry into the legality of the transfer of property or allegations of fraud cannot be adjudicated in a summary proceeding under Section 7 of the Insolvency and Bankruptcy Code (IBC).

Factual Background

Kotak Mahindra Bank Limited filed a Section 7 application seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against Mag.T Exim Limited, the corporate debtor, for a default of Rs. 9.44 crore. The loan was sanctioned to the corporate debtor and other co-borrowers to take over the existing liability from Yes Bank, with a property as mortgage security.

Procedural Background

The corporate debtor disputed the maintainability of the application, contending that the substratum of the loan transaction was vitiated due to alleged collusion between the financial creditor and Yes Bank in permitting the transfer of the mortgaged property to third parties.

Issues

The primary issue before the NCLT was:

Adjudication of Allegations of Fraud and Legality of Transfer: Whether the allegations of fraud and the legality of the transfer of property can be adjudicated in a summary proceeding under Section 7 of the IBC.

Contentions of Parties

Financial Creditor: Kotak Mahindra Bank Limited submitted that the corporate debtor and other co-borrowers availed financial assistance from the bank pursuant to a letter and loan agreement, and the loan recall notice entitles the bank to recall the loan.

Corporate Debtor: Mag.T Exim Limited contended that the financial creditor colluded with Yes Bank to permit the transfer of the mortgaged property to third parties, and the collateral security is gone, leaving the corporate debtor responsible for the loan without any protection from the asset that was supposed to back it.

Reasoning & Analysis

The NCLT observed that:

• Limitations of Summary Proceedings: Allegations and counter-allegations concerning the sale of mortgage property, collusion with Yes Bank, and the validity of the loan involve questions of fact and allegations of fraud that cannot be adjudicated in summary proceedings under Section 7 of the IBC.
• Need for Deeper Inquiry: The bench ruled that a deeper inquiry into allegations of fraud and the legality of transfer should be adjudicated by a competent forum.
• Multiple Proceedings: The applicant has already approached the Debt Recovery Tribunal (DRT) Chandigarh for the same debt, and the Code does not permit multiple proceedings for the same debt.

Implications

The NCLT's decision highlights the limitations of summary proceedings under Section 7 of the IBC and the need for a deeper inquiry into complex issues such as allegations of fraud and the legality of transfer. The judgment also underscores the principle that the IBC cannot be used as a substitute for recovery forums.

In this case the applicant was represented by Mr. Aman Vasisth, Advocate. Meanwhile the respondent was represented by Mr. Rishi Kapoor, Mr. Sumeet Kapoor, Mr. Ashish

Gupta and Mr. Pranjal Srivastava, Advocates.