Financial Soundness of Corporate Debtor No Shield Against Insolvency Once Debt and Default Are Established: NCLAT
Financial Soundness of Corporate Debtor No Shield Against Insolvency Once Debt and Default Are Established: NCLAT
Introduction
The National Company Law Appellate Tribunal (NCLAT), New Delhi, reaffirmed that a company’s financial strength or net worth is irrelevant in determining the maintainability of insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), if the existence of debt and default is established.
A Bench comprising Justice Ashok Bhushan (Chairperson) and Arun Baroka (Member-Technical) dismissed an appeal challenging the admission of Axis Bank’s Section 7 application against the corporate debtor for a default of ₹16.95 crore.
Factual Background
Axis Bank had extended a financial facility of ₹24.90 crore to the corporate debtor. However, the debtor defaulted on repayment, leading the bank to initiate proceedings under Section 7 of the IBC before the National Company Law Tribunal (NCLT). The NCLT admitted the petition, triggering the present appeal before the NCLAT.
Contentions of the Parties
Appellant’s Submissions: The corporate debtor argued that while the loan sanctioned was ₹24.90 crore, only ₹12.50 crore had been disbursed. It contended that property documents were submitted to the bank as security, but the bank later denied possession of those documents. The appellant also asserted that the NCLT had erred in admitting the application, given that the company’s net worth was far higher than the claimed debt.
Respondent’s Submissions: Axis Bank maintained that the undisputed disbursement of ₹12.50 crore and the subsequent default were sufficient to attract the provisions of Section 7. It argued that partial disbursement does not nullify the existence of financial debt. The bank emphasized that the debtor’s One-Time Settlement (OTS) proposal during the NCLT proceedings was a clear admission of debt and default.
Reasoning and Analysis
The NCLAT held that non-disbursement of the full sanctioned amount cannot form the basis for rejecting a Section 7 application. The bench observed that once debt and default exceeding ₹1 crore are proven, the application is maintainable irrespective of the corporate debtor’s financial position.
The tribunal further noted that the company’s net worth is irrelevant for determining insolvency under the IBC, as the objective of the Code is not to assess financial capability but to address defaults in repayment.
It also highlighted that the OTS proposal constituted an express acknowledgment of liability. The bench observed that the issue regarding post-moratorium sale of assets was immaterial to the adjudication of debt and default under Section 7. Consequently, the NCLAT found no merit in the appeal and upheld the NCLT’s admission order.
Implications
The decision reinforces the settled principle that once debt and default are established, insolvency proceedings cannot be defeated by citing the corporate debtor’s financial soundness or asset base. It underscores that the IBC’s purpose is to ensure creditor protection through timely resolution and not to measure a company’s net worth.
In this case the appellant was represented by Mr. Krishna Sharma and Ms. Kaushambi, Advocates. Meanwhile the respondent was represented by Mr. Anuj P Agarwala, Adv. for R1 Mr. S. Dixit Karan Vir Khosla, Adv. for RP, Mr. Rishi Sood, Intervenor.
