NCLAT Sets Aside Rejection Of Section 7 Plea; Holds Stamp Paper Timing Cannot Defeat Insolvency Application
NCLAT Sets Aside Rejection Of Section 7 Plea; Holds Stamp Paper Timing Cannot Defeat Insolvency Application
Introduction
The National Company Law Appellate Tribunal (NCLAT) has held that the timing of purchase of stamp paper and subsequent execution of a loan agreement cannot constitute a valid ground for rejecting an application under Section 7 of the Insolvency and Bankruptcy Code, 2016. The Appellate Tribunal set aside the order of the National Company Law Tribunal (NCLT), New Delhi, which had dismissed the insolvency plea on such grounds.
Factual Background
The appellant, Akshay Kumar Rout, proprietor of Jagannath Traders, had advanced a sum of ₹1.05 crore to Indo Laminates Pvt. Ltd. at an interest rate of 18% per annum. The disbursements were made between January and February 2025 through banking channels. A formal loan agreement was subsequently executed on 1 March 2025, although the stamp paper for the agreement had been purchased earlier on 12 February 2025.
Upon default in repayment by the corporate debtor, the appellant filed an application under Section 7 of the Insolvency and Bankruptcy Code seeking initiation of Corporate Insolvency Resolution Process (CIRP).
Procedural Background
The NCLT, New Delhi (Court-III, Special Bench), dismissed the Section 7 application. The Adjudicating Authority observed that the stamp paper had been purchased prior to execution of the agreement and that the agreement covered disbursals already made. The NCLT inferred that this sequence cast doubt on the bona fides of the financial creditor and suggested an attempt to retrospectively regularise the transaction. The NCLT also recorded that the respondent company was solvent, had a longstanding business relationship with the appellant, and had no prior record of financial delinquency. Aggrieved by the dismissal, the appellant approached the NCLAT.
Issues
1. Whether the timing of purchase of stamp paper and execution of a loan agreement can be a valid ground to reject a Section 7 application under the IBC.
2. Whether the solvency of the corporate debtor or absence of prior defaults can justify dismissal of an insolvency plea.
3. Whether undisputed disbursement and evidence of default warranted admission of the application for fresh consideration.
Contentions of the Parties
The appellant contended that once the disbursement of ₹1.05 crore through banking channels was not disputed, the timing of execution of the loan agreement could not be a ground to reject the insolvency application. It was further submitted that the solvency of the company or absence of prior financial misconduct is not relevant under Section 7 once debt and default are established.
The respondent did not dispute receipt of ₹1.05 crore but submitted that it was not in a position to pay the entire claimed amount. It sought to justify the dismissal by relying on the reasoning of the NCLT.
Reasoning and Analysis
The NCLAT observed that the disbursement of funds was not disputed and that partial repayments were reflected in the bank statements placed on record. The Appellate Tribunal held that the observation of the Adjudicating Authority regarding the purchase of stamp paper on 12 February 2025 and execution of the agreement on 1 March 2025 could not be a relevant consideration for rejecting a Section 7 application.
The bench of Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra emphasised that such observations, as recorded by the NCLT, could not form the basis for dismissal of the application. The existence of debt and default is the primary consideration under Section 7, and once disbursement and default are established, peripheral aspects such as timing of documentation cannot defeat the statutory remedy.
The Tribunal further clarified that solvency of the corporate debtor or absence of prior defaults is not determinative in proceedings under Section 7 if a financial debt and default are established.
Decision
The NCLAT set aside the order of the NCLT dismissing the Section 7 application and revived the insolvency plea for fresh consideration in accordance with law.
In this case the appellant was represented by Mr. Vipul Ganda, Mr. Nitin Barik, Mr. Akash Madan and Mr. Gyanesh Tiwari, Advocates. Meanwhile the respondent was represented by Mr. Shikhar Gupta and Mr. Pragun Bagla, Advocates.
