‘Incomplete’ financial statements no reason for rejection of insolvency application: NCLAT
The insolvency law does not empower the National Company Law Tribunal (NCLT) to reject an insolvency petition on the ground that the financial statements furnished with an insolvency application are incomplete.
The National Company Law Appellant Tribunal (NCLAT) in a recent order held that existence of debt and default is good enough for the NCLT to admit an insolvency application if there are no winding up proceedings against the corporate debtor and it is not covered by the ineligibilities provided under Section 11 of the Insolvency and Bankruptcy Code (IBC).
The NCLAT said that the NCLT has no business examining the documents annexed with the application as long as the application meets the above mentioned conditions.
Facts of the case
The case is related to Pondicherry Extraction Industries Pvt. Ltd, which had filed insolvency petition under Section 10 of the IBC. Under Section 10, a corporate debtor files an insolvency petition.
Pondicherry Extraction is a guarantor to the financial creditor – Bank of Baroda — to secure the amount borrowed by one JR Foods Ltd. (the borrower) from the financial creditor. The borrower defaulted in its repayment obligations to the financial creditor and accordingly on 30 March 2019, the accounts of the borrower were classified as NPA by the financial creditor. A demand notice under section 13(2) of the SARFAESI Act 2002 was issued by the financial creditor to the JR Foods, Pondicherry Extraction and another guarantor — JKS The Banyaan Pvt. Ltd.
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The shareholders of the Pondicherry Extraction at the Extraordinary General Meeting (EGM) held on 12 September 2019 approved initiation of corporate insolvency resolution process (CIRP). Therefore, the company filed an application under Section 10 of I&B Code before the adjudicating authority.
However, the financial creditor (Bank of Baroda) in objected to the insolvency application on the ground that the applicant has failed to mention details of the collateral securities given by the borrower and there are certain discrepancies in the amount mentioned in the application thus the application is incomplete. It alleged that the insolvency application is filed with the intention to defeat the SARFAESI measure initiated by it.
The Chennai bench of the NCLT noted that Rule 7 of Application of Adjudicating Authority Rules empowers it to ascertain whether the documents, and financial statements filed along with the application are in order. Exercising such powers, the Adjudicating Authority held that there are various discrepancies in audited balance sheets as on 31 March 2018, 31 March 2019 and for the period ending on 15 September 2019. It also further held that there was depletion in the amount of general reserve as on 31 March 2018 as compared to 15 September 2018. The reason for drain in reserve could not be explained by the corporate applicant.
With these findings, Adjudicating Authority held that the application filed by the corporate applicant is surrounded with doubts, therefore, rejected the application.
After the rejection of insolvency application under Section 10, Pondicherry Extraction filed an appeal with the NCLAT.
The NCLAT in its order concluded that it was of the view that the existence of debt and default is established and no winding up proceedings against the appellant and appellant is not covered by the ineligibilities provided under Section 11 of the I&B Code. However, the adjudicating authority has rejected the application on extraneous grounds. Therefore, the impugned order is set aside.
