Filing for Insolvency under Section 10 of the IBC: Grounds for Rejection

Bar & Bench August 26 2019

Swaroop George

While sections 7 and 9 of the Insolvency and Bankruptcy Code, 2016 (‘the Code’), allow creditors of a defaulting company to apply for rendering the company insolvent, Section 10 provides the defaulting company itself, the right to approach the adjudicating authority i.e. National Company Law Tribunal to declare it insolvent by filing an application under Form 6. This affords an opportunity to the company to resolve its debt and revive the company through the resolution process. 

In the present article, it is sought to be examined as to what is the scope of adjudication available to the adjudicating authority while deciding an application under section 10. The applications under the section 10 have been dealt with and adjudicated in various judgments from which the following principles may be culled out vide which admission of an application under Section 10 of the Code is to be determined.

I. There must be Existence of Debt and Default of the Same

The National Company Law Appellate Tribunal (‘NCLAT’) in Unigreen Global Private Limited vs. Punjab National Bank and Ors. (2017 SCC Online NCLAT 566) has compared sections 7 and 10 of the Code and held that the test laid down by the Supreme Court with regard to applications by financial creditors under section 7 in M/s. Innoventive Industries Ltd. versus ICICI Bank & Anr. (2018 1 SCC 407) is applicable to Section 10 i.e. the moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it must give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority.

Thereby, a creditor of the debtor company can raise a defence that there is no default or debt is not due or payable in fact or law as is the case in applications under section 7.  Applying the aforesaid principle, the NCLAT in Krishna Kraftex Pvt. Ltd. versus HDFC Bank & Ors. (2018 SCC Online NCLAT 357) set aside the judgment of the adjudicating authority which had rejected the application under section 10 on the ground that though the balance sheet of the debtor showed its liability, there was no evidence to show a claim had been lodged with the corporate debtor and was lying unpaid. The NCLAT directed the adjudicating authority to admit the application if it was complete.

II. Application must be complete and Disciplinary Proceedings must not be pending against the Interim Resolution Professional  

Section 10 posits that an application may be rejected on two grounds. Firstly, if the application is incomplete i.e. it does not contain  the special resolution passed by shareholders of the corporate debtor or the resolution passed by at least three-fourth of the total number of partners of the corporate debtor approving filing of the application, the information relating to its books of account and such other documents required to be filed in terms of the Code and the relevant rules and regulations, details relating to proposed interim resolution professional etc. However, the Adjudicating Authority shall, before rejecting an application, provide 7 days to the applicant to rectify its defects. The second ground for rejection is if any disciplinary proceeding is pending against the proposed resolution professional.

In this regard, in Gaja Trustee Company Private Limited & Ors. vs. M/s. Haldia Coke & Chemicals Pvt. Ltd. & Ors. (2018 SCC Online NCLAT 331), the NCLAT held that for filing an application praying for initiation of insolvency against another debtor company, the authorisation of the Board of Directors would be sufficient. However, when a debtor company was praying for initiation of insolvency against itself under section 10, then a resolution passed by shareholders would be a mandatory requirement.

In Mr. Suresh Padmanabhan & Anr. vs. Tata Steel Ltd. & Ors (2018 SCC Online NCLAT 780), it was held that an ex-employee has no right to oppose an application under Section 10. It was also held that 180 days’ time period provided in subclause (b) of Section 4 of the ‘SICA Repeal Act, 2003’ (by Eighth Schedule) enables a corporate applicant to make an application under section 10 without payment of fees if the same is made within 180 days of abatement of the reference under the ‘SICA Repeal Act, 2003’ but the same would not mean that the corporate applicant cannot file an independent application under Section 10 even after 180 days on payment of requisite fee.

III. Must not be barred under Section 11 of the Insolvency and Bankruptcy Code, 2016

Section 11 restricts certain categories of persons from initiating corporate insolvency resolution process i.e. (a) a corporate debtor undergoing a corporate insolvency resolution process; or (b) a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application; or (c) a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or (d) a corporate debtor in respect of whom a liquidation order has been made. 

In Unigreen Global Private Limited vs. Punjab National Bank and Ors. (Supra), it was clarified that if any winding up proceeding has been initiated against the corporate debtor by the High Court or Tribunal or liquidation order has been passed, in such case, the application under Section 10 is not maintainable. However, mere pendency of a petition for winding up, where no order of winding up or order of liquidation has been passed, cannot be a ground for rejection.

In Ameya Laboratories Ltd vs. Kotak Mahindra Bank and Ors. (2017 SCC Online NCLAT 536), the NCLAT held that when an order for winding up has been passed and subsequently been stayed by an appellate authority but the same is pending against the corporate debtor, the application under section 10 of the Code at the instance of the corporate applicant is not maintainable in view of the bar imposed under Section 11(d) of the  Code. 

IV. The application must be judged only on the basis of the information required under the Code and the accompanying rules and regulations 

The NCLAT in Unigreen Global Private Limited vs. Punjab National Bank and Ors. (Supra) has held that the examination of an application under section 10 must be confined to the record i.e. the information to be provided in the terms of the Code, regulations, rules and form 6 of the Application to Adjudicating Authority Rules, 2016 and extraneous factors need not be considered. Non- disclosure of any fact other than that required as stated aforesaid will not be considered as suppression of facts nor will it amount to the debtor not coming with clean hands except for any disclosure with regard to disqualification under section 11 of the Code. The existence of proceedings under Section 13(4) of the SARFAESI Act, 2002 against the corporate debtor or of a suit against the corporate debtor under Section 19 of DRT Act, 1993 before a Debt Recovery Tribunal or an appeal pending before the Debt Recovery Appellate Tribunal cannot be a ground to reject an application under Section 10 if the application is complete.

In Gemini Innovations Pvt. Ltd vs. State Bank of India (2018 SCC Online NCLAT 920), the NCLAT declared that the action of the adjudicating authority in examining the genuineness of the arbitral award on which the debt of the Corporate Debtor was predicated, went beyond the scope of adjudication. The finding that the arbitral award was procured in an unnatural manner and could not be believed was found to be beyond the record i.e. beyond the information required to disclosed and examined in terms of the Code. 

In BCL Homes Ltd. vs Canara Banks & Ors (2018 SCC Online NCLAT 134), the NCLAT held that the Code, Rules and Regulations do not stipulate that the debtor company has to provide details of the lands sold or assets transferred even if the same are transferred to close relatives of the directors of the debtor company prior to the filing of application under Section 10. 

In Antrix Diamond Exports Pvt Ltd vs. Bank of India and Ors. (2018 SCC Online NCLAT 33), the adjudicating authority had dismissed the application on the ground that the application was an attempt to scuttle the SARFAESI proceedings and delay the recovery of assets by the creditors. The NCLAT set aside the judgment while holding that the SARFAESI proceedings were an extraneous factor and not required to be disclosed in terms of the Code or form 6. 

V. The debtor company must not be a profit making company

In Vyomit Shares Stock & Investments Pvt. Ltd. Vs. Securities and Exchange Board of India (2019 SCC Online NCLAT 287), the NCLAT has held that where an applicant is generating sufficient income and profit, the application filed under section 10 may be rejected on such ground.

Swaroop George is an advocate practicing at New Delhi