Brief about decision:

Before admitting an application under Section 9 of the Code it is mandatory duty of the ‘adjudicating authority’ to issue notice.

Analysis of the case:

Section 61 read with Sections 7, 9 & 75 of the Insolvency and Bankruptcy Code, 2016 – Appeals and Appellate Authority

Facts:

Financial Creditor/Applicant having failed to realise the outstanding dues filed an application under section 7 of the Code before the Adjudicating Authority/NCLT. The applicant filed proof for service of notice to the corporate debtor. The NCLT satisfied that there was a default on the part of corporate debtor and passed an ex parte order admitting the application filed under section 7 of the Code declaring moratorium.

The corporate debtor/appellant filed an appeal against the order of NCLT on the following grounds: 1. In absence of notice given to the Appellant before admitting the case under Section 7 of the Code, the impugned order is violative of rules of natural justice. 2. The application under Section 7 by the Financial Creditor is incomplete, misleading and being not bona fide was fit to be rejected. 3. The impact of the appointment of Insolvency Resolution Professional on the business and management of the appellant was that in view of the mismanagement the appellant has incurred financial losses as one of its contracts was terminated and also suffered loss of several valuable human resources.

NCLAT Verdict:

It is clear that before admitting an application under Section 9 of the Code it is mandatory duty of the ‘adjudicating authority’ to issue notice. In the present case admittedly no notice was issued by the ‘adjudicating authority’ to the corporate debtor, before admitting the application filed under Section 9 of the Code. For the said reason the judgement order cannot be upheld having passed in violation of principle of natural justice.

Showing an incorrect claim, moving the application in a hasty manner and obtaining an ex-parte order from the ‘adjudicating authority’ which admitted such an incorrect claim, the Financial Creditor cannot disprove its mala fide intention by stating that the claim submitted is correct amount. The I&B Code does not provide for any such mechanism where post-admission, the applicant financial creditor can modify their claim amount.

In some of the cases, an insolvency resolution process can and may have adverse consequences on the welfare of the company. This makes it imperative for the ‘adjudicating authority’ to adopt a cautious approach in admitting insolvency applications and also ensuring adherence to the principles of natural justice.

For the reasons aforesaid, the appellate Tribunal set aside the ex-parte impugned order passed by NCLT.

In effect the appointment of Interim Resolution Professional, order declaring moratorium, freezing of account and all other order passed by ‘adjudicating authority’ pursuant to impugned order and action taken by the Interim Resolution Professional, including the advertisement published in the newspaper calling for applications are declared illegal. The ‘adjudicating authority’ is directed to close the proceeding. The appellant company is released from the rigour of law and allow the appellant company to function independently through its Board of Directors from immediate effect.

The Tribunal imposed a penalty of Rs. 50,000/- on Respondent/Financial Creditor.

Case Reference: NCLAT in case of Starlog Enterprises Limited Vs. ICICI Bank Limited, Company Appeal (AT) (Insolvency) No. 5 of 2017, Date of Order: 24.05.2017.

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