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Main objective IBC 2016 is reorganisation and resolution not recovery


Court :
NCLAT New Delhi

Brief :
The Hon'ble NCLAT New Delhi Bench upheld dismissal of petition filed under Section 9 of IBC,2016 on the grounds that Corporate Debtor being a solvent company and its status is MSME. The Corporate Debtor is providing employment to various persons and generating revenue. In such cases where amount due is small the question of “Reorganisation or Resolution” of Company does not arise.

Citation :
NCLAT, Company Appeal (AT) (Ins) No. 968 of 2020.

M/s Agarwal Veneers Vs. M/s. Fundtonic Service Pvt. Ltd.
NCLAT, Company Appeal (AT) (Ins) No. 968 of 2020.
Dated: 5th August,2022

HELD THAT

The Hon’ble NCLAT ,New Delhi Bench upheld dismissal of petition filed under Section 9 of IBC,2016 on the grounds that Corporate Debtor being a solvent company and its status is MSME. The Corporate Debtor is providing employment to various persons and generating revenue. In such cases where amount due is small the question of “Reorganisation or Resolution” of Company does not arise.

BRIEF FACTS

  • The Appellant ( M/s. Agrawal Veneers) filed a petition under provisions of Section 9 of IBC,2016 for initiation of CIRP against M/s. Fundtonic Services Private Limited.
  • The Petition of the Operational Creditor or appellant in this case has been rejected on below mentioned points;
  • The Respondent has issued two demand notices (page 28-55), the first one dated 24.06.2019 and second one dated 20.07.2019. Demand notice which is a pre- requisite under Section 8 of the Insolvency & Bankruptcy Code, 2016 for filing the petition under Section 9, is signed and issued by an advocate on behalf of M/s. Nehru & Co. (Advocates and Legal Consultants), whereas, the petition is signed by Mr. Rohit Agarwal, Partner of the applicant firm on the basis of authority letter dated 20.08.2019 issued by the other partner of the partnership firm.
  • On perusal of the records it is found that no authority is given to the advocate to issue demand notice or for filing an application u/s 9 of the IB Code. 
  • Therefore, the demand notice which is a pre-requisite for filing an application under Section 9 of the itself is bad in the eye of law.
  • On perusal of the records it is found that the Respondent Company is a going concern and at present giving employment to 20 employees. Hence, it would defeat the very purpose of the Code, if a going concern generating revenue, the employees and stakeholders are subject to the rigors of the CIRP.
  • It appears that the operational creditor has filed the instant petition as a tool of recovery mechanism which is not the objective of the IBC. It is a settled law that the Code is not intended to be a substitute to a recovery forum.
  • More so, when the corporate debtor company falls within the category of Micro, Small and Medium Enterprise (MSME), CIRP proceedings against a going concern Jeopardizing livelihood of several families is against the objectives of IB Code and cannot be used to jeopardize the financial health of a solvent company by pushing it into insolvency Initiating.
  • It is found that the petitioner has not produced on record documents like copy of the purchase order and delivery challan to substantiate its claim. Moreover, the applicant has not produced on record a copy of bank statement showing that no payment is received from the corporate debtor towards the invoices against which the claim has been raised.
  • Under the facts and circumstances discussed above, the Adjudicating Authority has no other option but to dismiss the petition as it is bad in the eye of law and not maintainable on the very reason that the demand notice is issued without any authority.
  • In the result, company Petition No. CP (IB) 824 of 2019 stands dismissed and disposed of. 
  • However, this will not stand in the way of the Petitioner approaching the appropriate forum seeking to enforce its claim against the Respondent, as this petition has been dismissed on the issue of maintainability taking into consideration the provisions of IB Code, 2016”.

THE OBSERVATIONS AND DECISION OF NCLAT

The Preamble of IBC is carefully worded to describe the spirit and objective of the Code to be 'Reorganisation' and 'Insolvency Resolution', specifically omitting the word 'Recovery'.

The Parliament has made a conscious effort to ensure that there is a significant difference between 'Resolution' and 'Recovery'. The Hon'ble Supreme Court has time and again observed that the fundamental intent of IBC is 'maximising the value of assets' in the process of 'Resolution'.

In 'Mobilox Innovations Private Limited' Vs. 'Kirusa Software Private Limited', (2018) 1 SCC 353, the Hon'ble Apex Court has examined in detail the United Nations Legislative Guide on Insolvency, in which the IBC finds its roots.

Any Application to commence CIRP can be denied when the Creditor is using Insolvency as an inappropriate substitute for Debt Recovery Procedures. 

The Company Appeal (AT) (Ins) No. 968 of 2020 If IBC is purely used for the purpose of Debt Recovery, particularly when the amounts due are small, and the Company is a solvent entity and is a going concern, the question of 'Reorganising' or 'Resolution of the Company' does not arise. 

This Tribunal in 'Binani Industries Limited' Vs. 'Bank of Baroda & Anr.', Company Appeal (AT) (Ins.) No. 82 of 2018, has differentiated between 'Recovery' and 'Resolution' and has observed that IBC is not a Recovery Proceeding. 'Recovery' dispossesses the 'Corporate Debtor' of its assets while a Resolution is an effort to keep it afloat. 

Further, this Tribunal in 'Asset Advisory Services' Vs. 'VSS Projects', CP (IB) No. 96/7/HDB (2017), and also in 'Praveen Kumar Mundra' Vs. 'CIL Securities Ltd.', 2019 SCC OnLine 21 | P a g e Company Appeal (AT) (Insolvency) No. 512 of 2021 NCLAT 334, has noted that CIRP cannot be initiated with fraudulent intent 'for any purpose other than the Resolution of Insolvency or Liquidation' and therefore it is clearly covered under Section 65 of the Code.

The Hon'ble Supreme court in 'Vidarbha Industries Power Ltd. vs. Axis Bank Ltd'. 2022 SCC Online SC 841 has observed that even if there is a 'debt' and 'default', the Adjudicating Authority should use its discretion in admitting/ rejecting an Application. 

In the instant case, the Adjudicating Authority has rightly rejected the Application on this ground too. Company Appeal (AT) (Ins) No. 968 of 2020

For all the aforenoted reasons, this Appeal fails on merits and is accordingly dismissed. No order as to costs.

CONCLUSION

The main objective of IBC,2016  is Reorganization and Resolution of Corporate Insolvency status. There is no place of recovery under the Code,2016. An Operational Creditor if wants to utilize provisions of IBC,2016 for recovery of its debt then it may be not allowed. A going concern ,earning revenue and providing employment to various persons cannot be brought under Corporate Insolvency Resolution Process( CIRP) for recovery of small dues of the Operational Creditor. The main aim of the Code,2016 as stated above is maximization of asset value of Corporate Debtor through Reorganization and Resolution Process.
DISCLAIMER  the case law presented here is only for sharing information and knowledge with the readers. The views are personal. In case of necessity do consult with professionals for more clarity and understanding on subject matter.

 

FCS Deepak Pratap Singh
on 15 August 2022
Published in Corporate Law
Views : 30
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