Whether Pendency of proceeding before DRT is Ground of Rejection under IBC

Whether Pendency of proceeding before DRT is Ground of Rejection under IBC

Short Summary:

In this flash tabloid, the writer initiates by speak of the provisions of Insolvency & Bankruptcy Code, 2016 (hereafter referred as “IBC”) in relation to power of NCLT to accept the application in which proceedings are already pending before DRT.

The main drive of the broadsheet, on the other hand, is upon the “Whether pendency of proceeding before DRT is ground of rejection under IBC.”

            This is article no. 261 of the series of editorials written by the author on corporate laws

{Including Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.

Introduction:

With the Insolvency and Bankruptcy Code inching in reality, the Debt Recovery Tribunals (DRT) will resolve individual bankruptcy cases, the National Company Law Tribunal will work on corporate insolvency.

The reasons for the pile-up of cases varied from legal lacunae to insufficient technical expertise in dealing with such cases. Labour and infrastructure issues also played a big role in hindering resolution. The time taken to close such cases was another major hindrance.

Here the question is; If a creditor has already filed application in DRT for recovery of Debt and case is pending with DRT in such situation whether application can be before NCLT under IBC.

CASE ELEMENT:

Case Name	SREI Infrastructure Finance Ltd V/s K.S. Oils Ltd
Bench Name	NATIONAL COMPANY LAW TRIBUNAL, AHMEDABAD BENCH
Order No.	C.P. (IB) NO. 32/7/NCLT/AHM/2017
Section	7 (Financial Creditor)

A.  Factual Background:

1.     M/s. SREI Infrastructure Finance Limited filed this Application invoking Section 7 of the Insolvency and Bankruptcy Code, 2016 ("Code") in respect of M/s. K.S. Oils Limited.

2.    Petitioner….. sanctioned Rupee Term Loan of Rs. 100 Crores to the Respondent on 16th August, 2010. Respondent accepted the terms and conditions mentioned in the sanction letter. On 23rd August, 2010, Rupee Loan Agreement No. SRE 130 was entered into between Applicant and Respondent

3.    The respondent-company failed and refused to make payment of its outstanding dues in accordance with terms and conditions of the Rupee Loan Agreement. Various cheques given by the respondent to the applicant towards payment of its outstanding dues were dishonored. 

4.   Petitioner……. initiated proceedings against the respondent under provisions of the Negotiable Instruments Act before the Debt Recovery Tribunal which was pending.

5.    Petitioner……. Further filed instant application as per sub rule (1) of rule 4 of the insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for initiation of Insolvency resolution process against the respondent company and served a copy of the said application on the respondent company.

6.   Respondent……..Secured creditors had filed original petition before the Debt Recovery Tribunal in respect of the assets of the company.

7.    Respondent……. Multiple litigations were pending between the company and secured creditors including claims/counter claims, set offs. The secured creditors were interested in realization of dues through direct sale under SARFAESI Act.

8.   Respondent……. It stated that initiation of corporate insolvency resolution process was not in public interest. It was also stated that incidence of default claimed in petition would be subject-matter of adjudication before DRT.

9.   Respondent……. Learned Counsel appearing for the Respondent contended that this Adjudicating Authority has to see whether corporate insolvency resolution process is in the public interest or not. He further argued that 'public interest' includes interest of stakeholders.

B.  Findings of the NCLT Bench: 

The pendency of proceedings before Debt Recovery Tribunal and initiation of action under SARFAESI Act by other secured creditors was no ground to reject application. Provisions of section 7 read with Rule 4 do not contemplated notice to other creditors, secured or unsecured, operational creditor or financial creditor. There is every opportunity for other Creditors of any class to refer their claims before the Interim resolution professional in case of admission of this application. Therefore, in the absence of any provision enjoining upon this authority to issue a notice to other creditors, no notice need to be issued to other creditors.

The main object of enacting 'Insolvency Code' is to have corporate insolvency resolution plan in respect of corporate debtors with an intention to revive the operations of the corporate debtor without straightway going to liquidation. In the process of resolution, every creditor has an opportunity and interest of every stakeholder is to be taken into consideration. Therefore, to say that corporate insolvency resolution process is not in public interest in all cases is not correct. In the case on hand Corporate debtor is unable to pay the debts to several creditors including the present financial creditor. Therefore, to keep the corporate debtor away from the resolution process is, not in public interest including the stakeholders. Therefore, the argument of respondent may not suit to the facts of this case.

This petition is admitted under section 7(5) of the Code.

Conclusion: 

On the basis of above decided case law it can be opine that “pendency of proceeding before DRT is not an ground for rejection of application of creditor under IBC”. Even with the pending DRT application, creditor can file petition with the NCLT under IBC. There are many other cases decided by the many benches of Hon’ble Tribunals in relation to pendency of cases with DRT.