Pranav B Prem

The National Company Law Tribunal (NCLT), Cuttack Bench, comprising Deep Chourasia (Judicial Member) and Babulal Meena (Technical Member), has held that the institution of criminal proceedings or allegations of fraud against officials of a financial creditor cannot bar the maintainability of an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Bench clarified that unlike an application under Section 9, a Section 7 petition cannot be rejected on the ground of a pre-existing dispute.

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The application was filed by Canara Bank under Section 7 of the IBC, seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against M/s S.S. Aluminium Private Limited for default amounting to ₹15.88 crore. The bank had sanctioned various credit facilities, including a cash credit of ₹3.5 crore and a term loan of ₹5.44 crore for modernisation and expansion of the corporate debtor’s aluminium extrusion plant at Haldiapada. Later, additional financial assistance was extended through further term loans, working capital facilities, and bank guarantees.

Upon the corporate debtor’s repeated defaults, the account was classified as a Non-Performing Asset (NPA) on 11.05.2021, and recovery proceedings under the SARFAESI Act were initiated. The bank issued a recall notice and subsequent notices under Sections 13(2) and 13(4) of the SARFAESI Act, followed by auction attempts. Despite restructuring of debts and several one-time settlement (OTS) proposals submitted by the debtor in 2021 and 2022, no payment was made, leading the bank to approach the Tribunal under the IBC.

Contentions of the Corporate Debtor

The respondent company disputed the maintainability of the petition, alleging contradictions in the loan documents regarding sanction dates and amounts. It claimed that the bank had forged signatures to create a mortgage over a third party’s property, for which an FIR No. 66 of 2023 had been registered against officials of the financial creditor. It further argued that the alleged default occurred during the moratorium period prescribed under Section 10A of the IBC and that the petition was barred by limitation. The respondent also contended that, being an MSME, the bank had failed to follow the mandatory revival and rehabilitation framework under the MSMED Act, 2006.

Response of the Financial Creditor

Canara Bank refuted these allegations, asserting that the defaults occurred well after the Section 10A period and that the corporate debtor had repeatedly acknowledged its liability through OTS proposals and restructuring agreements. It was further submitted that the respondent had not produced any document proving its MSME registration and that such a claim was raised belatedly to delay proceedings. The bank also relied on loan account statements, NeSL records, and debt restructuring agreements to establish the existence of financial debt and default.

Tribunal’s Observations

At the outset, the Bench rejected the contention that criminal proceedings or allegations of fraud against the bank’s officials could render the application under Section 7 non-maintainable. Referring to the definition of financial debt under Section 5(8) of the IBC, the Tribunal noted that its jurisdiction was confined to determining whether a financial debt existed and whether a default had occurred. It observed that, “the FIR registered by the respondent against officials of the financial creditor cannot be a ground to reject the application under Section 7 of the IBC, unlike in a Section 9 application, where a pre-existing dispute may be relevant.”

The Bench examined the loan account statements, NeSL certificates, and restructuring agreements, concluding that the corporate debtor had defaulted in repayment of the financial debt. The Tribunal held that defaults in this case had occurred after the Section 10A period and thus were not barred under the IBC. Relying on the decision of the NCLAT in NuFuture Digital (India) Ltd. v. Axis Trustee Services Ltd., it held that defaults occurring after the Section 10A period cannot be excluded for the purpose of determining default.

The Bench also rejected the MSME plea, observing that the corporate debtor had not provided any proof of MSME registration and had raised the issue for the first time only in written submissions. It reiterated that claims not pleaded at the initial stage cannot be entertained later, especially without documentary evidence. On the issue of limitation, the Tribunal relied on Dena Bank v. C. Shivakumar Reddy (2021) 10 SCC 330 and Asset Reconstruction Co. (India) Ltd. v. Tulip Star Hotels Ltd. (2022 SCC OnLine SC 944), holding that acknowledgments of liability in the form of OTS proposals and balance confirmations extend the period of limitation under Section 18 of the Limitation Act. Since the last acknowledgment was made in January 2022, the application filed in April 2024 was held to be within time.

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The Tribunal concluded that the financial debt exceeded ₹1 crore, the default occurred beyond the Section 10A period, and the petition was filed within the limitation period. It therefore admitted the application under Section 7 of the IBC, declared a moratorium under Section 14, and appointed Mr. Suresh Chandra Pattanayak as the Interim Resolution Professional (IRP) to conduct the CIRP of S.S. Aluminium Private Limited.

Cause Title: Canara Bank V. S S Aluminimum Pvt Ltd.

Case No: CP (IB) No 18/CB/2O24

Coram: Deep Chourasia (Judicial Member), Babulal Meena (Technical Member)