The Guwahati Bench of the National Company Law Tribunal (NCLT) has rejected a Section 7 insolvency application filed by SREI Equipment Finance Limited against Kitply Industries Limited, holding that the matter did not disclose a clear and undisputed “financial debt” and “default” fit for summary determination under the Insolvency and Bankruptcy Code, 2016. The NCLT held that where the very transaction forming the basis of a Section 7 petition is seriously challenged as non-genuine, collusive, fraudulent, or lacking legal sanctity, and where the creditor’s own Administrator has questioned the same transaction in separate Section 66 proceedings, the Adjudicating Authority cannot mechanically admit the petition merely on proof of disbursement and asserted default.
The Tribunal relied on the principle that the Adjudicating Authority must examine the nature of the financial transactions and not proceed solely because a debt and default are alleged. On the facts, the Tribunal found that the existence of a legally enforceable and undisputed financial debt was seriously overshadowed by substantial and bona fide issues requiring detailed adjudication, and therefore the essential ingredients of “financial debt” and “default” under the Code could not be said to stand established for the purposes of summary admission under Section 7.
Further, the NCLT held that although pendency of arbitration or Section 66 proceedings does not by itself bar a Section 7 petition, the present case involved disputed and complicated questions concerning the legitimacy and enforceability of the underlying transactions which were not fit for determination in summary insolvency jurisdiction. At the same time, the Tribunal declined to impose penalty under Section 65, holding that the materials on record did not meet the higher threshold needed to conclusively establish fraudulent or malicious initiation of proceedings.
The Division Bench comprising Rammurti Kushawaha (Judicial Member) and Yogendra Kumar Singh (Technical Member) observed that the case did not disclose a routine case of financial debt and default, but a peculiar factual matrix involving Kitply’s prior CIRP, implementation of its earlier resolution plan, allegations of connected-party control, same-day routing of funds, pending Section 66 proceedings before another Bench, and arbitral adjudication directed by the Calcutta High Court. It noted that although disbursement of amounts and execution of security documents were demonstrated, mere disbursement was not conclusive where serious allegations existed as to the true nature and legitimacy of the transaction.
The Tribunal placed significance on the fact that SEFL’s own Administrator had, in parallel proceedings, sought a declaration that the very same transactions under the contracts were fraudulent and amounted to wrongful trading. It further found, on the materials placed before it, that the allegation that SIFL and SEFL were in a position to exercise control over Kitply through Vision India Fund, Trinity and related entities appeared to be correct. The Tribunal also noted that the Calcutta High Court had observed that the question whether the money given to Kitply was in effect a loan or a sham transaction used for round-tripping required detailed adjudication before an arbitrator.
In those circumstances, the Tribunal held that the dispute extended beyond mere computation of dues and went to the very foundation of the alleged debt and default.
Briefly, the matter arose from a Section 7 application filed by SREI Equipment Finance Limited against Kitply Industries Limited seeking initiation of CIRP on the basis of an alleged financial debt of Rs. 333.58 crores, said to arise from loan facilities sanctioned under various contracts. SEFL relied on disbursements made under those facilities, the execution of security documents including deeds of hypothecation, pledge and mortgage documents, and asserted that the loans became fully due on Jan 28, 2024.
Kitply opposed the petition on the ground that the alleged loans were not genuine borrowing transactions but were sham or circular arrangements created during implementation of Kitply’s earlier resolution plan approved on Dec 07, 2018, under which entities connected with the SREI group allegedly exercised control over the corporate debtor.
Kitply also relied on the fact that SEFL’s own Administrator had, in separate Section 66 proceedings before the NCLT Kolkata Bench, challenged the same transactions as fraudulent and involving round-tripping, and further pointed to proceedings before the Calcutta High Court where disputes concerning the true nature of the transactions had been referred to arbitration.
Appearances:
None, for Petitioner
Sanjay Bhatt, Adv., for Corporate Debtor
Krishnendu Dutta, Adv., Intervener for Anil Singh