NCLAT on relevance of inability to pay the debt for admitting or rejecting an application for initiation of CIRP under the IBC

BACKGROUND

• An application under section 7 of the Insolvency and Bankruptcy Code was filed in NCLT by the petitioner in the case of Monotrone Leasing Pvt. Ltd vs PM Cold Storage Pvt. Ltd. The petition was filed against PM Cold Storage Company for Corporate Insolvency Resolution Process as they were unable to pay the debt of Rs.27,19,110/-
• However, after the amount was received, a notice under Section 138 of Negotiable Instrument Act, 1881 was served as a post-dated cheque of 9th October 2018 got dishonoured
•  NCLAT expressed a doubt whether the statement was in the name of Financial Creditor or not as there was no mention of the Financial creditor under the title of the statement
• The corporate debtor claimed that there was no debt due to the financial creditor and that the transaction by which the alleged loan was disbursed through RTGS was not in the name of Financial creditor

DECISION OF THE TRIBUNAL

• NCLAT rejected the reasoning of NCLT which stated that Corporate Debtor cannot commit any default being a solvent and held that that inability to pay the debt has no relevance for admitting or rejecting an application for initiation of CIRP under the IBC.
• It was observed by the Tribunal that for an application to be accepted under section 7 by the Adjudicating Authority, a default has to be done and in the current case, the default was in form of a debt of Rs. 25,00,000/-
• Further, NCLAT also held that “The Civil Court was not competent to issue an injunction order for a case pending before this Tribunal under IBC. The Adjudicating Authority has erred in rejecting the application based on the pendency of civil suit between the parties.
• The Swiss Ribbon case was referred to by the court in which it was held that rather than the "inability to pay debts", it is the "determination of default" that is relevant for allowing or disallowing an Application filed under Section 7, 9 or 10 of IBC.