Background Matrix

In the case of Subhash Chand Gupta v. Bhavesh Texo Fab Ltd The Operational Creditor, who sold commodities to the Corporate Debtor from its office in Ahmedabad, used to occasionally sell Cotton to the Corporate Debtor. In a compromise agreement dated February 21, 2017, the appellant, a director of the corporate debtor, a director of the operational creditor, and a director of Rishabh Texco Ltd. agreed to adjust an amount of Rs. 80 lakhs as part of the payment of the combined outstanding liability of the corporate debtor to the operational creditor and to Rishabh Texco Ltd. The Operational Creditor preferred an application under S. 9 of the IBC for the recovery of the amount owed by the Corporate Debtor to the Operational Creditor after issuing a Demand Notice under S. 8 of the IBC. 

The Corporate Debtor is responding to the Demand Notice by restating its position that the payment made to the Operational Creditor’s sister firms, Shiv Shakti International and Harsh Trading Company, has modified the amount owed to the Operational Creditor.

By order dated April 27, 2022, the Adjudicating Authority accepted the Section 9 application because there existed a debt and the Corporate Debtor had failed to make the required payment. The appellant filed an appeal before the NCLAT disputing the impugned order dated 27-04-2022 made by the adjudicating authority since they were unhappy with it.

Contention from both parties 

The appellant argued that since the sum made to the Operational Creditor’s sibling companies had already been deducted from the total, the Corporate Debtor owed the Operational Creditor nothing. The appellant further argued that the Corporate Debtor started a criminal case by submitting an application under Section 156 of the Criminal Procedure Code, which led to the registration of a First Information Report (FIR) under Sections 420, 467, 468, 471, and 120-B of the IPC and the filing of a Report under Section 173(2) of the Criminal Procedure Code.

The respondent argued that the Operational Debt is still unpaid and that this is evident in the Corporate Debtor’s balance statement. In addition, he claimed that the claim that the due date has been altered is in conflict with the Corporate Debtor’s balance report. The respondent further argued that since the relevant criminal proceedings began after the operational creditor gave the Section 8 Notice, the appellant cannot credit those proceedings in the current proceedings.

Analysis of Court Verdict

A Division Bench of the National Company Law Appellate Tribunal in Delhi, composed of Justices Ashok Bhushan and Barun Mitra, stated that a Corporate Debtor cannot benefit from criminal proceedings that were started after receiving a demand notice under Section 8 of the Insolvency and Bankruptcy Code 2016 (IBC) by applying Section 156 of the Criminal Procedure Code.

According to the NCLAT, the Adjudicating Authority erred in admitting the Section 9 application because it should have been evaluated and decided based on evidence pertaining to the debt and default, and in the current case, there is an outstanding debt owed by the corporate Debtor to the Operational Creditor. The NCLAT dismissed the current appeal because it did not discover any mistakes in the contested decision made by the adjudicating authority that approved the Section 9 application.