No Bar for Initiating Insolvency Proceedings under Section 7 of the Insolvency and Bankruptcy Code

In a recent decision in the case of Karan Goel vs. M/s Pashupati Jewellers & Anr., the NCLAT headed by Justice S J Mukhopadhyay held that the pendency of a suit filed by the corporate debtor against a financial creditor, cannot bar it from initiating insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016. It was also held that the pre-existing dispute cannot be a subject matter of Section 7, although it may be considered under Section 9 of the IBC.

M/s Pashupati Jewellers, the financial creditor, filed an application under Section 7 of the code against Marigold Overseas Limited, the corporate debtor, for which the insolvency proceedings was initiated by the NCLT. Aggrieved by this decision of the NCLT, Karan Goel, the promoter of Marigold, approached NCLAT challenging the order of the NCLT.

Pashupati Jewellers had extended Marigold Overseas a loan of Rs. 2,60,000/- against a ‘Corporate Guarantee and Undertaking Agreement’ executed between the two parties. Karan Goel contended that the loan advanced by Pashupati Jwellers violates Section 185 of the Companies Act, 2013 which prohibits companies from advancing any loan, or giving any guarantee or security with a loan taken by the directors of such company.

Karan Goel also submitted that the records of Marigold Overseas which was available with the Registrar of Companies did not reflect the amount of loan agreement and no information about the corporate guarantee was available. He contended that the documents related to Loan Agreement were fabricated and fraud. On the basis of his contentions that no corporate guarantee had been given by Marigold Overseas due to which application under Section 7 of the Code was not maintainable, Karan Goel filed a suit against the Pashupati Jewellers.

The NCLAT heard the contentions of Karan Goel and observed that the Loan Agreement was instituted on an e-stamp paper and it clearly mentions that the e-stamp was purchased by Marigold Overseas for the purpose of the Loan Agreement. The bench stated that the agreement cannot said to be a fraud merely because Karan Goel was unaware of the Agreement. The NCLT, based on the decision of the Supreme Court in the case of Innovative Industries Ltd. vs. ICICI Bank & Anr., asserted that if on the basis of records the NCLT is satisfied that there exists a default and the debt is payable, the Tribunal is required to admit the application under Section 7 of the Code.

On the basis of the aforesaid findings, it was concluded by the NCLAT that mere pendency of a suit against the financial creditor had no bearing on the insolvency proceedings initiated by it against Marigold, and accordingly dismissed Karan Goel’s appeal.

By-

Ayushi Mishra

Student Reporter, INBA