Separate Corporate Debtors' Defaults Cannot Be Combined To Meet ₹1 Crore IBC Threshold: NCLT Mumbai

The Mumbai National Company Law Tribunal (NCLT) on 7 July held that a financial creditor cannot aggregate defaults owed by different corporate debtors to meet the minimum default threshold under Section 4 of the Insolvency and Bankruptcy Code, 2016 (IBC), even if the entities belong to the same corporate group.

A Bench of Judicial Member Nilesh Sharma and Technical Member Sameer Kakar dismissed an insolvency application filed by Mr. R. Srikant Ayyer against Neogreen Agriculture LLP after finding that the default attributable to the respondent was below the statutory threshold of Rs. 1 crore. The Tribunal held:

“It is therefore safe to conclude that the present Section 7 Application has been filed by the Applicant artificially inflating the alleged debt and default through inclusion of another corporate entity's dues. Such an approach is contrary to the object and scheme of the IBC and amounts to a misuse of the insolvency process as a recovery mechanism, which has been consistently criticized by the Hon'ble Supreme Court and the Hon'ble NCLAT.”

The applicant claimed a default of Rs. 1.02 crore, comprising Rs. 50 lakh in principal and accrued interest, and sought initiation of the Corporate Insolvency Resolution Process (CIRP). He relied on two investment transactions. Under an investment agreement dated 5 December 2022, he invested Rs. 20 lakh in Neogreen Agriculture LLP under a scheme promising a 25 per cent annual return and repayment of the principal after five years.

He also invested Rs. 30 lakh in Neogreen Ventures Limited, a group company, under an alleged Compulsorily Convertible Preference Shares (CCPS) scheme. He argued that both entities functioned as a single economic unit and were jointly and severally liable for the entire amount.

The Tribunal found that only the Rs. 20 lakh investment had been made in Neogreen Agriculture LLP. The remaining Rs. 30 lakh had been invested in Neogreen Ventures Limited, a separate legal entity. Even according to the applicant's own calculations, the claim against Neogreen Agriculture LLP worked out to only Rs. 40.93 lakh, while the balance related solely to the other company.

Interpreting Sections 4 and 7 of the IBC, the Tribunal held that the minimum default threshold of Rs. 1 crore must be satisfied in respect of the corporate debtor against whom insolvency proceedings are sought. It observed that while the IBC permits multiple financial creditors to combine their claims against a single corporate debtor, it does not allow debts owed by different corporate debtors to be clubbed merely because they are part of the same corporate group.

Further, the Bench found that the applicant had not produced any guarantee, undertaking or agreement showing that Neogreen Agriculture LLP had assumed liability for the debts of Neogreen Ventures Limited. Without such a contractual obligation, the dues of the group company could not be attributed to the respondent. It held that the applicant had artificially inflated the alleged default by including the liabilities of another corporate entity, which was contrary to the scheme of the IBC and amounted to misuse of the insolvency process as a recovery mechanism.

Accordingly, the NCLT dismissed the Section 7 application as not maintainable while leaving the applicant free to pursue any other remedy available in law, holding that as the actual default attributable to Neogreen Agriculture LLP was below the statutory threshold of Rs. 1 crore.