Non-Issuance Of NOC By Financial Creditor After Default Cannot Stall Insolvency: NCLT Chandigarh

The National Company Law Tribunal (NCLT) at Chandigarh has rejected a plea by homebuyers seeking dismissal of insolvency proceedings against Vatika Ltd.

The tribunal held that non-issuance of a No Objection Certificate by the debenture trustee, which was required for execution and registration of conveyance deeds in favour of plot buyers, cannot by itself obstruct proceedings under Section 7 of the Insolvency and Bankruptcy Code once a financial default has occurred.

The matter was heard by Judicial Member Khetrabasi Biswal and Technical Member Shishir Agarwal. The bench observed that issues arising after the occurrence of default cannot dilute the statutory consequences flowing from an admitted default.

The tribunal held:

“In view of the aforesaid, it is evident that any issue pertaining to non-issuance of NOC, arose subsequent to the occurrence of default. Such post default events cannot dilute, extinguish, or override the statutory consequences flowing from an admitted default. Accordingly, the plea raised regarding non issuance of NOC does not constitute a valid ground to obstruct or bar the proceedings initiated under Section 7 of the Insolvency and Bankruptcy Code, 2016.”

The order was passed on an application filed under Section 65 of the Code by Hemant Yadav and other homebuyers of the “Aspiration” project. The applicants sought a declaration that the Section 7 petition filed by IDBI Trusteeship Services Ltd against Vatika Ltd had been initiated fraudulently and with malicious intent.

The homebuyers had paid between Rs 63 lakh and Rs 96 lakh each for allotted plots. They contended that the debenture trustee had withheld NOCs despite receipt of full sale consideration.

They argued that this stopped the execution of conveyance deeds and led to what they termed an artificial default, which was subsequently relied upon to initiate insolvency proceedings.

Opposing the application, the debenture trustee submitted that the Section 7 petition was based on defaults under secured, redeemable, non-convertible debentures amounting to Rs 146 crore.It stated that cumulative dues stood at Rs. 274.13 crore as of January 19, 2024. The dues comprised principal, coupon interest, redemption premium and default interest.

The petitioning financial creditor argued that issues relating to the issuance of NOCs or execution of conveyance deeds were separate from the question of financial debt and default under the debenture trust deed.

On merits, the tribunal held that Section 65 of the Code is a penal provision.

It requires specific and cogent material to establish fraudulent or malicious initiation of proceedings. The bench found that no such material had been placed on record.

The tribunal further observed that alleged non-issuance of NOC arose subsequent to the occurrence of default. It held that such post-default developments could not override the statutory framework under Section 7.

The bench also noted that the rights of homebuyers remain protected during the Corporate Insolvency Resolution Process. It referred to the provisions that allow handover of possession during CIRP and to the powers vested in the resolution professional.

The tribunal dismissed the Section 65 application (avoidance application). It also recorded that the main Section 7 CIRP Rpetition had already been admitted. It held that the present application had therefore become infructuous.

For Applicant: Advocate Atul V. Sood