NCLAT Declines To Interfere With Talent Unlimited CIRP, Grants Affle Liberty To Move NCLT

The National Company Law Appellate Tribunal (NCLAT), New Delhi, has declined to interfere with the order admitting Talent Unlimited Online Services Pvt. Ltd. into the Corporate Insolvency Resolution Process (CIRP).

It has, however, given Affle 3i Limited liberty to approach the National Company Law Tribunal (NCLT) with a proper application under Section 65 of the Insolvency and Bankruptcy Code (IBC).

Section 65 deals with cases where insolvency proceedings are initiated fraudulently or with malicious intent for a purpose other than resolution of insolvency. The provision allows the NCLT to impose a penalty where such fraudulent or malicious initiation is established.

The bench of Officiating Chairperson Justice Yogesh Khanna and Technical Member Barun Mitra observed that Affle's allegations of fraudulent initiation should have first been raised before the NCLT.

“We are also inclined to agree with the Respondent No.1 that any grievance of fraudulent or malicious initiation of CIRP was required to have been raised by the Appellant before the Adjudicating Authority and adjudicated in accordance with law. An issue which was required to have been considered by the Adjudicating Authority in the first place cannot be raised by the Appellant at the appellate stage,” the tribunal observed.

The NCLT, New Delhi had on June 12 admitted a Section 7 application filed by Axis Trustee Services Ltd., acting as debenture trustee, against Talent Unlimited. Section 7 allows a financial creditor to initiate CIRP when a company defaults on a financial debt.

Affle, which held shares in Talent Unlimited, later submitted an assignment/settlement proposal to Axis Trustee on July 3. It sought to bring the CIRP to an end by offering to acquire or take assignment of the debt without any haircut. No positive response was received, according to the NCLAT order.

Affle challenged the NCLT order under Section 61 of the IBC. This provision allows an aggrieved person to appeal an NCLT order before the NCLAT.

It alleged that the CIRP had been fraudulently initiated to resist enforcement of arbitral awards and judicial orders recognising its inspection rights. Affle also claimed that it was a substantial investor holding compulsory convertible preference shares.

It further relied on independent contractual rights under the shareholders agreement. It described itself as an investor, decree-holder and award-holder.

Axis Trustee opposed the appeal. It argued that Affle's grievance arose from its position as a shareholder and did not give it a direct injury to qualify as an aggrieved person under Section 61.

It also argued that Affle could not seek to bring the CIRP to an end through its settlement proposal. The committee of creditors had already been constituted and Form G had been issued.

The NCLAT examined the NCLT order and found that the adjudicating authority had satisfied itself about the existence of debt and default. The NCLT had relied on documents including the securities subscription agreement, debenture documents, bank records, default notices and records filed with NeSL.

The appellate tribunal also noted that Talent Unlimited had contested the debt and default before the NCLT. It had also resisted the initiation of CIRP.

The NCLAT found that the material relied on by Affle to allege fraudulent initiation had not been placed before the NCLT. It therefore declined to reach a finding on fraudulent initiation at the appellate stage without foundational material before the adjudicating authority.

Relying on the Supreme Court's judgment in Beacon Trusteeship Ltd. v. Earthcon Infracon Pvt. Ltd., the tribunal held that allegations of fraudulent initiation must first be examined by the NCLT.

The Supreme Court had held that where such an allegation is raised, the adjudicating authority must deal with it in accordance with law.

The NCLAT also held that allegations under Section 65 require a high evidentiary threshold. It observed that the degree of proof required to establish fraudulent initiation must be beyond reasonable doubt and based on unimpeachable evidence.

The NCLAT therefore declined to interfere with the Section 7 admission order. It granted Affle liberty to file a proper Section 65 application before the NCLT.

The NCLT may then consider Affle's contentions, including whether it has the locus to file such an application and whether the CIRP was initiated fraudulently.