CIRP Can Be Initiated Only On Default, Not On Apprehension Of Inability To Pay: NCLT Ahmedabad

A corporate insolvency resolution process can be initiated only upon the occurrence of default and not on a mere apprehension of inability to pay debts, the National Company Law Tribunal, Ahmedabad Bench, has held while rejecting a voluntary insolvency application filed by a textile company under Section 10 of the Insolvency and Bankruptcy Code.

The matter was heard by a coram comprising Judicial Member Chitra Hankare and Technical Member Dr. Velamur G. Venkata Chalapathy.

Rejecting the plea, the tribunal reiterated that the Insolvency and Bankruptcy Code is default-based legislation and cannot be invoked on the basis of financial apprehension.

“The applicant can only initiate CIRP upon occurrence of default and not on mere likelihood of inability to pay debts or prematurely produce the moratorium provisions,” the bench observed.

The application was filed by Rajshree Silk Mills Private Limited, the corporate debtor itself, citing financial stress and stating that its loan account had been classified as a non-performing asset. On this basis, it sought initiation of CIRP and the consequential moratorium under Section 14 of the Code.

On examining the record, the tribunal noted that the corporate debtor had passed a special resolution to initiate CIRP on April 3, 2024, prior to its loan account being classified as an NPA on May 3, 2024.

The tribunal further observed that while the textile company later asserted defaults by multiple creditors, the application itself named only one financial creditor and did not contain pleadings establishing defaults in respect of other creditors. It also recorded that no material was placed on record to show service of notice of the insolvency application on such creditors to substantiate the alleged defaults, if any.

The tribunal noted that in the rejoinder the applicant furnished details of defaults relating to several creditors, but for some creditors the dates of default were stated to be “not even known,” leading the Bench to observe that the application appeared “suspicious in nature.”

The tribunal also indicated that the explanation linking financial stress to the COVID-19 pandemic did not fully support the case for default

In the absence of a properly established default in terms of Section 10 requirements, the tribunal refused to admit the application and dismissed the plea.