Financial Creditor Cannot Allege Fraud In One Forum And Enforce Same Transactions As Debt In Another: NCLT Guwahati

The National Company Law Tribunal (NCLT) at Guwahati has held that insolvency proceedings cannot be admitted mechanically where serious disputes concerning the genuineness and enforceability of the underlying debt are already pending consideration before another forum.

A bench of Judicial Member Rammurti Kushawaha and Technical Member Yogendra Kumar Singh observed, “Where the creditor itself alleges in separate proceedings that the transaction is fraudulent and constitutes wrongful trading, this Tribunal cannot mechanically proceed on the assumption that a clear and undisputed 'financial debt' exists. The issue is not merely about computation of dues but concerns the very substratum and legitimacy of the transaction itself.”

The ruling came while the Tribunal was considering an insolvency petition filed by SREI Equipment Finance Limited (SEFL) against Kitply Industries Limited over an alleged default of ₹333.58 crore arising from loan facilities extended by SEFL and SREI Infrastructure Finance Limited (SIFL).

According to SEFL, the facilities matured on January 28, 2024 and remained unpaid. The financial creditor relied on the loan agreements and security documents executed by Kitply to establish the existence of debt and default.

Kitply opposed the petition, contending that the transactions were linked to implementation of its resolution plan approved in 2018 and that the funds were routed back to SIFL. The company also relied on proceedings pending before the NCLT's Kolkata Bench, where the Administrator of SEFL and SIFL has sought a declaration that the same transactions constituted fraudulent and wrongful trading. Kitply further pointed to arbitral proceedings arising from orders of the Calcutta High Court, where disputes concerning the nature and validity of the transactions are under consideration.

While examining the matter, the Tribunal noted that SEFL had demonstrated disbursement of funds to the corporate debtor. It held, however, that disbursement alone was not conclusive in the circumstances of the case.

“This Tribunal Finds that at the outset it is evidenced that disbursement of certain amounts to the Corporate Debtor has been demonstrated by the Financial Creditor. However, mere disbursement by itself is not always conclusive of existence of a genuine 'financial debt' when serious allegations regarding the true nature and purpose of the transaction arise from the materials placed on record,” the Tribunal observed.

The bench also noted that SEFL's own Administrator had challenged the legitimacy of the same transactions before the Kolkata Bench.

“Once the Financial Creditor itself, through its Administrator, has questioned the legitimacy and genuineness of the very transactions forming the basis of the present Section 7 petition, it cannot simultaneously seek initiation of CIRP on the strength of the same alleged debt. The Financial Creditor cannot be permitted to approbate and reprobate simultaneously by alleging fraud in one forum and seeking enforcement of the same transactions as valid 'financial debt' before another forum,” the Tribunal held.

The order records that the Administrator had challenged transactions arising out of the same loan agreements before the Kolkata Bench, alleging that they constituted fraudulent and wrongful trading and involved routing back of funds. In those circumstances, the Tribunal found that the very foundation of the insolvency proceedings had become doubtful.

The Tribunal also rejected Kitply's contention that the petition was barred because of the suspension of insolvency filings during the Covid-19 period. It noted that the loan facilities were repayable upon maturity on January 28, 2024 and that the earlier communications relied upon by Kitply related to irregular servicing of interest obligations.

“The materials on record indicate that the facilities were repayable upon maturity on 28.01.2024 as evidenced from loan agreement dated 24.01.2019. The earlier communications relied upon by the Corporate Debtor appear to pertain to irregularity in servicing of interest obligations and cannot ipso facto be treated as crystallization of the entire debt becoming immediately due and payable,” the Tribunal observed.

Even so, the bench held that admission of an insolvency petition carries serious consequences and that the Tribunal is not expected to act mechanically when the very existence and enforceability of the debt is already under challenge before a coordinate bench.

“Admission of CIRP carries serious civil consequences including suspension of the Board of Directors, imposition of moratorium and possible displacement of a going concern enterprise. Therefore, although proceedings under Section 7 are summary in nature, this Tribunal is not expected to act mechanically where serious disputes regarding the genuineness and enforceability of the underlying debt already exist and are pending consideration before a coordinate Bench,” the tribunal observed.

The tribunal also examined the impact of the arbitral proceedings. It noted that the dispute was not merely about parallel proceedings but concerned the very nature and validity of the underlying transactions, including whether they were genuine or sham.

The bench noted that the Calcutta High Court, while considering proceedings between the parties, had observed that the question whether the money advanced constituted a genuine loan or a sham transaction involving round-tripping would require detailed examination in arbitration.

Against that backdrop, the tribunal observed that the Financial Creditor had apparently engaged in forum shopping by filing the insolvency petition on the basis of the same transactions.

“The filing of the present petition based on the same set of facts and transactions demonstrate that the Financial Creditor has apparently engaged in forum shopping. Such conduct militates against scheme and object of the IBC,” the Tribunal held.

The insolvency petition was accordingly dismissed.

The tribunal, however, declined to hold that the proceedings had been initiated fraudulently or with malicious intent and refused to impose any penalty on SEFL.

“Merely because the present Section 7 Petition is found unfit for admission does not automatically lead to the conclusion that the proceedings were initiated fraudulently or maliciously within the meaning of Section 65 of the Code,” the tribunal held.

For Petitioner: Senior Advocate S Sen, Advocates S Sarkar and A Kanodia

For Respondent: Senior Advocate R Banerjee, S Mitra, Advocates K Kejriwal, S Bhatt, K Dutta, S Todi, D.K Jain, CA