Financial Hardship No Ground To Reject Insolvency Plea Once Default Is Established: NCLT Jaipur

The National Company Law Tribunal (NCLT) at Jaipur has observed that financial hardship and liquidity constraints are not legally recognised grounds to reject an insolvency petition once default is established under Section 9 of the Insolvency and Bankruptcy Code, 2016.

A coram of Judicial Member Reeta Kohli and Technical Member Kavita Bhatnagar admitted an application filed by Epicrop Organics Limited and initiated the Corporate Insolvency Resolution Process (CIRP) against Cropberry Foods Private Limited.

Epicrop filed the petition under Section 9 of the Code seeking initiation of CIRP against Cropberry, claiming a default of Rs 1,67,44,116.22. The amount comprised a principal sum of Rs 1,60,93,000 and interest of Rs 6,51,116.22 charged at 18% per annum.

Epicrop, engaged in the business of trading varieties of basmati rice, wheat, and pulses, stated that it had supplied basmati rice to the corporate debtor under various invoices. It submitted that despite long-standing business relations and sufficient time granted for payment, Cropberry failed to clear the outstanding dues.

The operational creditor issued a demand notice dated August 7, 2024, in statutory form 4 at the registered address of the corporate debtor. Despite receipt of the demand notice, the outstanding amount remained unpaid.

In its reply, Cropberry did not deny the existence of the operational debt. Instead, it contended that it was facing severe financial hardship and temporary liquidity constraints arising from unforeseen business disruptions that had affected its cash flow. It sought a period of at least six months to regularise the outstanding payments, stating that it was ready and willing to discharge the liability.

The tribunal observed that under Section 9 of the Code, the adjudicating authority is required to examine whether the application is complete, whether the operational debt is due and payable and has not been paid, whether the demand notice was delivered, and whether there exists any pre-existing dispute.

The Bench noted that the corporate debtor had acknowledged the existence of the debt and merely sought time to pay. It found that the alleged “oral dispute” regarding quality of goods was unsupported by any contemporaneous documentary material and that no credible evidence of a genuine pre-existing dispute was placed on record.

Rejecting the defence, the Tribunal held:

“In the absence of any credible material showing a genuine pre-existing dispute, we are unable to hold that the petition is barred under Sections 8 and 9.”

On the plea of financial distress, the bench further observed:

“We also observe that the plea of 'financial hardship' and 'liquidity constraints' is not a legally recognised ground to reject an otherwise maintainable petition under Section 9 once default is established.”

It added:

“The Code proceeds on the objective criterion of default, and the Adjudicating Authority cannot rewrite the commercial bargain by granting installments or time in place of the statutory consequence of admission, except in situations contemplated by law.”

Accordingly, the tribunal admitted the petition, initiated CIRP against Cropberry Foods Private Limited, declared a moratorium in terms of Section 14 of the Code, and appointed Kailash Shah as the Interim Resolution Professional.

For Operational Creditors: Advocates Tirth Nayak and Kartik Agarwal

For Corporate Debtor: Advocate Aditya Khandelwal