S.7 IBC | Only Financial Creditor And Corporate Debtor Have Vested Right To Be Heard At Pre-Admission Stage: NCLT Bengaluru

The National Company Law Tribunal (NCLT) at Bengaluru has held that no third party has a right to intervene at the pre-admission stage of a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016, reiterating that the Tribunal's scope at that stage is limited to examining the existence of financial debt and default.

A coram of Judicial Member Sunil Kumar Aggarwal and Technical Member Radhakrishna Sreepada was dealing with an interlocutory application seeking permission to intervene in an insolvency petition filed by Mysore Mercantile Company Ltd against Vistara Media Pvt. Ltd.

The applicants claimed that they had acquired shareholding from the erstwhile promoters after investing substantial funds in the company and were inducted into the management, while the promoters had exited the company.

They submitted that despite the alleged transfer of shares, their names were not entered in the Register of Members, and a petition seeking rectification of the register is pending before the tribunal.

They further contended that the financial creditor had initiated multiple proceedings against the corporate debtor and the applicants, including civil, company law, and criminal proceedings, which according to them had disrupted the functioning of the company.

Stating that no one was presently representing the corporate debtor, the applicants sought permission to intervene in the insolvency proceedings and represent the company so that the Section 7 petition would not be decided ex parte.

The financial creditor opposed the application, contending that at the pre-admission stage of a petition under Section 7, the Adjudicating Authority is only required to examine whether a financial debt exists and whether default has occurred, and that third-party disputes cannot be entertained as it would defeat the summary nature of the insolvency process.

Relying on the NCLAT's decision in Deb Kumar Majumdar v. State Bank of India, the Tribunal observed:

“no person, other than the Financial Creditor and the Corporate Debtor, has a vested right to be heard at the pre-admission stage of a petition under Section 7 of the Code.”

The Tribunal held that at the pre-admission stage of a Section 7 petition, its scope is confined to examining the existence of financial debt and occurrence of default.

“At this stage, the Adjudicating Authority is not required to adjudicate inter-se disputes between shareholders, allegations of oppression, mismanagement, fraud in corporate filings, or disputes arising out of share transfers and internal management of the Corporate Debtor,” the Tribunal said.

Noting that the applicants had already initiated separate proceedings regarding shareholding and management of the company, the Tribunal observed:

"The grievances raised by the Applicants are matters that are required to be adjudicated in the appropriate proceedings and cannot be gone into in the present insolvency proceedings.”

Holding that the applicants failed to demonstrate how they are either necessary or proper parties to the Section 7 proceedings, the Tribunal dismissed the application, while clarifying that the order would not prevent them from pursuing other remedies available in law.

For Applicants: Advocate Chethan Kumar

For Respondent: Advocate Guarav Kumar