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NCLT does not have power to direct pre-admission enquiry

In Allahabad Bank vs Poonam Resorts Limited and Allahabad Bank vs Link House Industries Limited, two Company Petitions were filed before the NCLT under Section 7 by the Appellant- ‘Financial Creditor’ against Respondents- ‘Corporate Debtors’ praying for initiation of ‘Corporate Insolvency Resolution Process’ on the ground that the ‘Corporate Debtors’ had committed default qua the financial debt that was payable in law and in fact to the ‘Financial Creditor’. As some objections were raised on behalf of the ‘Corporate Debtors’ that the ‘Corporate Insolvency Resolution Process’ had been initiated fraudulently and with a malicious intent to drag a solvent corporate who was willing to pay amounts that were actually due and payable legally, the Adjudicating Authority, being of the view that during the entire loan process due diligence was not carried out, appointed PWC as Forensic Auditor to examine allegations raised by the ‘Corporate Debtor’ and submit an Independent Report delineating some factual aspects bearing upon utilisation of the credit facility extended by the ‘Financial Creditor’ to ‘Corporate Debtor’. Against this order of the NCLT, the appeals were filed before the NCLAT.

The question for consideration is whether the Adjudicating Authority was justified in ignoring the time frame prescribed under Section 7 of the ‘I&B Code’ and embarking upon an enquiry to determine whether the applications filed under Section 7 contained false information, when the matters were at the very threshold stage. 

Referring to the decision of the Supreme Court in Innoventive Industries Limited v. ICICI Bank and Anr.- (2018) 1 SCC 407, the NCLAT held that the dictum of law propounded by the Hon’ble Apex Court is loud and clear. The Adjudicating Authority cannot travel beyond the letter of law and the dictum of the Hon’ble Apex Court. The satisfaction in regard to occurrence of default has to be drawn by the Adjudicating Authority either from the records of the information utility or other evidence provided by the ‘Financial Creditor’. The Adjudicating Authority cannot direct a forensic audit and engage in a long drawn pre-admission exercise which will have the effect of defeating the object of the ‘I&B Code’. If the ‘Financial Creditor’ fails to provide evidence as required, the Adjudicating Authority shall be at liberty to take an appropriate decision. If the application is incomplete, it can return the same to the ‘Financial Creditor’ for rectifying the defect. This has to be done within 7 days of the receipt of notice from the Adjudicating Authority. However, the ‘I&B Code’ does not envisage a pre-admission enquiry in regard to proof of default by directing a forensic audit of the accounts of the ‘Financial Creditor’, ‘Corporate Debtor’ or any ‘financial institution’. Viewed thus, the impugned order cannot be supported.

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