NCLT flags rush for insolvency suits

As the banking sector prepares to resolve troubled loans of large borrowers through the Insolvency and Bankruptcy Code (IBC), concerns are being raised by National Company Law Tribunal itself over rush by banks and creditors in dragging companies to court and resolve the cases.

Some judges have raised the issue of natural justice which requires that judgements should be proclaimed only after hearing out all the parties.

Consider the following two recent rulings by the National Company Law Appellate Tribunal (NCLAT) and the National Company Law Tribunal (NCLT) in the respective cases of Innoventive Industries versus ICICI Bank and Rural Electrification Corp versus Ferro Alloys Corp.

"It will be imperative for the adjudicating authority (NCLT) to adopt a cautious approach in admitting insolvency application by ensuring adherence to the principle of natural justice," Judge Sudhansu Jyoti Mukhopadhaya has said in his ruling.

Innoventive Industries had appealed before the NCLAT on the ground that the Mumbai bench of NCLT had passed an order without notice to the company against the principle of rules of natural justice.

ICICI Bank countered that there is no provision for 'hearing' in the IBC and that the law prescribed that the NCLT is only required to ascertain the existence of a default and pass necessary orders.

The court was of the view that "the adjudicating authority (NCLT) is bound to issue a limited notice to the corporate debtor before admitting a case for ascertainment of existence of default".

But the court rejected the debtor's plea as it found that NCLT has satisfied itself that a default has indeed taken place.

"The IBC was enacted to have insolvency resolution in a time-bound manner for maximising the value of assets and balance the interests of all stakeholders. In this case, NCLT was required to ascertain existence of default from the records of information utility or on the basis of other evidence furnished by the financial creditor. Beyond that NCLT being adjudication authority does not require to look into any other factor," Sutanu Sinha, insolvency professional and former director, Canara Bank, told DNA Money.

In the similar case of Rural Electrification Corp versus Ferro Alloys Corp, the Kolkata bench of NCLT, while referring to the case of Innoventive Ind, asked debtor Ferro Alloys Corp to file a reply after invoking the principle of natural justice as the insolvency process was heard ex-parte.