CIRP plea filed u/s 7 of IBC can’t be mediated u/s 442 of the Companies Act, 2013

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  • Last Updated on 7 March, 2023

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plea filed u/s 7 of IBC

Case Details: White Stock Ltd. v. Prajay Holdings (P.) Ltd. - [2023] 147 taxmann.com 329 (NCLAT-Chennai)

Judiciary and Counsel Details

    • M. Venugopal, Judicial Member & Naresh Salecha, Technical Member
    • P.H. Arvindh Pandian, Sr. Adv. for the Appellant.
    • Dr K. Ravichandran, PCS & Ms S. Manjula Devi, Adv. for the Respondent.

Facts of the Case

In the instant case, the appellant (the financial creditor) had entered into an investment agreement with the corporate debtor. According to the agreement, the appellant was entitled to receive coupon payments at 11% p.a. during the development period. In case, outstanding principal amounts were not repaid, they were to be converted into shares based on a conversion price at the end of the development period.

However, the appellant didn’t receive any return on investment in any form and alleged mismanagement and malaise by the corporate debtor. The appellant filed a company petition u/s 241 of the Companies Act, 2013 and thereafter filed an application u/s 7 of IBC against the corporate debtor.

The Adjudicating Authority (NCLT) referred both the application and company petition for mediation to the ‘International Arbitration & Mediation Centre’, in Hyderabad, (IAMCH) under section 442 of the Companies Act.

It was noted that the audited financial statements of the corporate debtor acknowledged liability of the amount payable. Further, the financial arrangement made between the financial creditor and the corporate debtor clearly fell under the definition of debt and default. Therefore, the financial creditor had a right to move an application u/s 7 of the IBC.

NCLAT Held

The NCLAT observed that there was a debt of more than Rs. 1 crore, which was admittedly not paid resulting in default and thereby meeting the requirement of section 7 of IBC.

The NCLAT, further observed that instead of accepting or rejecting the application after establishing the fact that the debt was due, remained unpaid and default took place, NCLT preferred to refer an application u/s 7 to IAMCH for mediation, which was not in conformity with the law. Therefore, the impugned order of NCLT was to be set aside.

The NCLAT held that the petition filed u/s 241 of the Companies Act was entirely for a different purpose, which entitled aggrieved parties due to oppression and mismanagement to file an application. The application filed u/s 7 was purely regarding the initiation of CIRP for the default of debt of more than Rs. 1 crore by the corporate debtor.

The NCLAT, further held that the petition made u/s 241 of the Companies Act could not be equated with an application filed u/s 7 of the IBC and the NCLT was required to treat these petitions on a separate footing.

Therefore, NCLT erred in tagging the application filed u/s 7 with the petition filed under section 241 and referring both applications for mediation to IAMCH. The rejection of the act of NCLT to refer the said application filed u/s 7 for mediation was beyond the jurisdiction.

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