NCLAT Sets Aside NCLT Order Dismissing Nine Section 7 Applications, Quashes Rs 25 Lakh Penalty on Financial Creditor and Corporate Debtors
NCLAT's Principal Bench reverses NCLT Chandigarh's dismissal of nine IBC Section 7 applications filed by J&K Integrated Textiles Park, finding financial debt proved and Section 65 penalty unsustainable.
The National Company Law Appellate Tribunal's Principal Bench at New Delhi has allowed 18 appeals arising from nine separate Section 7 applications filed under the Insolvency and Bankruptcy Code, 2016 by J&K Integrated Textiles Park Limited against nine corporate debtors, all units within a government-backed textile park in Kathua, Jammu & Kashmir. The NCLT Chandigarh Bench had dismissed all nine applications on 8 January 2025, holding that there was no financial debt, that the financial creditor lacked valid board authorisation, and that the proceedings were collusive. It had also imposed a penalty of Rs 25,00,000 each on the financial creditor and each corporate debtor under Section 65 of the IBC. NCLAT found each of those conclusions to be erroneous, set aside all nine NCLT orders, directed the Adjudicating Authority to admit the Section 7 applications within 30 days, and quashed the penalties.
The Textile Park Scheme and the Loan Arrangements
The dispute has its roots in the Government of India's Scheme for Integrated Textiles Parks launched in 2005. Under the scheme, J&K Integrated Textiles Park Limited was incorporated as a Special Purpose Vehicle to implement an integrated textile park at the industrial estate in Kathua. J&K State Industrial Development Corporation Ltd. granted the SPV a 90-year lease over 200 Kanals of land by a Lease Deed dated 22 March 2012, with a premium of Rs 1,50,000 per kanal and annual ground rent of Rs 3,000 per kanal. The SPV paid Rs 3,00,00,000 as premium and Rs 12,00,000 as advance ground rent. A Memorandum of Agreement was subsequently executed on 29 May 2013 between the President of India through the Ministry of Textiles and the SPV, under which the Government of India sanctioned a project cost of Rs 39.70 crores.
The SPV then allocated sites to nine industrial units. Tripartite Agreements were executed on 12 May 2017 between J&K State Industrial Development Corporation Ltd., the SPV, and each of the nine corporate debtors, with each unit receiving leasehold rights over 20 Kanals. A Loan Agreement dated 16 October 2018 was entered between the SPV and each corporate debtor. Taking the agreement with Silklon Processors Pvt. Ltd. as representative, the Loan Agreement recorded that the total payment against land and building came to Rs 6,75,00,000, comprising Rs 3,20,00,000 as cost of land and Rs 3,55,00,000 as an unsecured loan for construction of the building. The unsecured loan carried interest at 13% per annum, with interest payable annually from 1 January 2018 and principal repayable in equal monthly instalments over three years from 1 January 2020. A penal interest of 2% per annum quarterly was also stipulated on defaults.
Punjab National Bank had separately extended financial facilities to the corporate debtors — Rs 9.25 crores to Silklon Processors alone — and had initiated proceedings under Section 13(2) of the SARFAESI Act, 2002 after defaults. PNB conducted auctions of the corporate debtors' assets and issued sale certificates, though the auction was subsequently set aside by the High Court of Punjab & Haryana on account of the absence of a no-objection certificate from J&K State Industrial Development Corporation Ltd.
The corporate debtors failed to pay lease rent, interest, and principal. The financial creditor issued a recall notice on 22 April 2020 demanding Rs 4,67,97,700 from Silklon Processors alone. The corporate debtor replied on 19 August 2020 enclosing post-dated cheques for Rs 4,70,00,000, which were subsequently dishonoured. Section 7 applications were filed by the financial creditor in December 2023 before the NCLT Chandigarh Bench.
What the NCLT Decided and Why It Was Challenged
The NCLT framed five issues: limitation, validity of board authorisation, existence of financial debt, whether the parties were related parties, and whether interveners Punjab National Bank and Sunder Lal Aggarwal (a minority shareholder of the financial creditor) could maintain applications under Section 65. The NCLT found limitation in favour of the financial creditor but ruled against it on every other issue.
On board authorisation, the NCLT held that the Board Resolution dated 21 November 2014 could not authorise Mr Ram Avtar Aggarwal to file a Section 7 application because the IBC came into force only on 28 May 2016, two years after the resolution was passed. On financial debt, the NCLT held that the amount of Rs 3,20,00,000 was cost of land and not a financial debt, and that the transaction did not satisfy Section 5(8). On related parties, the NCLT accepted the pleadings of PNB and Sunder Lal Aggarwal that the financial creditor and the corporate debtors were related. It then concluded in paragraph 30 of its order that the petition was “collusive and malicious in nature” and dismissed all nine applications. It imposed Rs 25,00,000 each on the financial creditor and each corporate debtor under Section 65, directing deposit into the Prime Minister National Relief Fund within four weeks.
Eighteen appeals followed: nine by the financial creditor challenging the dismissal and the penalty, and nine by the corporate debtors challenging only the penalty imposed on them.
NCLAT's Analysis: Board Resolution, Financial Debt, and Related Party
Board authorisation. NCLAT examined the Board Resolution dated 20 November 2014, which authorised Mr Ram Avtar Aggarwal as Managing Director to sign, prepare, and submit documents and to represent the company before any department, bank, office, or court of India. The Tribunal held that this was a general power of attorney of the broadest scope. It relied on the Supreme Court's judgment in Rajendra Narottamdas v. Chandra Prakash Jain, (2022) 5 SCC 600, where a board resolution predating the IBC had been held sufficient to authorise filing of a Section 7 application. NCLAT held that the NCLT's reasoning — that the resolution was passed before the IBC was enacted and therefore could not authorise proceedings under it — was clearly erroneous. A general authorisation to represent the company before any court of India was sufficient; no fresh resolution specific to the IBC was required.
Financial debt. NCLAT found that the NCLT had focused only on the Rs 3,20,00,000 land cost component and had not adverted to the second and distinct component of the Loan Agreement: the unsecured loan of Rs 3,55,00,000 extended for construction of the building, carrying 13% interest per annum with a defined repayment schedule. The Tribunal noted that the corporate debtor's own balance sheet for the financial year ending 31 March 2022 recorded this amount under “Unsecured Loans — From Others” under long-term borrowings. NCLAT held that the unsecured loan fell squarely within Section 5(8)(f) of the IBC as an amount raised under a transaction having the commercial effect of a borrowing. The NCLT's reliance on Jaipur Trade Expocentre Pvt. Ltd. v. Metro Jet Airways Training Pvt. Ltd. was misplaced because that case concerned lease and licence dues classified as operational debt, whereas the present transaction involved a distinct unsecured loan with interest and a repayment schedule.
Related party. NCLAT examined the pleadings in PNB's intervention application, which described the alleged relationships. For Silklon Processors, the only stated basis was that its directors were “friends” of Ram Avtar Aggarwal, the director of the financial creditor. NCLAT found this did not satisfy any sub-clause of Section 5(24). The Tribunal also noted that the NCLT had not identified which specific sub-clause of Section 5(24) was attracted in respect of each corporate debtor. The financial creditor had placed on record a detailed chart showing that none of the criteria under Section 5(24)(a) to (m) were met in the case of Silklon Processors — no common directors, no cross-shareholding above 20%, no control over board composition, no interchange of managerial personnel. NCLAT held the related-party finding unsustainable.
NCLAT added that even if the corporate debtor were treated as a related party, that would not bar a financial creditor from filing a Section 7 application. Where financial debt and default are proved, the Adjudicating Authority is required to admit the application. The corporate debtor's issuance of post-dated cheques for Rs 4,70,00,000 and their subsequent dishonour, followed by a Section 138 notice, were themselves evidence of the debt and default.
Section 65 Penalty: Against the Financial Creditor
NCLAT held that the ingredients of Section 65(1) were not proved. Section 65 is a penal provision requiring strict pleading and proof that the insolvency resolution process was initiated fraudulently or with malicious intent for a purpose other than resolution of insolvency. The two circumstances relied upon by the NCLT were: the pendency of SARFAESI proceedings by PNB, and the timing of the Section 7 filing. NCLAT rejected both.
PNB's SARFAESI proceedings were independent statutory proceedings available to a secured creditor. Their pendency could not interdict the financial creditor's independent right under Section 7. The fact that the Section 7 application was filed after PNB conducted an auction did not establish fraudulent or malicious intent, particularly when the auction itself had been set aside by the High Court. The dispute between Sunder Lal Aggarwal and the financial creditor under Sections 241-242 of the Companies Act, 2013 was an internal shareholder dispute and could not be a basis for concluding that the Section 7 application was fraudulently initiated. Since the foundational findings — no financial debt, related party — had been set aside, the conclusion in paragraph 30 of the NCLT order that the petition was collusive and malicious also fell away.
Section 65 Penalty: Against the Corporate Debtors
The corporate debtors' nine appeals challenged only the penalty imposed on them. NCLAT relied on its earlier judgment in Rakesh Arora & Anr. v. Acute Daily Media Pvt. Ltd. & Ors., Company Appeal (AT) (Ins.) No. 1606 of 2024, where it had held that Section 65 penalises only the person who initiates the insolvency resolution process. The definition of “initiation date” under Section 5(11) makes clear that initiation is by a financial creditor, operational creditor, or corporate applicant. A corporate debtor does not initiate the process and therefore cannot be penalised under Section 65. NCLAT reiterated that Section 65 is a penal provision to be strictly construed, citing the Supreme Court's principle in Tolaram Relumal and Anr. v. State of Bombay, AIR 1954 SC 496 that where two reasonable constructions of a penal provision are possible, the court must lean towards the one that exempts the subject from penalty. Imposing Section 65 penalties on the corporate debtors was held to be beyond the jurisdiction of the Adjudicating Authority.
Order
NCLAT allowed all 18 appeals. The impugned orders dated 8 January 2025 passed by the NCLT Chandigarh Bench in all nine Company Petitions — CP(IB)/No. 309/CHD/J&K/2023, CP(IB)/No. 312/CHD/J&K/2023, CP(IB)/No. 315/CHD/J&K/2023, CP(IB)/No. 313/CHD/J&K/2023, CP(IB)/No. 310/CHD/J&K/2023, CP(IB)/No. 317/CHD/J&K/2023, CP(IB)/No. 322/CHD/J&K/2023, CP(IB)/No. 314/CHD/J&K/2023, and CP(IB)/No. 307/CHD/J&K/2023 — were set aside. The Adjudicating Authority was directed to pass a consequential order admitting the Section 7 applications within 30 days of production of a copy of the NCLAT order. The penalties of Rs 25,00,000 imposed under Section 65 on the financial creditor and on each corporate debtor were set aside. Parties were directed to bear their own costs.