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NCLAT Directs NCLT to First Adjudicate Allegations of Sugar Cooperative in Insolvency Case
The , has directed the , to first decide an application filed by a sugar cooperative alleging in a Section 7 insolvency petition before proceeding to adjudicate the main case. The ruling, delivered on a appeal by , underscores the importance of hearing whose interests may be materially affected by proceedings.
The NCLAT bench, comprising Judicial Member Justice Sharad Kumar Sharma and Technical Members Arun Baroka and Indevar Pandey, observed that “in all , it was expected that the Tribunal by virtue of the Impugned Order, before closing the proceedings of CP No. 990/2024, it ought to have taken into consideration the application preferred by the appellant invoking provision contained under Section 60(5) of the Code.” The appellate tribunal found that the NCLT had proceeded to finalise the without addressing the cooperative’s plea for intervention, thereby potentially prejudicing its rights.
Background of the Dispute
The case originates from a filed by against before the NCLT, Mumbai. allows a financial creditor to initiate CIRP against a corporate debtor for default on a financial debt. However, the sugar cooperative—though not a party to that petition—claimed that the proceedings were collusive and could adversely affect its own property and interests.
The cooperative had entered into a collaboration agreement with the corporate debtor on , under which the debtor was to manage and operate the cooperative’s sugar mill for 18 crushing seasons. Disputes later arose, leading to arbitration and a subsequent compromise. Under the compromise, the corporate debtor agreed to repay amounts owed to various banks and indemnify the cooperative if any bank took action due to non-payment. The cooperative, representing contributions from about 18,000 farmers, apprehended that its property might be treated as belonging to the corporate debtor during CIRP because of the debtor’s management role under the agreement.
The NCLAT’s Directive
On , the cooperative filed an application under read with , seeking permission to intervene and requesting the NCLT to reject the insolvency petition as . However, the NCLT, on , had already recorded that the matter would proceed without the corporate debtor’s reply, which had not been filed despite being granted time. The cooperative’s application remained pending when the NCLT proceeded to decide the .
The NCLAT held that in the “peculiar circumstances,” the application had to be considered before the was finally decided. It observed that keeping the application pending would “nullify the purpose” for which it had been filed, particularly as the cooperative had alleged that the proceedings were collusive. The appellate tribunal therefore directed the NCLT to first decide the on its merits and only thereafter proceed with the . It also directed the NCLT to dispose of the application within three months from , if not already decided.
Legal Implications of the Ruling
The NCLAT’s decision reinforces the procedural safeguards available to third parties under the IBC. Section 60(5) empowers the to decide questions of law or fact arising out of or in relation to insolvency proceedings. By requiring the NCLT to hear the plea before the main petition, the appellate tribunal has affirmed that the extends beyond the immediate parties when property rights or significant interests are at stake.
This ruling is particularly significant for cases involving operational arrangements between corporate debtors and third parties. The cooperative’s apprehension that its sugar factory and property could be treated as assets of the corporate debtor during CIRP highlights the potential for abuse in insolvency proceedings. The NCLAT’s insistence on ensures that such allegations are examined at the threshold, preventing to .
Impact on Insolvency Practice
For legal practitioners, the judgment serves as a reminder that Section 60(5) applications must be actively pursued and that tribunals are obligated to consider them before closing the main petition. It also underscores the importance of early intervention by affected parties who are not formal parties to the proceedings. The three-month timeline set by the NCLAT for deciding the application adds urgency to such interim matters.
The decision may also encourage more challenges in insolvency cases where financial creditors and corporate debtors are perceived to be acting in concert to the detriment of other creditors or stakeholders. However, the NCLAT has limited its direction to the “peculiar facts” of this case, leaving room for tribunals to assess each situation on its merits.
Conclusion
The NCLAT’s directive is a clear endorsement of in insolvency adjudication. By prioritising the cooperative’s plea, the appellate tribunal has ensured that the NCLT will examine the of the before proceeding further. The case now returns to the Mumbai Bench, which must decide the within the stipulated period. The outcome will be closely watched by insolvency professionals and stakeholders alike, as it could set a precedent for how non-party rights are protected in CIRP.
