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North Life Spaces' Deposit Not In IBC Section 7: NCLAT
The has delivered a significant ruling clarifying that a deposit made expressly "" to a debtor's rights and contentions cannot, by itself, be treated as an of liability in proceedings under . The bench of Justice N. Seshasayee and Technical Member Indevar Pandey set aside an order of the , Mumbai Bench, which had closed a Section 7 petition after the debtor deposited the claimed amount without adjudicating its objections on , debt, and default.
Case Background: Dispute Over Facility Agreement
The dispute arose from a Facility Agreement dated , between the appellant, , and the respondent, . The trust claimed that approximately ₹4.15 crore was due from the appellant and filed a petition under Section 7 of the IBC before the , alleging default. The claim comprised principal of ₹2,98,34,717, interest of ₹90,04,363, and a tax penalty of ₹26,80,863.
North Life Spaces contested the petition on multiple grounds, questioning its , the authority of the person instituting the proceedings on behalf of the trust, and the very existence of the . It also filed an seeking production of documents to support its objections.
The Deposit and the NCLT's Order
After the matter was heard and reserved for orders on
, North Life Spaces deposited two demand drafts totaling ₹3,49,55,172 with the
. The accompanying praecipe explicitly stated that the deposit was made
"
to its rights, remedies and contentions"
and
"purely as a gesture of
conduct"
to demonstrate
.
On , the NCLT directed the release of the demand drafts to the trust, recorded payment of principal and interest, noted the withdrawal of tax penalty and default interest claims, and closed the petition. Crucially, the tribunal did not adjudicate the objections raised by North Life Spaces regarding , debt, and default.
Arguments Before the NCLAT
The appellant argued that the NCLT erred by closing the Section 7 proceedings without determining its objections, particularly since the deposit was made expressly . It contended that the subsequent dated , claiming ₹2,77,72,206 towards interest, default interest, and legal expenses, was materially different from the original claim and could not be justified under the liberty granted by the impugned order.
The respondent countered that the appellant voluntarily offered to deposit the amount after the matter was reserved for orders, and the NCLT merely acted upon that deposit. It argued that the deposit amounted to an and default, and the appellant could not by now challenging the order. The respondent also maintained that the petition was validly instituted by a duly appointed trustee and that the subsequent did not alter the validity of the impugned order.
NCLAT's Legal Analysis: Deposit Not Admission
The NCLAT rejected the respondent's contention that the deposit amounted to an . The bench observed that a deposit expressly made cannot, by itself, be treated as an , particularly when the debtor had already raised specific objections to the of the proceedings. At best, the deposit only indicates , not , which is the threshold for initiating Resolution Process (CIRP).
The tribunal emphasized that the NCLT was duty-bound to adjudicate the objections that were already argued before it. The subsequent deposit did not extinguish those objections.
"The fact that an amount was deposited could be taken into account, but it does not substitute the determination required in a Sec. 7 proceeding, particularly where the existence of debt, default and
had been specifically questioned,"
the bench noted.
Key Observations
-
"A deposit expressly made cannot, by itself, be treated as an of a liability, particularly when the appellant had already raised specific objections to the of the proceedings. At the best it only indicates that the appellant is solvent and not insolvent to initiate CIRP."
-
"The real question, therefore, is not the factum of deposit, but the legal consequence that can be attached to a deposit so made."
-
"If Sec.7 IBC is not a recovery proceeding, it is difficult to hold how can the same debtor, be treated as an insolvent justifying the commencement of a CIRP one for part of the claim and the other for rest of the claim, where both the claims arise out of the same transaction."
-
"Such subsequent computation cannot, by itself, establish a financial debt."
The tribunal also addressed the subsequent , noting that its components were materially different from the original Section 7 claim. It held that the liberty granted to pursue other legally maintainable claims could not amount to an adjudication of those claims, and each component must have a contractual or statutory foundation.
Final Decision and Implications
The NCLAT allowed the appeal and set aside the NCLT's order dated . The matter was remanded back to the for fresh consideration of the Section 7 petition. The respondent was directed to re-deposit the amount to the credit of the case before the NCLT. The tribunal clarified that it was not deciding the merits of the subsequent claim, and the trust remained free to pursue any amount otherwise legally due.
This ruling reinforces the principle that Section 7 proceedings are not recovery mechanisms but gateways to determine . A debtor's voluntary deposit made cannot shortcut the adjudicatory process, and the NCLT must rule on all objections before closing a petition. The decision provides crucial guidance for both creditors and debtors navigating the IBC framework.
