NCLAT Rules Pendency of CIRP Commences Upon Filing of Section 7 Application for the Purpose of Section 60(2) IBC Jurisdiction

The appeal before the  National Company Law Appellate Tribunal (NCLAT) was instituted by Mr. S. Vasudevan, the Suspended Director of M/s. Tuscan Consultants and Developers Private Limited (the Corporate Debtor/CD). The Appellant challenged the Impugned Order dated October 9, 2023, passed by the Adjudicating Authority (NCLT Chennai) which had admitted the Section 7 application filed by Respondent No. 1, IDBI Trusteeship Services Limited (Financial Creditor).

Overriding the Appellant’s contention that jurisdiction under Section 60(2) is attracted only upon the commencement (admission) of the Corporate Insolvency Resolution Process (CIRP) of the Principal Borrower, the Ld. NCLAT held that CIRP proceedings are considered “pending” for the purpose of Section 60(2) from the date of initiation, i.e., the date of filing the Section 7 application. This ruling ensures that proceedings related to the Principal Borrower and the Corporate Guarantor arising from the same transaction are adjudicated before a single forum, thereby avoiding multiplicity of proceedings and potential conflicts.

The controversy arose from a default under a Debenture Trust Deed (DTD) dated June 29, 2016, executed between the Financial Creditor and Ozone Projects Pvt Ltd. (the Principal Borrower). The CD (Tuscan Consultants) had provided an unconditional and irrevocable Corporate Guarantee Agreement on the same date. Following the Principal Borrower’s failure to pay, the Financial Creditor initiated Section 7 applications against both the Principal Borrower (Ozone Projects) and the Corporate Debtor (Tuscan Consultants) before the Ld. National Company Law Tribunal (NCLT), Chennai.

The following chronology was critical to the case:

• • August 5, 2022: Section 7 application filed against the Principal Borrower (Ozone Projects)

• • September 19, 2022: Section 7 application filed against the Corporate Debtor (Tuscan Consultants)

• • May 1, 2023: NCLT admitted the Section 7 application against the Principal Borrower

• • May 10, 2023: NCLAT granted an interim order in the appeal filed by Ozone Projects’ Suspended Director, keeping further CIRP proceedings in abeyance

• • October 9, 2023: NCLT admitted the Section 7 application against the Corporate Debtor (impugned order)

The Appellant contended that since the CD’s registered office was located in Bangalore, the Section 7 application should have been filed before NCLT Bangalore, pursuant to Section 60(1) of the Insolvency and Bankruptcy Code (IBC). The Appellant argued that Section 60(2), which provides an exception, was not applicable because, on the date of filing against the Corporate Debtor (September 19, 2022), the CIRP against the Principal Borrower had not yet commenced (as commencement date was May 1, 2023). Thus, according to the Appellant, only a mere Section 7 application was “pending”, which did not qualify as “CIRP or liquidation proceeding pending” under Section 60(2).

The Ld. NCLAT rejected the Appellant’s interpretation, relying on the statutory objective and the definitions provided within the Code.

1. Distinction between Initiation and Commencement: The Appellate Tribunal noted that while the Code defines “initiation date” (date of application filing under Section 5(11)) and “insolvency commencement date” (date of admission under Section 5(12)), these terms have distinct meanings. Initiation means the start of proceedings by filing, while commencement starts only upon the Adjudicating Authority admitting the application under Section 7(5).

2. Meaning of ‘Pending’ in Section 60(2): The NCLAT held that for the purpose of Section 60(2), the term “pending” refers to the period from the date of starting the proceedings (date of initiation) by filing the application until it is concluded. Drawing on judicial precedent defining ‘pending’ as a legal proceeding that has commenced and is not yet concluded, the Ld. Tribunal concluded that the filing of the Section 7 application against the Principal Borrower on August 5, 2022, meant that the proceedings were already “pending” adjudication before the Ld. NCLT Chennai when the application against the Corporate Debtor was filed on September 19, 2022.

3. Objective of Section 60(2): The tribunal emphasized that the exception under Section 60(2) is carved out to ensure that the insolvency of the corporate debtor and its guarantor are grouped together and dealt with by a single forum. This avoids conflicting decisions and multiplicity of forums, especially when the liabilities flow from common documents, such as the Debenture Trust Deed in this case.

This judgment offers vital clarity on Section 60(2) of the IBC, confirming that insolvency proceedings against guarantors can be initiated at the same NCLT where the principal borrower’s case is pending, regardless of jurisdiction. It streamlines the process for financial creditors, reinforces procedural efficiency, and curbs forum-shopping. It is a welcome step toward cohesive and speedy resolution of interconnected insolvency matters.