Tribunal rules that insolvency proceedings cannot be misused to settle family disputes or exert pressure in unresolved family matters.
In a significant ruling, the National Company Law Tribunal (NCLT), Indore Bench, dismissed an insolvency petition filed by Mr. Prakash Chuhardas Khatri against Indore Glass House Private Limited. The tribunal emphasized that insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016, are not intended as a tool to settle family disputes or recover disputed financial claims.
The case stemmed from Mr. Khatri’s application seeking the initiation of Corporate Insolvency Resolution Process (CIRP) against M/s. Indore Glass House Pvt. Ltd., alleging default on a financial debt of INR 4.21 crore. The alleged debt consisted of a principal amount of INR 2.85 crore and accrued interest of INR 1.36 crore. However, the tribunal found that the nature of the transaction and the existence of a financial debt were disputed, primarily because the transactions occurred amidst ongoing family disputes over property and business interests.
The bench, comprising Mr. Brajendra Mani Tripathi and Mr. Man Mohan Gupta, observed that the absence of a written agreement, repayment schedule, or evidence of the time value of money precluded the classification of the transaction as a financial debt. The tribunal noted that entries in the balance sheet and mere acknowledgments of receipt of funds do not suffice to establish a financial debt when the nature of the transaction is contested, especially in a family setting.
The tribunal highlighted that the alleged financial transactions occurred between family members and lacked formal documentation, such as a loan agreement or a defined repayment schedule. The tribunal stressed that such disputes are better resolved in a civil court rather than through summary insolvency proceedings.
Moreover, the tribunal noted that Mr. Khatri had already initiated a civil suit for partition concerning the family business and properties, which included Indore Glass House Pvt. Ltd. as part of the Hindu Undivided Family (HUF) property. This civil suit underscored the ongoing family dispute, further complicating the insolvency proceedings.
The tribunal concluded that no financial debt or default, as defined under the Insolvency and Bankruptcy Code, was established. Additionally, it emphasized that insolvency proceedings are designed for genuine cases of insolvency where financial debt and default are clearly demonstrated, not for exerting pressure in family conflicts.
In light of these findings, the NCLT dismissed the petition filed by Mr. Khatri, reiterating the principle that insolvency proceedings should not be misused to resolve familial disputes or other non-insolvency-related issues.
Bottom Line :
Insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 cannot be used as a tool to resolve family disputes or recover money in cases where the nature of the transaction and the existence of a financial debt are disputed.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Sections 3(12), 5(8), 7
