Supreme Court questions genuineness of financial claim and pulls up NCLT over delay in resolution plan approvals

Background of the dispute

The proceedings in AVJ Heightss Apartment Owners Association Vs IIFL Finance Limited & Anr. (Supreme Court of India) arise from two connected appeals challenging a common order of the National Company Law Appellate Tribunal (NCLAT). The NCLAT had affirmed the decision of the National Company Law Tribunal (NCLT) directing that the claim of a financial creditor, India Infoline Finance Limited (IIFL), be taken into account by the Resolution Professional (RP) in the CIRP of M/s AVJ Developers (India) Private Limited.

Two appellants approached the Supreme Court:

  • AVJ Heightss Apartment Owners Association; and
  • One of the suspended Directors of the corporate debtor, M/s AVJ Developers (India) Private Limited.

Both were aggrieved by the NCLAT’s direction that the RP must consider IIFL’s financial claim in the ongoing insolvency process.

The central controversy concerns the admissibility and authenticity of IIFL’s claimed financial debt of Rs. 85,00,00,000/- with interest, which:

  1. Was initially rejected by the Resolution Professional on 24.01.2020 on the ground that the claim could not be corroborated from the corporate debtor’s records;
  2. Was thereafter allowed by the NCLT, which directed that the claim be accepted in the CIRP; and
  3. The NCLAT, in turn, dismissed the appeal by the AVJ Heightss Apartment Owners Association on 02.01.2023 and sustained the NCLT’s order.

Before the Supreme Court, the appellants argued that IIFL’s claim was entirely sham and fabricated, raising numerous objections on facts and documents. During the hearing, a significant supervening development was brought to the Court’s notice: an arbitral award dated 03.07.2024 passed in arbitration proceedings initiated by IIFL itself concerning the very same Rs. 85 crore loan transaction.

Parties and procedural history

Appeals before the Supreme Court

The Supreme Court was dealing with:

  • An appeal filed by AVJ Heightss Apartment Owners Association; and
  • A connected appeal filed by a suspended Director of the corporate debtor.

Both appeals emanated from the same NCLAT judgment dated 02.01.2023 in Company Appeal No.626/2021, which in turn related to the NCLT order dated 20.05.2021 in I.A. No.1261/2020 in CP (IB) No.654 (PB)/2019, titled:

“M/s. Vishal Fabrics & Ors. vs. M/s. AVJ Developers (India) Private Limited”

The NCLT had directed that the claim of IIFL be recognised and considered by the RP in the CIRP of AVJ Developers (India) Private Limited, and the NCLAT upheld that direction.

Rejection of IIFL’s claim by the RP

The materials on record showed that on 24.01.2020, the RP rejected IIFL’s claim because:

  • The RP could not verify the existence or quantum of the claim from the records of the corporate debtor;
  • Consequently, the debt claimed by IIFL was not admitted into the CIRP at the initial stage.

IIFL challenged this rejection before the NCLT, which ruled in its favour. The apartment owners’ association then filed an appeal before the NCLAT, which dismissed the appeal and confirmed the NCLT’s decision. These appellate findings triggered the present appeals before the Supreme Court.

Arbitral proceedings on the same Rs. 85 crore claim

Arbitral award dated 03.07.2024

During the Supreme Court hearing, both counsel for the appellants and counsel for the RP produced an arbitral award dated 03.07.2024. This award arose from arbitration proceedings commenced by IIFL concerning its claim of Rs. 85,00,00,000/- (Rupees Eighty Five Crore only) along with interest.

The Supreme Court extracted and recorded key portions of the arbitral tribunal’s findings, which cast serious doubt on the loan transaction and the supporting documentation relied upon by IIFL.

Key arbitral findings raising questions on the loan transaction

Disbursement pattern versus sanction terms

The arbitral tribunal recorded that, as per IIFL’s own records, the alleged Rs. 85 crore loan was shown as disbursed on 30.09.2017 as follows:

  • INR 18,38,85,621.00 to CL-151
  • INR 56,83,34,016.00 to CL-152
  • INR 9,77,80,360.00 to CL-252

All these loan accounts were in the name of M/s AVJ Developers (India) Pvt. Ltd.

However, as per the sanction letter C-5, the loan was supposed to be disbursed into account CL-288. Notably:

  • IIFL did not produce any ledger pertaining to CL-288.
  • Instead, an instruction letter R-33 dated 04.10.2017, signed by Rahul Doshi (IIFL’s witness), directed HDFC Bank to transfer Rs. 85 crore from **AVJ Developers (India) Pvt. Ltd. Escrow Account No.