Stage of CIRP Inconsequential in Considering Section 65 Application: NCLAT

Stage of CIRP Inconsequential in Considering Section 65 Application: NCLAT

Introduction

The National Company Law Appellate Tribunal (NCLAT) New Delhi bench, comprising Justice N Seshasayee (Judicial Member) and Mr. Arun Baroka (Technical Member), has held that the stage at which an application under Section 65 of the Insolvency and Bankruptcy Code (IBC) is considered is inconsequential, and if fraud in initiating insolvency proceedings is proved, the entire proceedings stand vitiated.

Factual Background

The present appeal was filed by Expert Realty Professionals Private Limited against an order passed by the National Company Law Tribunal (NCLT) New Delhi, which had dismissed the insolvency plea against Logix Infrastructure Private Limited. The Appellant had invested ₹15 crores in Logix's project under a Memorandum of Understanding (MoU) with a buyback arrangement.

Procedural Background

The NCLT had recalled the corporate insolvency resolution process (CIRP) against Logix Infrastructure, holding that the petition under the IBC was fraudulent and aimed at protecting Logix from its dues to homebuyers and the Noida authority. The Appellant appealed to the NCLAT, arguing that the application under Section 65 was filed at a belated stage and was not maintainable.

Issues

The main issue before the NCLAT was whether the application under Section 65 of the IBC was maintainable, and whether the Adjudicating Authority had jurisdiction to consider allegations of fraud and collusion.

Contentions of the Parties

Appellant: The Appellant argued that merely being a related party is not sufficient to attract Section 65, and that the application was filed at a belated stage.

Respondents: The Respondents submitted that the prompt response of Logix in admitting liability reflects a malicious and fraudulent approach adopted by the parties to release Logix of its obligations to other creditors and allottees.

Reasoning and Analysis

The NCLAT held that:

• Fraud Vitiates Everything: If there is fraud, it will vitiate everything, including the order approving the resolution plan.
• Stage of CIRP Inconsequential: The stage of CIRP is inconsequential while considering the Section 65 application.
• Related Party Status: The companies were found to be "related parties" under the IBC, and the non-disclosure of this relationship was a strong indicator of fraud.

Implications

The NCLAT's decision has significant implications for the use of the IBC as a tool for recovery or collusive purposes. It emphasizes the importance of maintaining the integrity of the insolvency process and preventing its misuse.

Relief Sought

The Appellant sought to set aside the impugned order passed by the NCLT, while the Respondents sought to uphold the order and dismiss the appeal.

In this case the appellant was represented by Mr. Sunil Fennandes, Sr. Advocate with Mr. Ketan Madan and Ms. Muskan Surana, Advocates. Meanwhile the respondent was represented by Mr. Gaurav Rana and Mr. Ajitesh Kumar, Advocates for R-2 & 3 along with Mr. Rishi Singhal, Mr. Pawan Kr. Goyal and Ms. Reena, Advocates for RP/R-1.