NCLAT: Insolvency application can be rejected if It Is filed collusively

NCLAT: Insolvency application can be rejected if It Is filed collusively

Tribunal said that the Adjudicating Authority may impose a penalty if a person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent

The National Company Law Appellate Tribunal (NCLAT) dismissed an appeal filed against the order of the National Company Law Tribunal (NCLT) at Kolkata Bench, which rejected the Application u/S. 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) on the ground that Respondent – Corporate Debtor colluded with the Appellant – Financial Creditor to escape its liability as a corporate guarantor.

The matter titled Hytone Merchants Pvt Ltd v Satabadi Investment Consultants Pvt Ltd was placed before the Division Bench of NCLAT at New Delhi comprising of Justice A.I.S. Cheema and V.P. Singh.

The facts of the case were that a loan of Rs 3,00,000 was sought from the Appellant – Financial Creditor by the Respondent – Corporate Debtor for six months carrying interest at the rate of 15 per cent per annum on 15 February 2019. But due to business losses and economic recession, the Corporate Debtor was not able to recover and thus was unable to repay the loan. Therefore, the Financial Creditor proceeded with an Application u/S 7 of the IBC against the Corporate Debtor. The Application was rejected on the finding of purported collusion by the NCLT, Kolkata bench based on the assumption regarding the financial position of the Corporate Debtor based on the Corporate Debtor's financial statement for 2018-2019 and the Corporate Debtor's Master Data available on the MCA portal.

The Appellant – Financial Creditor submitted that the NCLT had no discretion except to admit the Application filed u/S 7 of the Code when the petition fulfils all the ingredients of Section 7 of IBC. The Respondent – Corporate Debtor sought necessary clarification about the balance sheet, regarding the Company's net worth being Rs 15,36,39,015 as per the financial statement of 2018 -19. The bench, however, observed that still, in the present situation when the order was passed, the Company's position is starkly deteriorated and is unable to repay the loan.

The Corporate Debtor admitted that it had made a substantial investment in M/s Kohinoor Pulp and Paper Private Limited and Kohinoor Paper and Newsprint Private Limited. Kohinoor Pulp and Paper Private Limited is under liquidation, and Kohinoor Paper and Newsprint Private Limited is under this Corporate Insolvency Resolution Process wherein an Application has already been filed to initiate the liquidation process. Master data of the Corporate Debtor further reflects that the Corporate Debtor had extended the corporate guarantee of Rs 482,42,00,000 and the Company's net worth is Rs 15,36,39,015.

The Division Bench observed that the petition complied with all requirements of Section 7(5) of the IBC. Section 7 (5) of the Code provides that 'where the Adjudicating Authority is satisfied that in default has occurred and the Application under Sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed Resolution Professional, it may, by order, admit such Application.' The bench observed the following while dealing with this Section:

"The use of the phrase 'it may' under Sub-section (5) of section 7 itself leaves the scope of discretion exercised by the Adjudicating Authority in admitting or rejecting the Application. Section 7 (5) (a) lays down parameters about general conditions to admit an Application. However, in the given situation where it appears that Application is filed collusively not with the purpose of Insolvency Resolution but otherwise, then despite fulfilling all the conditions of Section 7(5) of the Code, the Adjudicating Authority can exercise its discretion in rejecting the Application relying on Section 65 of the Code."

It went on to observe that Section 65 of the IBC explicitly says that if any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for resolution of Insolvency or liquidation, as the case may, the Adjudicating Authority may impose a penalty.

The Division Bench further stated that that the Adjudicating Authority should be very cautious in admitting the Application so that Corporate Debtor cannot be dragged into Corporate Insolvency Resolution Process with mala fide for any purpose other than the resolution of the insolvency. Therefore, to protect the Corporate Debtor from the mala fide Initiation of CIRP, the law has provided a penalty under sections 65 and 75 of the Code.

"Before admitting the Application, every precaution is necessary to be exercised so that the insolvency process is not misused for any purposes other than the resolution of insolvency," the bench observed.

The bench further observed that even if the petition complied with all requirements of Section 7 of the Insolvency and Bankruptcy Code, 2016, it was filed collusively, not with the intention of Resolution of Insolvency but otherwise. Therefore, it is not mandatory to admit the Application to save the Corporate Debtor from being dragged into Corporate Insolvency Resolution Process with mala fide.

The concept of corporate entity was also highlighted by the bench where it stated that this concept was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. The Court may ignore the corporate character and will look at the reality behind where the corporate character is employed for the purpose of committing illegality or for defrauding others. The bench also dealt with Section 29-A of the IBC wherein it observed that the expression 'acting jointly' in the opening sentence of Section 29-A cannot be confused with 'joint venture agreements.'

The Division Bench concluded that the plausible contention cannot be ruled out that the Corporate Debtor colluded with the Financial Creditor to escape its liability as a corporate guarantor since the Master Data of the Corporate Debtor reflects that the Corporate Debtor is also a Corporate Guarantor and has extended the Corporate Guarantee of a considerable amount worth Rs 482,42,00,000. Therefore, this Appeal was dismissed under these circumstances.