NCLAT Slams Fraudulent CIRP to Evade Taxes, Upholds Rs. 10 Lakh Penalty Under Section 65 IBC
NCLAT Slams Fraudulent CIRP to Evade Taxes, Upholds Rs. 10 Lakh Penalty Under Section 65 IBC
Introduction
The NCLAT, New Delhi, held that initiation of Corporate Insolvency Resolution Process (CIRP) with the intent to evade tax liabilities amounts to fraud under Section 65 of the Insolvency and Bankruptcy Code, 2016. The Tribunal upheld the termination of CIRP and imposition of penalty, emphasizing that insolvency proceedings cannot be misused as a shield against statutory dues.
Factual Background
The case arose from a Section 9 application filed by Gopal Trading Company claiming an operational debt of Rs. 3.80 crore against Matrushri Fibres Pvt. Ltd. The CIRP was admitted on 25 September 2023. The Committee of Creditors consisted primarily of tax authorities, namely the Assistant Commissioner of GST and the Assistant Commissioner of State Tax, holding an overwhelming majority of voting share. During the CIRP, the Resolution Professional faced persistent non-cooperation from the suspended management, which failed to provide statutory records. Additionally, the operational creditor delayed depositing CIRP costs and only made partial payment after contempt proceedings were initiated.
Procedural Background
Due to stagnation of the CIRP, the Resolution Professional filed applications seeking termination of the process and initiation of proceedings under Section 65 of the Code for fraudulent initiation of CIRP. The NCLT Ahmedabad allowed the applications, terminated the CIRP, imposed a penalty of ₹10 lakh on the operational creditor, and directed payment of CIRP costs. Aggrieved, Gopal Trading Company filed an appeal before the NCLAT.
Issues
1. Whether initiation of CIRP to evade tax liabilities constitutes fraud under Section 65 of the IBC.
2. Whether the Adjudicating Authority can invoke Section 65 after admission of CIRP.
Contentions of Parties
The appellant contended that it was a small company facing financial hardship and that the imposition of penalty and CIRP costs caused grave prejudice. It argued that the delay and stagnation of the CIRP were attributable to the non-cooperation of the suspended management and not to any fault on its part. It further submitted that once the CIRP had been admitted, the Adjudicating Authority could not subsequently declare the proceedings as fraudulent. The respondents, on the other hand, supported the findings of the NCLT, contending that the CIRP was initiated with mala fide intent to avoid tax liabilities and that the conduct of the appellant demonstrated lack of bona fide participation in the insolvency process.
Reasoning and Analysis
The Bench comprising Judicial Member Justice Ashok Bhushan and Technical Member Barun Mitra held that Section 65 of the IBC is intended to prevent misuse of insolvency proceedings and can be invoked at any stage, including after admission of CIRP. It rejected the contention that there exists any temporal limitation on invoking Section 65. The Tribunal noted that the timing of the CIRP admission, coupled with the surrounding circumstances, clearly indicated that the proceedings were initiated to circumvent tax liabilities and take advantage of the moratorium. It further observed that the appellant failed to participate meaningfully in the CIRP after initiation, including failure to file claims and pursue the process, thereby undermining the genuineness of the insolvency proceedings.
The Tribunal also took note of the close relationship between the appellant and the corporate debtor, observing that the appellant had previously served as a director and shared familial ties with the management. This, combined with the conduct of the appellant, reinforced the inference of collusion and fraudulent intent. The Tribunal concluded that the CIRP was not initiated for genuine resolution but as a device to stall statutory recovery, thereby attracting Section 65.
Decision
The NCLAT dismissed the appeal and upheld the order of the NCLT terminating the CIRP, imposing a penalty of Rs. 10 lakh on the appellant, and directing payment of CIRP costs.
In this case the appellant was represented by Advocates Karan Valecha and A Dwivedi.
