Application U/S 65 Of IBC Can Be Considered Even Before Admission Of Insolvency Petition: NCLAT New Delhi

Brief Facts

This appeal is directed against two orders passed by the NCLT on August 29, 2023 wherein a petition under section 7 and an application under Section 60(5), 65 and 75 of the IBC were dismissed by the NCLT. The appellant filed a petition under section 7 of the IBC to initiate corporate insolvency resolution process against Aravali Cylinders Pvt. Ltd.(corporate debtor) for the debt amount to the tune of Rs. 2,31,00,000 which was dismissed. Second application was filed jointly by Leelawati Mahipal and Sanjay Mahipal, shareholders of the corporate debtor under Section 60(5), 65 and 75 of the IBC on the ground that such application could not be admitted before the admission of the petition under section 7 of the IBC.

Contentions

The appellant contended that the tribunal dismissed the petition under section 7 without providing an opportunity of being heard therefore it violated the principle of natural justice. It was further argued that the appellant should have been heard before dismissing the petition. It was contended that the petition should be restored and remanded back to the NCLT to hear the matter afresh. As far as the dismissal of application under Section 60(5), 65 and 75 of the IBC is concerned, it was contended by the appellant that the tribunal wrongly interpreted the provisions of the IBC and it is not a condition a precedent that an application under Section 60(5), 65 and 75 could not admitted before a petition under section 7 is admitted. They relied on multiple judgments of the wherein it was held that an application under section 65 can be admitted even at the admission stage of CIRP petition.

The appellant referred to the Supreme Court judgment in Beacon Trusteeship Limited Vs. Earthcon Infracon Pvt. Ltd. & Anr (2019) wherein it was held that when allegations of fraud are raised under section 65, the adjudicating authority must address them.

It was further contended that the tribunal is obligated to enquire into allegations of fraudulent or malicious intent under section 65 notwithstanding whether petition for CIRP has been admitted or not.

Per Contra, the respondent conceded that an opportunity of being heard was not given to the appellant but maintained that the petition under section 7 of the IBC was devoid of merit and deserved to be dismissed. It was further submitted that the tribunal was right in rejecting an application under section 65 because no allegations of fraud could be investigated before the forma admission of the petition under section 7 of the IBC.

NCLAT's Analysis

The NCLAT agreed with the contentions of the appellant and held that rejection of the application under section 65 was legally incorrect. Section 65 of the IBC serves major purpose of restricting fraudulent or malicious CIRP petitions from being admitted therefore interpretation given by the NCLT to this provision was not sustainable. The Tribunal referred to the NCLAT judgment in Shree Ambica Rice Mill Vs. Kaneri Agro Industries Ltd.(2021) wherein it was held that it is clear that the Adjudicating Authority is obliged to investigate the nature of the transaction and should be very cautious in admitting the Application in order to prevent taking undue benefit of provisions of IBC to detriment of the rights of legitimate creditors as well as to protect the Corporate Debtor from being dragged into CIRP with malafide.

The Supreme Court judgment in Beacon Trusteeship Limited Vs. Earthcon Infracon Pvt. Ltd. & Anr (2019) was also referred wherein it was held that the plea of collusion could not have been raised for the first time in the appeal before the NCLAT or before this Court in this appeal. This purpose will be defeated if the allegations are left to be examined after the admission of the CIRP petition.

The NCLAT further observed that the principles of natural justice were violated by the NCLT by not providing an opportunity of being while dismissing the petition under section 7 of the IBC. The tribunal further held that since the principle of natural justice was violated, the matter had to be remanded back to the NCLT for fresh consideration. It was held as under:

“The application bearing 1120 of 2022 dismissed by the impugned order is restored and the matter is remanded back to the Tribunal to decide the aforesaid application in accordance with law.”

The NCLAT finally held that:

“Thus, in view of the aforesaid discussion and law laid down by the Hon'ble Supreme Court and this court dismissal of the application by the Tribunal only on this ground that the application has been filed before the admission of the application under Section 7 is not sustainable.”

Conclusion

The NCLAT concluded that an application under section 65 could be maintained even before the admission of the petition under section 7 of the IBC. The tribunal further held that the NCLT erred in not providing an opportunity of being heard to the appellant while dismissing their section 7 petition. Accordingly, the present appeal was allowed and impugned order was set aside.

Case Title: Devashree Developers Pvt. Ltd. and Ors. v. Aravali Cylinders Pvt. Ltd.

Court: National Company Law Appellate Tribunal, New Delhi

Case Reference: Comp. App. (AT) (Ins) No. 1406 of 2023 & I.A. No. 5032 of 2023 with Comp. App. (AT) (Ins) No. 1430 of 2023 & I.A. No. 5118, 5119 of 2023

Judgment Date: 05/08/2024

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