Fraudulent Initiation Of CIRP, NCLAT Upholds Issuance Of Show Cause Notice To Related Parties

Background Facts

M/s. Par Excellence Real Estate Pvt. Ltd. ("Corporate Debtor") had obtained a loan amounting to Rs.7 Crores from IndiaBulls and the Director of Zoom Communications Pvt. Ltd., Mr. Gulshan Kumar Jhurani, was a co-applicant in the said loan. A petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 ("IBC") was filed by Zoom Communications Pvt. Ltd. ("Operational Creditor"), seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against the Corporate Debtor, over an unpaid invoice of Rs. 57,25,000/-, which the Operational Creditor had allegedly paid towards the processing fee for procuring the loan for the Corporate Debtor.

The Adjudicating Authority vide an order dated 17.05.2022 dismissed the petition and took the view that the Operational Creditor and the Corporate Debtor were having common director, namely Mr. Gulshan Kumar Jhurani. Upon piercing of Corporate Veil the Adjudicating Authority held that the Parties were related parties and the transaction was a sham transaction.

It was observed that Proviso to Section 21(2) of IBC, states that no right of representation, participation or to vote has been granted to a 'Related Party' on initiation of CIRP of the Corporate Debtor.

"Since, the said transaction has turned out to be a sham transaction, we are of the considered view that both the parties are in collusion and the present Application has not been filed for the resolution of Insolvency rather, the parties have attempted to kickstart the CIR Process with a malicious intent for a purpose other than the resolution of insolvency of the Corporate Debtor, which is not permissible under the IBC 2016."

The Adjudicating Authority issued a Show Cause Notice (SCN) to the Appellant, Corporate Debtor and to Mr. Gulshan Kumar Jhurani to show cause as to why the penalty as stipulated under Section 65(1) of IBC, 2016 shall not be imposed on them.

The Appellant filed an appeal before the NCLAT against the order dated 17.05.2022.

Contentions Of The Appellant

The Operational Creditor (Appellant) submitted that the present management who had filed Section 9 Petition was not aware about Mr. Gulshan Kumar Jhurani being a related party of the Corporate Debtor. Further, the show-cause notice issued under Section 65(1) was mere formality since findings and observations have already been made in the impugned order. Hence, the show-cause notice would not serve any purpose.

Contentions Of The Respondent

The Respondent argued that the balance sheet of the Corporate Debtor for the year 2017-18 clearly mentioned that Mr. Gulshan Kumar Jhurani was Director of both the Corporate Debtor as well as the Operational Creditor.

DECISION OF THE NCLAT

The Bench observed that when both Operational Creditor and Corporate Debtor were Co-Applicants for the loan, then the Operational Creditor cannot claim payment of fee for procuring the loan. The Bench held that the Adjudicating Authority had sufficient reason to believe that debt itself was doubtful. Accordingly the order dated 17.05.2022 was upheld and the Adjudicating Authority was directed to consider the reply filed by the Parties to the SCN while passing an order on the same.

Case Title: Zoom Communications Pvt. Ltd. v M/s. Par Excellence Real Estate Pvt. Ltd., Comp. App. (AT) (Ins.) No. 619 of 2022

Counsel For Appellant: Mr. Mohit Sethi, Mr. Nikhil Singhvi, Advocates.

Counsel For Respondent: Mr. Vikas Mehta, Ms. Akanksha Vigyan, Mr. Jishnu Bhardwaj, Advocates.

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