Suspecting Prima Facie Case Of Collusion Between Promoters & Petitioners, SC Stays Insolvency Proceedings At NCLT, Mumbai [Read Order]

The Supreme Court recently stayed proceedings in a matter at the National Company Law Tribunal's Mumbai bench observing that there seems to be a prima facie case of a collusive effort between the promoters and the petitioners.

The division bench of Justice Rohinton F Nariman and Justice Navin Sinha made the observation while hearing a civil appeal filed by investors of a collective investment scheme run by two companies namely Royal Twinkle Star Club Ltd and Citrus Check Inns Ltd.

Senior advocates Shyam Divan and Sanjiv Sen along with Amit Karkhanis and Rahul Gaikwad of Gravitas Legal appeared on behalf of the investors in the matter.

Case Background

Ten of the investors in this collective investment scheme filed intervention applications before NCLT, Mumbai, after a petition for initiating corporate insolvency resolution process was admitted by NCLT. This petition was filed by investors of Royal Twinkle Star Club Ltd and Citrus Check Inns Ltd.

Once their intervention application was rejected on technical grounds at NCLT, investors moved NCLAT but even there the application was rejected. Then, the investors moved to the Supreme Court in appeal.

The investors of the scheme alleged that under the scheme, a total of 18 lakh investors had put in Rs.7500 crores of their savings and NCLT was not informed about certain rulings of SEBI and SAT.

The market regulator had directed the four directors of Royal Twinkle Star Club Ltd (RTSC) to refund investors' money within three months. The money was collected under various holiday plans, which promised cashbacks if the investors did not utilise them. SEBI asked RTSC and its directors to refrain from garnering money under the Collective Investment Scheme (CIS), and barred them from accessing markets for four years in 2016.

In its 2015 order, SEBI had said: "The company and its directors are restricted from disposing off any assets, except for refunding money to investors."

SAT upheld SEBI's ruling and banned the scheme.

Court Order

It was submitted on behalf of the investors before the apex court that the very fact that respondent did not object when an Insolvency Resolution Professional (IRP) was appointed in the matter points to collusion between promoters and investors.

"It has also been pointed out to us that the entire object of the present exercise, under the Insolvency Code, is a collusive effort between the parties concerned (as is evident from the fact that respondent No.2 did not object to the Insolvency Resolution Professional (IRP) being appointed, as is reflected in the order dated 02.05.2017.) We are, therefore, of the view that prima facie, this appears to be correct and further proceedings under the Insolvency Code are directed to be stayed forthwith," the court said.

It also directed the IRP to file a report detailing work done so far in the case.