Fraudulent Initiation Of CIRP Can Be Set Aside By NCLAT While Hearing Appeal U/S 61: NCLAT New Delhi

The NCLAT New Delhi bench of Justice Rakesh Kumar Jain (Judicial Member),Mr. Naresh Salecha (Technical Member) and Mr. Indevar Pandey (Technical Member) has held that fraudulent initiation of the CIRP can be set aside by the NCLT or as a corollary by NCLAT also as they have jurisdiction to decide whether any proceeding under the code has been initiated fraudulently or not. In this case, the financial creditor in connivance with the corporate debtor and ex management of the corporate debtor had initiated the CIRP under section 7 of the code.

Brief Facts

This appeal has been filed against an order passed by the NCLT, New Delhi by which an application under section 7 of the IBC was admitted.

The Appellant had let out its premise to Respondent No. 1 (Corporate Debtor) on a rent of Rs. 17,00,000/- p.m for a period of three years from 01.03.2016 to 28.02.2019 which was increased from 01.03.2019 to the tune of Rs. 19,55,000. When Respondent No. 1 defaulted in payment of the rent and other charges it filed a petition under Section 9 of the Code for the resolution of an amount of Rs. 1,13,57,341/- outstanding as on 19.03.2019.

The said application was dismissed on 18.03.2020, inter alia, on the ground that outstanding rent does not fall within the definition of operational debt and that there was a pre-existing dispute between the parties.

The Appellant has recovered the possession of the premise let out to Respondent No. 1 through a suit filed before the Hon'ble High Court of Delhi.

In order to circumvent the proceedings initiated by the Appellant in the suit, a collusive application bearing CP (IB) No. 228/ND/2022 under Section 7 of the Code has been filed in which the impugned order has been passed to which the Appellant was not a party and about which the Appellant came to know, from public announcement made by the IRP about the CIRP of the CD.

Thereafter, It filed the claim on Form B for an a mount of Rs. 17,41,09,137/- and without prejudice to the filing of the claim, the Appellant the Appellant has filed the present appeal seeking setting aside of the impugned order on the ground that it has been obtained by Respondent No. 2 (Assignee) in collusion with exmanagement and shareholder of Respondent No. 1 by initiating the CIRP for a purpose other than the resolution to defraud the appellant and other creditors.

Contentions

The appellant submitted that it is a clear case of collusion and connivance between Respondent No. 1 and 2 as debt and default has been admitted by Respondent No. 1 before the Tribunal without contesting the application at all and no appeal was filed by the suspended directors of the CD.

It was also submitted that all three respondents are related to each other as respondent no. 3 holds shares in each of the companies.

It was further submitted that if the outstanding loan of Rs. 11,08,94,834/- assigned to Respondent No. 2 by agreement dated 10.02.2020 then why Navayuga in its financial statement of the year 2018- 19 and 2019 to 2020 did not reflect the loan amount as the loan given to Respondent No. 1 under loan and advances.

Per contra, the Respondents submitted that at one time the appellant wanted to drag the corporate debtor into the insolvency and when their application was dismissed then only they are raising grievances that there is a collusion among the respondents.

It was further submitted that claims have already been filed before the IRP by the appellant which estoppes them from assailing the same CIRP in the present appeal. Just because there is a common shareholder of Respondent No. 1 and Respondent No. 2 this will not make it a case of related party under section 5 (24) of the IBC.

NCLAT's Analysis

The tribunal firstly addressed the contention whether the Respondent No. 1 and 2 are related party for which Note 3 of the Audit Report was referred which provides that 'loans and advances from related parties' is Rs. 11,08,94,834/- which is the amount in question for which the application has been filed by Respondent No. 2. This amount has been assigned by way of an agreement dated 10.02.2020 on the basis of which the application under Section 7 has been filed,

It was observed that Respondent No. 3 who happened to be a director and shareholder in all three companies and that too with a significant shareholdings makes it a case of related party therefore this case shall come within Section 5(24)(m)(i) and (iii) of the Code as Respondent No. 3 is controlling more than 20% of the voting share of these companies and also the assignor.

The tribunal noted that it has been held by the Hon'ble Supreme Court in the case of Phoenix ARC (P) Ltd. Vs Spade Financial Services Ltd, (2021) that amount disbursed to third party that too by the related party will not qualify as a financial debt under the Code.

The tribunal referred to its own judgment in Hytone Merchants Pvt. Ltd. Vs. Satabadi Investment Consultants Pvt. Ltd.,2021 wherein it was held that if collusion is proved, CIRP can be set aside even if the ingredients of section 7 are satisfied. In the present case, the appellant has made a specific case about the presence of the respondent no. 3 in all three companies as shareholders which has not specifically been denied by the respondents in their reply.

Having noticed the sequence of events, it was observed that it cannot be said that he was not a related party especially when it is incorporated in the financial statement of the CD much less Note 3 of the audit report that long term borrowings the amount in question, is taken from the related parties.Moreover, neither the application under Section 7 was contested by Respondent No. 1 nor any appeal has been filed against the impugned order which means that it was just an eyewash.

In Embassy Property Development Pvt. Ltd. v. State of Karnataka and Others, (2019) the Supreme Court has held that the NCLT and NCLAT would have jurisdiction to enquire into the fraudulent initiation of proceedings under the code.

The court in above case has held that “NCLT is vested with the power to inquire into (i) fraudulent initiation of proceedings as well as (ii) fraudulent transactions. It is significant to note that Section 65(1) deals with a situation where CIRP is initiated fraudulently "for any purpose other than for the resolution of insolvency or liquidation".Therefore, it is clear that NCLT has jurisdiction to enquire into allegations of fraud. As a corollary, NCLAT will also have jurisdiction. Hence, fraudulent initiation of CIRP cannot be a ground to bypass the alternative remedy of appeal provided in Section 61.”

Since in the present case, it has been clearly established that the CIRP was fraudulently initiated in collusion and connivance with the related parties therefore it was observed that “the petition filed by Respondent No. 2 against Respondent No. 1 was collusive and for a purpose other than for the resolution of insolvency.” Accordingly, the present appeal was allowed.

Case Title: Apnaghar Builders Pvt. Ltd. Versus Intense Fitness & Spa Pvt. Ltd. & Ors.

Case Number: Comp. App. (AT) (Ins.) No. 1025 of 2022 & I.A. No. 2964, 2965, 2966 of 2022

Date Of Judgment: 28/11/2024

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