NCLT Jaipur Imposes Rs 5 Lakh Cost On Jaipur Company for Malicious Voluntary Insolvency Plea

The National Company Law Tribunal (NCLT) at Jaipur has imposed a cost of Rs. 5 lakh on a Jaipur-based company after holding that it had misused the insolvency process to block recovery action by State Bank of India.

The tribunal dismissed the insolvency petition filed by M.D. Suitings Pvt. Ltd. for its own insolvency under Section 10 of the Insolvency and Bankruptcy Code, finding it to be fraudulent and malicious.

The order was passed by a bench of Judicial Member Reeta Kohli and Technical Member Kavita Bhatnagar. The tribunal accepted SBI's case that the insolvency plea was filed only to trigger a moratorium and stall recovery proceedings.

It observed, “We therefore find substance in the contention of the Applicant that the CD had filed Section 10 Petition to derail the recovery process of the Bank since moratorium would have been imposed if Section 10 Petition had been admitted which would have had the effect of prohibiting institution or continuation of pending suits or proceedings before any Court or Tribunal including DRT.”

M.D. Suitings had approached the tribunal seeking initiation of insolvency proceedings against itself for resolution of its debts. SBI opposed the plea. The bank said it had extended multiple credit facilities to the company, secured by mortgage and hypothecation over movable and immovable assets, including plant and machinery. As of March 8, 2023, about Rs. 15.34 crore was outstanding.

According to the bank, an inspection in February 2022 showed that the company had stopped production and sold its plant and machinery without permission, even though the assets were hypothecated. The sale proceeds were not used to repay bank dues and were diverted elsewhere. SBI had already issued a demand notice under SARFAESI and lodged an FIR alleging criminal breach of trust and misappropriation.

The bank also relied on a forensic audit, which flagged serious irregularities. It said company funds were diverted to the personal accounts of directors, machinery was sold without the bank's consent, unsecured loans were repaid before clearing bank dues, money was routed through different accounts, and transactions were carried out with sister concerns.

The tribunal said the company had not approached it with clean hands. It noted that the hypothecated assets were sold without prior permission and the proceeds were not used to clear bank dues.

Holding that the case squarely fell within Section 65 of the Insolvency and Bankruptcy Code, the tribunal concluded that the petition was filed with malicious and fraudulent intent for purpose other than resolution of insolvency.

It dismissed it with a direction to deposit Rs. 5 lakh in the Prime Minister's Relief Fund.

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