Admission Order Of Application U/S 7 Of IBC Can Be Recalled If Fraud Or Malicious Intent Is Proved U/S 65 Of Code: NCLAT

The NCLAT New Delhi bench of Justice Ashok Bhushan (Judicial Member), Mr. Barun Mita (Technical Member) and Mr. Arun Baroka (Technical Member) has held that when CIRP proceedings are initiated fraudulently or maliciously, the Adjudicating Authority has jurisdiction under the IBC to consider the allegations of fraudulent and malicious initiation of CIRP proceedings in terms of Section 65 and recall the CIRP admission order.Brief FactsThe appellants filed an application under section 7 of the code which came to be admitted by the NCLT. In the CIRP of the corporate debtor, a resolution plan was also approved by the CoC and an application seeking approval of the plan was also filed by the RP before the Adjudicating Authority. The respondent stated that the insolvency process was initiated fraudulently or maliciously as the appellants colluded with the promoters of the corporate debtor. An application for oppression and management filed by the respondent against the reduction of its shares in the CD was also allowed. An application filed by the respondent under section 65 of the code was allowed and the CIRP was terminated. This appeal has been filed against this order.Contentions:The appellants submitted that the CIRP admission order of 17.05.2022 not having been challenged by the Appellant, the same had already attained finality. Since appeal against this order stood time barred, with a view to indirectly challenge the CIRP initiation order, the Respondent took recourse to file Section 65 application vide IA No. 3602 of 2022. Recall of the CIRP order of 17.05.2022 was violative of the settled principles of law under IBC.It was also argued that the Appellants were not even a party to the OMP filed by the Respondent and hence were unaware of the facts and circumstances pertaining to the OMP petition therefore it was denied that the Appellants had filed the Section 7 petition to pre-empt the likely success of the Respondents in the OMP filed by them.It was further submitted that Section 65 application cannot sustain merely on the basis of assertion of fraud and malice without any cogent evidence. It was added that the allegation made by the Respondent that the purpose behind filing of the Section 7 by the Financial Creditors was propelled by malicious intent to defeat the rights of the Respondent which were likely to be restored to them under the OMP was based on surmises and conjectures.Per contra, the respondents submitted that the promoters of the Corporate Debtor on realising that they were on a weak footing in the OMP and that the present Respondent No.1 was likely to succeed, they contrived the Section 7 petition with a view to pre-empt the Respondent No.1 from gaining control of the Corporate Debtor.It was also argued that no loan transactions had actually taken place. What has been sought to be projected as loans by the Appellants were infact not genuine loan transactions but were routine business transactions.Lastly, it was submitted that the Section 7 application was the outcome of fraud and collusion between the Corporate Debtor, Financial Creditors and Promoters. The Appellants have failed to bring on record cogent evidence to show that Section 7 application was filed with an objective other than the resolution of the Corporate Debtor.Observations:The tribunal observed that it is well settled that for an application under section 7 of the code to be admitted, only requirements of debt and default have to be satisfied. Once the debt is established and which remains unpaid, section 7 application can be admitted provided the debt crosses the threshold limit as provided under section 4 of the code.It further added that section 65 of the code empowers the Adjudicating Authority to ascertain whether the CIRP has been initiated fraudulently or maliciously even if the application has been admitted. It also observed that there are no legal impediments for the Adjudicating Authority to decide the application under section 65 of the code to protect the CD from being dragged into insolvency unnecessarily.It further noted that there was no record of board meetings in the Annual Returns filed indicating any resolution that had been passed to authorise the loan agreements therefore the argument that the loan was sanctioned in these meetings does not hold any merit. In the absence of the cogent and sufficient explanation, it was rightly decided by the Adjudicating Authority that the alleged loan agreements were forged and antedated with fraudulent intent.It further noted that the fact that no accrued interest income is reflected shows that no loan transaction ever took place and in the absence of interest or any other consideration to show time value of money, the transaction does not become a financial debt. There is no satisfactory explanation to justify the non-accrual of interest in the Balance Sheet of the Appellant No.1 except for attributing it to the accounting standards followed by them which is a feeble...

Admission Order Of Application U/S 7 Of IBC Can Be Recalled If Fraud Or Malicious Intent Is Proved U/S 65 Of Code: NCLAT

Mohd Malik Chauhan

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Admission Order Of Application U/S 7 Of IBC Can Be Recalled If Fraud Or Malicious Intent Is Proved U/S 65 Of Code: NCLAT

Mohd Malik Chauhan

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