2020 (2) TMI 1385 - Tri - Insolvency and Bankruptcy

Recall of order of admission - it has been alleged that the order for CIRP has been obtained by way of fraud, hence, this order needs to be set aside - whether the impugned order can be set aside within the scope of section 65 of IBC 2016? - inherent power read with rule 11 of NCLT Rules, 2016 - fraud appear to exist or not - inherent power of Court or Tribunal - HELD THAT - As per accepted and settled judicial understanding, inherent powers are such powers which are unalienable from Court / Tribunal and may be exercised by Court or Tribunal to do full and complete justice between the parties before it. Such power is derived from the principles of natural justice and equity. As far as Tribunal is concerned, Rule 11 of NCLT Rules, 2016 vests it with the inherent power. It becomes apparent that this rule is parallel of section 151 of Code of Civil Procedure, 1908. Two elements which it comprises of are that the Court / Tribunal may pass such orders as may be necessary to meet the ends of justice and to prevent abuse of the process of the Tribunal. These two elements have not been defined but the principles have emanated relating to these elements from several judicial decisions. Scope of provisions of section 65 of IBC 2016 - HELD THAT - Such section is limited in its scope as it empowers the Adjudicating Authority to impose penalty if it is found that initiation of insolvency resolution process is due to fraudulent act or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation as the case may be. The preceding stage of the applicability of this provision is a conclusive finding by the Tribunal in the case that there was an act of fraud or malicious intent in initiation of Insolvency Resolution Process or Liquidation proceedings. Further, for taking any action under this section, opportunity of hearing to the party going to be affected is a must. Thus, Tribunal has got inherent powers to recall its earlier order and also to impose penalty if it is found that such order has been procured by an act of fraud or with malicious intent or through abuse of the process of Tribunal. The order for CIRP was obtained fraudulently and with malicious intention to defraud the applicant by abusing the process of Tribunal - application allowed.

Issues Involved:
1. Application under Section 65 of IBC 2016 and Rule 11 of NCLT Rules 2016 for recalling the order of admission.
2. Allegation of fraudulent and malicious intent in filing the petition.
3. Collusion between Financial Creditor and Corporate Debtor.
4. Inherent powers of the Tribunal.
5. Applicability of Section 65 of IBC 2016.
6. Imposition of penalty under Section 65 of IBC 2016.

Detailed Analysis:

1. Application under Section 65 of IBC 2016 and Rule 11 of NCLT Rules 2016 for recalling the order of admission:
The application was filed to recall the order of admission passed on 31.10.2019 in C.P. No. 1278/KB/2019, alleging that the petition was filed fraudulently with malicious intent. The Financial Creditor and Corporate Debtor were accused of colluding to deprive the applicants of shares held as security.

2. Allegation of fraudulent and malicious intent in filing the petition:
The Financial Creditor, incorporated with a paid-up capital of ?1,00,000, allegedly gave a loan of ?50,00,000 without security to the Corporate Debtor, which was claimed to be an instance of collusive action. The applicants argued that the petition under Section 7 of IBC 2016 was filed to obtain a moratorium and stall proceedings under Sections 58-59 of the Companies Act 2013.

3. Collusion between Financial Creditor and Corporate Debtor:
The applicants contended that the Financial Creditor and Corporate Debtor had no prior dealings, and the loan was given without security, indicating collusion. The Financial Creditor’s recent incorporation and its primary business objectives were inconsistent with the loan transaction, further suggesting collusion.

4. Inherent powers of the Tribunal:
The Tribunal discussed its inherent powers under Rule 11 of NCLT Rules 2016, which are parallel to Section 151 of the Code of Civil Procedure, 1908. These powers allow the Tribunal to make orders necessary for justice or to prevent abuse of process. The Tribunal emphasized that inherent powers could be exercised to recall orders obtained through fraud or abuse of process.

5. Applicability of Section 65 of IBC 2016:
Section 65 of IBC 2016 allows the Tribunal to impose penalties if insolvency proceedings are initiated fraudulently or with malicious intent. The Tribunal noted that a conclusive finding of fraud or malicious intent is required before taking action under this section. The Tribunal found that the Financial Creditor’s actions, including the timing and nature of the loan, indicated malicious intent and abuse of process.

6. Imposition of penalty under Section 65 of IBC 2016:
The Tribunal concluded that the order for CIRP was obtained fraudulently and with malicious intent. However, before imposing a penalty under Section 65, the Tribunal directed the Registry to issue notices to the Corporate Debtor and involved parties to present their case, ensuring an opportunity for a hearing.

Conclusion:
The Tribunal set aside the order dated 31.10.2019 in C.P. No. 1278/KB/2019, terminated the moratorium under Section 14 of IBC 2016, and directed the Registry to prioritize the application under Sections 58-59 of the Companies Act 2013. Notices were to be issued to the Corporate Debtor and related parties for a hearing on the imposition of penalties under Section 65 of IBC 2016.

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