2019 (8) TMI 1700 - AT - Insolvency and Bankruptcy

Maintainability of insolvency application can be entertained in a case where financial fraud exists - Section 7 of the Insolvency and Bankruptcy Code 2016 - HELD THAT - The Adjudicating Authority has allowed intervention applications filed by different creditors which is not the requirement of the I B Code / law - In Innoventive Industries Ltd. v. ICICI Bank Anr. 2017 (6) TMI 959 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL MUMBAI this Appellate Tribunal held that before admitting an application under Sections 7 or 9 a limited notice is required to be given to the Corporate Debtor by the Adjudicating Authority - the matter subsequently fell for consideration before the Hon ble Supreme Court in Innoventive Industries Ltd. v. ICICI Bank and Anr. 2017 (9) TMI 58 - SUPREME COURT wherein dealing with the provisions of Sections 7 or 9 the Hon ble Apex Court observed and held that the debt means a liability of obligation in respect of a claim and a claim means a right to payment even if it is disputed. The Code gets triggered the moment default is of rupees one lakh or more. The Hon ble Supreme Court specifically held that when it comes to a Financial Creditor triggering the process Section 7 becomes relevant. The application is made by a Financial Creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts which requires particulars of the applicant in Part I particulars of the Corporate Debtor in Part II particulars of the proposed Interim Resolution Professional in Part III particulars of the Financial Debt in Part IV and documents records and evidence of default in Part V - Thus it is clear that once the record is complete Code is to be triggered if there is a default of more than 1 lakh. The Corporate Debtor can only point out that the debt may not be due in a sense it is not payable in law or in fact. It is a settled law that the Adjudicating Authority is only required to ensure whether there is a debt and default on the basis of record (Form 1). It cannot take into consideration any other facts which are irrelevant. The Corporate Insolvency Resolution Process not being a litigation much less adversarial litigation or a recovery proceeding or a money suit - the Adjudicating Authority cannot notice to hold that owing to the financial fraud the amount was not paid by the Corporate Debtor . In the present case the Adjudicating Authority has failed to show that the present proceeding under Section 7 was filed by the Appellant fraudulently or with malicious intention for initiation of the Corporate Insolvency Resolution Process against the Corporate Debtor . Whatever the grounds shown for not entertaining the application are not related and beyond Form 1 and were not to be pleaded. In fact nothing on the record to suggest that the Appellant filed application fraudulently with malicious intention for initiation of the Corporate Insolvency Resolution Process against the Corporate Debtor . The case is remitted back to the Adjudicating Authority to admit the application after notice to the Corporate Debtor so as to enable the Corporate Debtor to settle the claim - appeal allowed.

Summary

Issues Involved:
1. Whether insolvency application can be entertained in a case where financial fraud exists.
2. Whether the Corporate Insolvency Resolution Process (CIRP) can be initiated against a financial services provider.
3. Whether the application for CIRP was filed fraudulently or with malicious intent.

Issue-wise Detailed Analysis:

1. Whether insolvency application can be entertained in a case where financial fraud exists:
The Adjudicating Authority rejected the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code) on the grounds that the corporate debtor had raised deposits from retail investors in the guise of debentures, which were issued in breach of public issue norms. The Authority emphasized that the intent of the Insolvency resolution process is to repair a financially distressed company, not to interfere in cases involving financial fraud or irregularities. The Authority noted that the promoters/directors had siphoned funds into affiliated companies, reflecting a financial fraud. It concluded that the benevolent scheme of IBC is not meant for cases of financial fraud, where directors/promoters have engaged in schemes similar to Ponzi schemes. Therefore, the application for CIRP was rejected to ensure effective implementation of existing orders for repayment and prosecution of offenders responsible for financial fraud.

2. Whether the Corporate Insolvency Resolution Process (CIRP) can be initiated against a financial services provider:
The Adjudicating Authority also rejected the CIRP application on the grounds that the corporate debtor, engaged in the business of accepting deposits, falls under the definition of a "financial services provider" as per Section 3(17) and Section 3(16)(a) of the I&B Code. Financial services providers are excluded from the ambit of the Code as per Section 3(7). The Authority reasoned that placing such entities under moratorium could have serious implications for the financial system, especially when public money is involved. Consequently, the Authority held that the exclusion of financial services providers from the IBC is crucial to prevent systemic risks and ensure public interest.

3. Whether the application for CIRP was filed fraudulently or with malicious intent:
The Adjudicating Authority directed the issuance of show-cause notices under Section 65 of the I&B Code against the appellants for allegedly initiating the CIRP fraudulently or with malicious intent. However, the appellate tribunal found that the Adjudicating Authority failed to show that the proceeding under Section 7 was filed fraudulently or with malicious intent. The tribunal noted that there was no evidence to suggest that the appellants had any connection with the directors or promoters of the corporate debtor or that the application was filed with malicious intent. The tribunal emphasized that the grounds for rejecting the application were unrelated to the requirements of Form 1 and beyond the scope of what should have been considered. Therefore, the tribunal set aside the impugned judgment and remitted the case to the Adjudicating Authority to admit the application after issuing a notice to the corporate debtor, allowing them to settle the claim.

Order:
The appellate tribunal allowed the appeal, set aside the impugned judgment, and directed the Adjudicating Authority to admit the application after notice to the corporate debtor. The tribunal also stated that no intervention application should be entertained by the Adjudicating Authority before the admission of the application. The appeal was allowed with the aforementioned observations and directions, with no costs.