2018 (7) TMI 2183 - Tri - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Fraud - Financial Creditors or not - existence of debt and dispute or not - HELD THAT - On perusal of the report of Amicus Curiae it appears that the corporate debtor company i.e. The Prism Industrial Complex Limited has committed a financial fraud. It appears that the corporate debtor company has issued secured debentures of the aggregate value of ₹ 31.79 crores up to 31 March 2017. The paid-up share capital of the company on that date was merely ₹ 5 lakh 50 lakh (application money) ₹ 55 lakhs. The only tangible asset of the company was land valuing ₹ 75.08 lakhs. The funds of Prism Industrial Complex Limited raised through secured debentures might have been diverted to group companies and/or the directors and their associates - The offer for sale of land now is nothing but farce and a clever device to prolong the proceedings in cases where orders have been passed against them. Since this land is owned by Prism Infracon Ltd and not by Prism Industrial Complex Limited, it cannot be sold and proceeds utilised for meeting the liabilities of Prism Industrial Complex Limited. The present case is one where interests of a large number of retail investors, from whom money has been raised in the guise of debentures or deposits, is involved, None of these retail investors, who have been deprived of their life s savings, could be intending to be benevolent to think of resolution or revival of such a company. it is also evident that having raised money from numerous investors, the promoters/directors have siphoned the funds out into various affiliated companies. This is evident from a study of the balance sheet of the company - This will actually mean the orders made by SEBI or NCLT for immediate refund of the money raised from retail investors will not be implemented during the moratorium period. Also, the constitution of the Committee of Creditors and the system of voting there at, goes on the basis of majority by value. It is quite possible that the corporate person may have created creditors with high value, who may care least for the interests of retail investors, from whom money has been raised. Hence, the so-called resolution plan may harm the interests of such investors. Thus it is clear that while a petition is filed under Insolvency and Bankruptcy Code 2016, fraudulently with malicious intention for initiation of CIRP, then in that case the petition can not be admitted not be admitted and actions should be initiated under section 65 of the Code. This is a fit case where that this petition has been filed fraudulently for intimation of corporate insolvency process, therefore petition deserves to be dismissed. Petition dismissed.

Summary

Issues Involved:
1. Default in payment of debentures.
2. Corporate Insolvency Resolution Process (CIRP) initiation.
3. Financial fraud allegations.
4. Jurisdiction and applicability of Insolvency and Bankruptcy Code (IBC).
5. Public interest and implications of moratorium under IBC.

Issue-wise Detailed Analysis:

1. Default in Payment of Debentures:
The Corporate Debtor issued debentures amounting to ?81,34,000 to the applicants, which were to be repaid on the redemption date along with monthly income in some cases. The Corporate Debtor initially made some payments but later defaulted, resulting in an outstanding amount of ?96,15,553. Despite constant reminders, the debtor failed to repay, leading the Financial Creditors to file the petition under Section 7 of the Insolvency & Bankruptcy Code, 2016.

2. Corporate Insolvency Resolution Process (CIRP) Initiation:
The Financial Creditors filed the petition to initiate CIRP against the Corporate Debtor. The declaration from the Insolvency Professional was received, and the application was claimed to be complete and in conformity with Section 7 of the Code. The Corporate Debtor did not oppose the petition, stating that CIRP would be in the interest of debenture holders and the debtor.

3. Financial Fraud Allegations:
The Amicus Curiae report indicated that the Corporate Debtor committed financial fraud by issuing secured debentures of ?31.79 crores with inadequate security and possibly diverting funds to group companies and associates. The company’s financial statements were not filed for several years, raising suspicions of illegal disposal of assets and financial irregularities.

4. Jurisdiction and Applicability of Insolvency and Bankruptcy Code (IBC):
The Tribunal considered whether insolvency application could be entertained in a case involving financial fraud. It was noted that the provisions of the IBC are intended for resolving insolvency and not for cases involving financial fraud or irregularities. The Corporate Debtor's actions resembled a Ponzi scheme, and the Tribunal emphasized that the IBC should not be used to interfere in cases of financial fraud.

5. Public Interest and Implications of Moratorium under IBC:
The Tribunal highlighted the public interest involved, as the debentures were issued to over 3000 retail investors. The moratorium under IBC would halt the execution of orders for immediate repayment, harming the interests of retail investors. The Tribunal stressed that the IBC's benevolent scheme for resolution should not be applied to cases of corporate fraud. Additionally, the Tribunal noted that financial service providers are excluded from the IBC's ambit, and the Corporate Debtor, engaged in accepting deposits without proper registration, should not benefit from the IBC.

Conclusion:
The Tribunal concluded that the petition was filed fraudulently with malicious intent to initiate CIRP and benefit from the moratorium. Therefore, the petition was dismissed, and show cause notices under Section 65 of the IBC were issued against the petitioner Financial Creditors. The order was communicated to SEBI and the Central Government, with further proceedings scheduled.

Order:
The petition filed under Section 7 of the IBC was dismissed, and show cause notices under Section 65 of the IBC were issued against the petitioner Financial Creditors. The case was listed for further proceedings on 7th August 2018.