2017 (7) TMI 74 - AT - Insolvency and Bankruptcy

Application under Section 61 of Insolvency & Bankruptcy Code, 2016 - Held that - Showing an incorrect claim, moving the application in a hasty manner and obtaining an ex-parte order from the adjudicating authority which admitted such an incorrect claim, the Financial Creditor cannot disprove its malafide intention by stating that the claim submitted is correct amount. The I&B Code does not provide for any such mechanism where post-admission, the applicant financial creditor can modify their claim amount. In some of the cases, an insolvency resolution process can and may have adverse consequences on the welfare of the company. This makes it imperative for the adjudicating authority to adopt a cautious approach in admitting insolvency applications and also ensuring adherence to the principles of natural justice. Admittedly the impugned order is ex-facie illegal and ought to be set aside by the Appellate Tribunal. For the reasons aforesaid, we set aside the ex-parte impugned order dated 17th February 2017 passed by adjudicating authority , Mumbai Bench and allow the appeal. In effect the appointment of Interim Resolution Professional, order declaring moratorium, freezing of account and all other order passed by adjudicating authority pursuant to impugned order and action taken by the Interim Resolution Professional, including the advertisement published in the newspaper calling for applications are declared illegal. The adjudicating authority is directed to close the proceeding. The appellant company is released from the rigour of law and allow the appellant company to function independently through its Board of Directors from immediate effect.

Issues Involved:
1. Violation of principles of natural justice due to lack of notice before admitting the application under Section 7 of the I&B Code.
2. Allegations of misrepresentation and misleading information by the Financial Creditor.
3. Conduct of the Financial Creditor in relation to Joint Lenders’ Forum (JLF) guidelines.
4. Impact of the Interim Insolvency Resolution Professional (IRP) on the business and management of the Corporate Debtor.
5. Non-application of mind by the adjudicating authority.

Detailed Analysis:

1. Violation of Principles of Natural Justice:
The Appellant challenged the impugned order on the ground that it was passed ex-parte without giving notice to the Corporate Debtor, violating the principles of natural justice. The Tribunal referred to previous decisions, emphasizing that while the I&B Code does not explicitly require a hearing before admitting an application under Section 7, principles of natural justice necessitate a limited notice to ascertain the existence of default and completeness of the application. The Tribunal concluded that the adjudicating authority must issue notice before admitting an application under Section 7, and failure to do so in this case rendered the order unsustainable.

2. Allegations of Misrepresentation by the Financial Creditor:
The Appellant contended that the Financial Creditor misrepresented facts to obtain the admission order. The notice dated 6th February 2017 demanded ?10,02,28,271.60, but the application filed on 8th February 2017 inflated the default amount to ?29,81,02,395.62. The Tribunal noted the discrepancy and the Appellant’s argument that the entire amount had not become due as per the repayment schedule. The Tribunal found that the misstatement of the default amount was incorrect and contrary to law, warranting penalization under Section 75 of the I&B Code.

3. Conduct of the Financial Creditor in Relation to JLF Guidelines:
The Appellant highlighted that the Respondent, being part of the JLF, acted contrary to RBI guidelines by independently filing the application without the consent of other JLF members. The Tribunal referred to the precedent set in “M/s. Innoventive Industries Ltd v ICICI Bank & Anr.”, which held that the adjudicating authority need not consider whether permission from JLF was obtained. Therefore, the contention that the Respondent acted independently of JLF was rejected.

4. Impact of IRP on Business and Management:
The Appellant detailed the adverse effects of the IRP’s actions on its business operations, including loss of contracts, financial losses, and resignations of key employees. The Tribunal acknowledged these issues, noting that the IRP’s interference with the subsidiaries’ affairs was beyond his powers as per the I&B Code. The Tribunal found these actions to be ex-facie illegal and unsustainable.

5. Non-application of Mind by Adjudicating Authority:
The Tribunal criticized the adjudicating authority for failing to apply its mind to the apparent mismatch between the amounts demanded in the notice and the application. The authority also did not properly consider whether the notice complied with procedural requirements. The Tribunal found the adjudicating authority’s conclusion that the Appellant defaulted on ?27.77 crores to be perverse and contrary to the application’s contents.

Conclusion:
The Tribunal set aside the ex-parte impugned order dated 17th February 2017, declaring all actions taken by the IRP illegal. The adjudicating authority was directed to close the proceedings, releasing the Appellant from the rigour of law, and allowing it to function independently. Additionally, a cost of ?50,000 was imposed on the Financial Creditor, payable to the Registrar, National Company Law Appellate Tribunal, New Delhi, for library development. The appeal was allowed with the aforementioned observations and directions.

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