2018 (1) TMI 505 - AT - Insolvency and Bankruptcy

Dismiss an application for initiation of Corporate Insolvency Resolution Process - non-disclosure of facts beyond the statutory requirement under the I & B Code read with relevant form - Whether the penalty imposed by the Adjudicating Authority under Section 65 of the I & B Code is legal or not? - Held that - There is nothing on record to suggest that the Corporate Applicant has suppressed any fact or has not come with the clean hands. The Adjudicating Authority has also not held that the application has been filed by the Corporate Applicant fraudulently or with malicious intent for any purpose other than for the resolution process or liquidation or that the voluntary liquidation proceedings have been initiated with the intent to defraud any person. In absence of any such reasons recorded by the Adjudicating Authority the impugned order cannot be upheld. Further, as the Adjudicating Authority before imposing penalty under Section 65 has not given nor served any notice to the Corporate Applicant recording its prima facie view and intent to punish the Corporate Applicant, the impugned order dated 8th May, 2017 cannot be upheld having been passed in violation of rules of natural justice. For the reasons aforesaid, the impugned order dated 8th May, 2017 passed in C.P.is set aside. The case is remitted back to the Adjudicating Authority for admission of the application under Section 10, if the application is otherwise complete. In case it is incomplete, the Adjudicating Authority will grant time to the appellant to remove the defects. At this stage, it is desirable to state that the Central Government in Form 1 or 5 or 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 , has not provision for the parties to state whether any winding up proceeding has been initiated or liquidation order has been passed against the Corporate Debtor or not. No provision has been made there in for the parties to state whether any of clause of Section 11 is attracted or not. Non-disclosure of such relevant facts in the relevant Form 6, may be a ground to reject the application but a person can plead that the Form does not stipulate to disclose any ineligibility under Section 11. Therefore, we are of the view that the Central Government should make necessary amendment in the relevant Form 6 appended to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, which will enable the Adjudicating Authority to decide at the time of admission whether any fact has been suppressed or the person has come with the clean hand or not. We hope and trust that appropriate modification of the relevant Rules and Forms shall be made by the Central Government. In the meantime, the Adjudicating Authority may direct the Financial Creditors / Corporate Applicant to file an affidavit giving declaration in terms of Section 11 of the I & B Code and to state whether any winding up proceeding has been initiated or liquidation order has been passed by any High Court or Tribunal or Adjudicating Authority or not. The appeal is allowed with the aforesaid observations

Summary

Issues Involved:
1. Whether non-disclosure of facts beyond the statutory requirement under the I & B Code read with relevant form, prescribed under the Insolvency and Bankruptcy (Application to Adjudicating Authority), Rules, 2016 can be a ground to dismiss an application for initiation of Corporate Insolvency Resolution Process.
2. Whether the penalty imposed by the Adjudicating Authority under Section 65 of the I & B Code is legal or not.

Issue-wise Detailed Analysis:

1. Non-disclosure of Facts Beyond Statutory Requirement:
The appellant, Unigreen Global Private Limited, filed an application under Section 10 of the Insolvency & Bankruptcy Code, 2016 (I & B Code) for initiation of Corporate Insolvency Resolution Process (CIRP) due to its failure to pay debts owed to financial and other creditors. The application was rejected by the Adjudicating Authority on the grounds of non-disclosure of full particulars regarding assets mortgaged or securities furnished to financial creditors, and ongoing legal proceedings involving certain properties.

The respondent, Punjab National Bank (PNB), alleged that the appellant suppressed facts and did not disclose full particulars of assets, including properties entangled in legal proceedings. The Adjudicating Authority noted that the directors of the appellant company were involved in multiple legal proceedings to remove properties from the accountability of creditors, which were not disclosed in the application.

The Appellate Tribunal observed that under Sections 7 and 10 of the I & B Code, the essential factors are the existence of debt and default. The Tribunal emphasized that the application must be admitted if it is complete, and any extraneous factors unrelated to the resolution process should not be considered grounds for rejection. The Tribunal held that non-disclosure of facts unrelated to Section 10 and Form 6 cannot be termed as suppression of facts or grounds to reject the application. The Tribunal also noted that once the application is admitted, related proceedings cannot proceed further due to the moratorium under Sections 13 and 14 of the I & B Code.

2. Legality of Penalty Imposed Under Section 65 of the I & B Code:
The Adjudicating Authority imposed a penalty of Rs. Ten Lakhs on the appellant under Section 65 of the I & B Code, which deals with penalties for initiating insolvency resolution process or liquidation proceedings fraudulently or with malicious intent.

The Appellate Tribunal noted that for imposing a penalty under Section 65, the Adjudicating Authority must form a prima facie opinion that the application was filed fraudulently or with malicious intent. The Tribunal found no evidence on record to suggest that the appellant suppressed facts or acted with fraudulent or malicious intent. The Tribunal also observed that the Adjudicating Authority did not provide the appellant with a reasonable opportunity to explain its case before imposing the penalty, thus violating the principles of natural justice.

Conclusion:
The Appellate Tribunal set aside the impugned order dated 8th May, 2017, passed by the Adjudicating Authority, and remitted the case back for admission of the application under Section 10, if it is otherwise complete. The Tribunal directed that if the application is incomplete, the Adjudicating Authority should grant time to the appellant to remove the defects. The Tribunal also suggested that the Central Government amend the relevant forms to include provisions for disclosing any ineligibility under Section 11 of the I & B Code to prevent future issues of non-disclosure. The appeal was allowed without any order as to costs.