2019 (6) TMI 767 - AT - Insolvency and Bankruptcy

Initiation of Corporate Insolvency Resolution Process against the Corporate Debtor - Section 7 of the Insolvency and Bankruptcy Code, 2016 - allegation is Applicant Bank s involvement in defrauding the Corporate Debtor - HELD THAT - An application under Section 7 being an independent proceeding has nothing to do with the pendency of the Criminal Case relating to misappropriation of the funds by the Chief Financial Officer of the Corporate Debtor and the employees of the Banks. The Bank which is the Financial Creditor is a separate entity from the Chief Financial Officer of the Corporate Debtor or the individual employees of the Bank(s), if any, involved. The pendency of the investigation or trial cannot be a ground to refuse an application under Section 7 if the application is complete and there is a debt and default. The I B Code being a complete Code will prevail over the other Acts and no person can take advantage of the pendency of the case to stall Insolvency and Bankruptcy proceeding filed under Section 7. Appeal dismissed.

Summary

Issues:
- Appeal against order initiating Corporate Insolvency Resolution Process under Section 7 of the Insolvency and Bankruptcy Code, 2016.
- Allegation of fraudulent withdrawal by Bank officials.
- Cooperation of Financial Creditors in recovery efforts.
- Involvement of Chief Financial Officer in fraudulent activities.
- Independence of insolvency proceedings from criminal cases.
- Applicability of Insolvency and Bankruptcy Code over other laws.

Analysis:
1. The appeal was filed against the order initiating Corporate Insolvency Resolution Process under Section 7 of the Insolvency and Bankruptcy Code, 2016. The Appellant, a shareholder of the Corporate Debtor, alleged that Bank officials fraudulently withdrew funds from the Corporate Debtor's account, leading to financial distress. A criminal case was registered, and a charge sheet was filed in connection with the fraudulent withdrawals.

2. The Appellant argued that four out of five Financial Creditors (Banks) were cooperating with the Corporate Debtor to recover the fraudulently withdrawn amount. It was contended that if the funds had not been embezzled, the Corporate Debtor would have been able to meet its financial obligations towards the Financial Creditors.

3. The Appellant further claimed that the Chief Financial Officer of the Corporate Debtor was involved in the fraudulent activities by signing forged cheques and facilitating the unauthorized withdrawals from the Corporate Debtor's accounts. However, the Respondent Bank, as a Financial Creditor, was considered a separate entity from the individuals involved in the fraudulent activities.

4. The Tribunal held that the pendency of the criminal case related to misappropriation of funds by the Chief Financial Officer and Bank employees should not affect the insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code. The Tribunal emphasized that the Code is a comprehensive legislation that takes precedence over other laws, and the existence of a debt and default is sufficient to initiate insolvency proceedings.

5. Therefore, the Tribunal dismissed the appeal, stating that the investigation or trial of the criminal case cannot be used as a reason to halt the insolvency and bankruptcy proceedings. The decision reaffirmed the independence of insolvency proceedings from criminal cases and reiterated the supremacy of the Insolvency and Bankruptcy Code in such matters.