2020 (8) TMI 493 - AT - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its debt - existence of debt and dispute or not - whether the Applicant is a Financial Creditor and the Debt duly payable in law by the Corporate Debtor? HELD THAT - Application under Section 7 of IBC, the Financial Creditor to initiate CIRP against the Corporate Debtor before the Adjudicating Authority when a default has occurred. The Creditor has been defined in Section 3(10) of IBC means any person to whom a debt is owed and includes a Financial Creditor, an Operational Creditor, a Secured Creditor, an unsecured Creditor and a Decree holder. Debt has been defined in Section 3(11) means a liability or an obligation in respect of a claim which is due from any person and includes a Financial Debt and Operational Debt. The Default has been defined in Section 3(12) of IBC means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the Debtor or the Corporate Debtor as the case may be. In view of default made by the Respondent-Corporate Debtor, the Appellant filed the Application before the Adjudicating Authority and the Adjudicating Authority admitted the Application and observed that the debt and default is concerned, the Corporate Debtor does not deny the same. Further it is observed that the financial facilities have been duly granted and the amounts have been disbursed. In the facts of the present case, the Adjudicating Authority has already observed that the adverse observation will be subject to final outcome of the investigation. The Hon ble Supreme Court in the matter of ICICI Bank Vs. Shanti Devi Sharma and Others 2008 (5) TMI 707 - SUPREME COURT held that the Court could have been more careful to note that the facts that it discussed were alleged. Recognising as such, the Court clarified that its observations were not to influence or affect the proceedings. The adverse observations made by Adjudicating Authority, being admittedly subject to correction in investigation, were avoidable. They will not affect investigation in any manner or be basis to hold adversely against Appellant Bank or its officials. For the purpose of finding debt due and default for admitting Application it was not possible to accept defence of valuation claimed in averments vis- -vis valuation done in record of seizure - the Adjudicating Authority could not have decided such averments. Appeal disposed off.

Summary

Issues Involved:
1. Adverse remarks made by the Adjudicating Authority against the Appellant-Bank.
2. The necessity and impact of these remarks on ongoing investigations and the reputation of the Appellant-Bank.
3. The appropriateness of the Adjudicating Authority's directions to communicate the order to various authorities.

Detailed Analysis:

1. Adverse remarks made by the Adjudicating Authority against the Appellant-Bank:
The Appellant-Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code (IBC) against the Corporate Debtor for initiating Corporate Insolvency Resolution Process (CIRP) due to default in loan repayment. The Adjudicating Authority admitted the application but made certain observations that the Appellant-Bank found disparaging and unwarranted. These observations included criticism of the bank's conduct in granting financial facilities worth thousands of crores on the pledge of alleged fake diamonds without proper verification. The Authority cited a previous judgment (Director of Income Tax v. Bharat Diamond Bourse) to emphasize the unnaturalness of such transactions and the need for scrutiny.

2. The necessity and impact of these remarks on ongoing investigations and the reputation of the Appellant-Bank:
The Appellant argued that once the Adjudicating Authority concluded the default by the Corporate Debtor and admitted the CIRP application, the adverse remarks were unnecessary and prejudicial. The Appellant contended that these remarks could affect ongoing investigations by the Economic Offences Wing (EOW) and harm the bank's reputation. The Appellant cited several judgments, including "State of Uttar Pradesh Vs. Mohammad Naim," emphasizing that disparaging remarks should only be made if the party had the opportunity to defend itself, there was evidence justifying the remarks, and they were necessary for the case's decision.

3. The appropriateness of the Adjudicating Authority's directions to communicate the order to various authorities:
The Appellant also challenged the direction to communicate the order to authorities like the Enforcement Directorate, EOW, Income Tax Department, and Serious Fraud Investigation Office. The Appellant argued that such directions were out of context and unwarranted, especially when investigations were already in progress by other authorities.

Judgment Analysis:
The Tribunal examined whether the observations made by the Adjudicating Authority were germane to the context of admitting the CIRP application. It noted that the Financial Creditor (Appellant) had initiated the CIRP due to the Corporate Debtor's default, which was not denied by the Debtor. The Tribunal found that the adverse remarks were based on the Corporate Debtor's reply and were avoidable. It emphasized that the observations should not impact the ongoing investigations or the Insolvency Resolution Process.

The Tribunal referred to the judgment in "State of Uttar Pradesh Vs. Mohammad Naim," which outlined criteria for making disparaging remarks: opportunity for defense, evidence on record, and necessity for the case's decision. It concluded that the Adjudicating Authority's remarks, being subject to correction based on the investigation's outcome, were unnecessary and avoidable. The Tribunal clarified that these remarks should not influence the investigation or adversely affect the Appellant-Bank.

Conclusion:
The Tribunal disposed of the appeal, noting that the adverse observations made by the Adjudicating Authority were avoidable and should not impact the ongoing investigation or the reputation of the Appellant-Bank. The directions to communicate the order to various authorities were also deemed unnecessary in the context of admitting the CIRP application. The appeal was disposed of with no orders as to costs.