2021 (4) TMI 777 - AT - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Debt or not - issuance of demand notice, mandatory or not - HELD THAT - There was no valid ground to conclude that the Petition was filed with malicious intent. The Adjudicating Authority's finding regarding malicious intent cannot be treated as valid by any stretch of the imagination. The Petition was dismissed mainly because alleged debt cannot be treated as financial debt. Only on this basis, the inference cannot be drawn that the Petition was filed with malicious intent. In any event, the apparent malicious intent was for the issuance of the demand notice, which, as stated above, is not even a legal requirement under Section 7 of the Code. Therefore it is clear that the observation of the learned Adjudicating Authority that the Petition is filed with malicious intent is invalid. In the facts and circumstances of the present case, only on the ground that the Adjudicating Authority has not treated the alleged Transaction as a financial debt, no action could have, in any event, be taken under Sections 65, 72 and 75 of the Code. In any event, from the facts of the case, none of the preconditions of the above-mentioned provisions of Sections 65, 72 or 75 of the Code has been satisfied, which is evident from the following - Appellant had initiated proceeding under Sections 7 of the Code in the financial creditor's capacity to exercise their legal right. While the petitions were dismissed on merits, there is no doubt that the said proceedings were initiated for the purposes envisaged by law. There is nothing on record to show that the proceedings u/s 7 of the Code were initiated for the purpose other than seeking a resolution, which is the sine qua non for initiation of proceedings under Section 65 of the Code. Appeal disposed off.

Issues Involved:
1. Observations made by the Adjudicating Authority while dismissing the Petitions under Section 7 of the Insolvency and Bankruptcy Code, 2016.
2. Cross Appeals by Respondents seeking action against the Appellants under Sections 65, 72, and 75 of the Insolvency and Bankruptcy Code, 2016.

Issue-Wise Detailed Analysis:

1. Observations Made by the Adjudicating Authority:
The Appellants challenged the observations made by the Adjudicating Authority in the Order dated 30 July 2020, which dismissed their Petitions under Section 7 of the Insolvency and Bankruptcy Code, 2016. The Adjudicating Authority had concluded that there was unlawful collusion and misuse of position by the Petitioners. Specifically, the Authority noted that there was no effective service of demand notice, as the notice was sent, received, and replied to by the Petitioner and his brother among themselves, indicating collusion and malicious intent.

The Appellants argued that the Adjudicating Authority failed to notice that there is no requirement for issuance of demand notices under Section 7 of the Code. They contended that the allegations of collusion were unsubstantiated and that the conclusions regarding their control over the Respondent companies' affairs were factually incorrect. They also emphasized that the proceedings were initiated in their capacity as Financial Creditors to exercise their legal rights.

The Tribunal agreed with the Appellants, stating that there was no concrete material to conclude any unlawful collusion and that the allegations were based on unsubstantiated claims. The Tribunal highlighted that suspicion, however strong, does not take the place of proof to conclude collusion. It was also noted that the term 'Collusion' requires more than one person, and the necessary parties were not impleaded in the proceedings.

2. Cross Appeals by Respondents:
The Respondents filed cross Appeals seeking action against the Appellants under Sections 65, 72, and 75 of the Insolvency and Bankruptcy Code, 2016. They contended that the Appellants had initiated fraudulent and malicious proceedings to hide their actions of mismanagement, forgery, siphoning off funds, and manipulation of statutory records.

The Tribunal found no valid grounds to conclude that the Petitions were filed with malicious intent. It was noted that the Adjudicating Authority's finding regarding malicious intent was invalid, as the Petitions were dismissed mainly because the alleged debt could not be treated as financial debt. The Tribunal emphasized that the proceedings were initiated for the purposes envisaged by law, and there was nothing on record to show that the proceedings were initiated for any other purpose.

Regarding Sections 65, 72, and 75 of the Code, the Tribunal found that none of the preconditions for invoking these sections were satisfied. Section 65 pertains to fraudulent or malicious initiation of proceedings, Section 72 deals with punishment for willful and material omission from statements relating to the Corporate Debtor's affairs, and Section 75 provides punishment for false information furnished in the Application. The Tribunal concluded that there was no evidence to support the invocation of these sections.

Conclusion:
The Tribunal allowed the Appeals (Nos. 847, 848, and 853 of 2020) and expunged the remarks/observations made by the Adjudicating Authority in paragraphs 18 and 19 of the impugned judgments. The cross Appeals (Nos. 1016, 1018, and 1019 of 2020) were dismissed as they lacked merit.

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