2022 (7) TMI 1194 - AT - Insolvency and Bankruptcy

Dismissal of Application filed under Section 9 of the IBC by the Appellant - direction to Adjudicating Authority to issue SCN under Section 65(1) to the parties for appropriate action - related party transaction or not - HELD THAT - The loan sanction order which has been placed before us indicates that along with the Corporate Debtor who was Applicant for the loan, the Director of the Operational Creditor Mr. Jhurani was also co-applicant. Thus, when both the Operational Creditor and the Corporate Debtor were Applicants, it cannot be seen how the Operational Creditor can claim payment of fee for procuring the loan. We in the present case are considering the initiation of the CIRP, the Adjudicating Authority had sufficient reason to believe that debt itself is doubtful. No error has been committed by the Adjudicating Authority in refusing to initiate the CIRP on such suspicious debt. Thus, the order of the Adjudicating Authority refusing to initiate CIRP cannot be faulted and we affirm the said order passed by the Adjudicating Authority. Show-cause notice under Section 65(1) of the IBC - HELD THAT - The notice has been issued consequent to the impugned order passed, to which the parties were entitled to file reply. Learned Counsel for the Appellant submits that the Appellant has already filed a Reply to show-cause notice and Learned Counsel for the Respondent submits that he has also filed a Reply to the show-cause notice. Order under Section 65 after considering the show-cause notice are yet to be passed by the Adjudicating Authority. We only observe that while passing the order under Section 65, the Adjudicating Authority shall consider the Reply given by the Respondent and shall not be influenced by any observation made in the impugned order. Appeal dismissed.

Summary

Issues:
1. Dismissal of Section 9 Application by Adjudicating Authority
2. Allegations of sham transaction between related parties
3. Validity of show-cause notice under Section 65(1) of IBC

Issue 1: Dismissal of Section 9 Application by Adjudicating Authority
The Appellate Tribunal heard an appeal against the Adjudicating Authority's order dismissing a Section 9 Application under the IBC by an Operational Creditor, claiming a debt of Rs. 57,25,000 as a process fee for procuring a loan for the Corporate Debtor. The Adjudicating Authority deemed the transaction between related companies in 2015 as a sham, leading to the dismissal of the CIRP initiation. The Appeal challenged this decision, arguing that the present management was unaware of the Director's related party status. However, the Tribunal upheld the Adjudicating Authority's decision, stating that the debt was doubtful and correctly refused to initiate CIRP.

Issue 2: Allegations of Sham Transaction Between Related Parties
The Tribunal noted that both the Applicant and the Corporate Debtor had a common Director, making them related parties at the time of the transaction. The Adjudicating Authority found that the transaction was a sham, as the Director procured a loan for his company and charged a procurement fee. This led to the conclusion that the parties colluded to initiate the CIR Process with malicious intent, rather than for insolvency resolution, which is impermissible under the IBC. Consequently, a show-cause notice was issued under Section 65(1) of the IBC to explain why penalties should not be imposed.

Issue 3: Validity of Show-Cause Notice under Section 65(1) of IBC
Regarding the show-cause notice issued under Section 65(1) of the IBC, both parties filed replies. The Tribunal emphasized that the Adjudicating Authority must consider these replies independently of the impugned order while deciding on penalties under Section 65. The Appeal was ultimately dismissed, subject to the observations made regarding the show-cause notice. The Tribunal affirmed the Adjudicating Authority's decision to refuse CIRP initiation based on the suspicious debt and upheld the issuance of the show-cause notice for further proceedings.