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2022 (8) TMI 235 - AT - Insolvency and BankruptcyScope of IBC - dishonor of cheque - compounding of offences - Recovery of the dues - whether the Section 7 Application admitted against a Solvent Company, in the background where the Company has issued two cheques as security for the amount lent, and one cheque amount has been paid, (pursuant to the Order of the Trial Court under Section 138 of the NI Act, 1881, to compound one of the cases), and for the balance second cheque amount, does the initiation of Insolvency Proceedings fall within the ambit of the scope, objective and spirit of the Code which is Resolution and not Recovery ? - Whether the Adjudicating Authority while admitting a Section 7 Application, as in this case, examine only if there is a Debt and Default but also assess if the intent of the Applicant is primarily only Recovery of the dues ? HELD THAT - From the particulars of Financial Debt , it is clear that the amount claimed as default is Rs.87,50,000/- which is inclusive of cheque amount of Rs.57,00,000/- issued on 01.09.2016 and against which the Corporate Debtor paid an amount of Rs.67,90,000/- vide a Demand Draft dated 09.09.2019 before the Trial Court to compound one of the cases. It is an admitted fact that the said payment led to the closure of Case No. 1505 of 2017 which was filed for the dishonour of the cheque of Rs.57,00,000/- - In Part IV of the Application, the debt amount is claimed to be Rs.87,50,000/-. It is pertinent to mention that the said Application was filed on 30.11.2018 while there were parallel proceedings for recovery of the amount under Section 138 of the NI Act, 1881 before the District Court, Gurgaon. The amounts claimed pertain to the period prior to the date of Notification. We also do not wish to delve into the other submissions of the Appellant regarding the nature of transactions, absence of Financial Contract, non-registration of debt with the information utility whether interest at 18% per annum was ever concluded between the parties except for reference in the legal Notice issued by the second Respondent. The Preamble of IBC is carefully worded to describe the spirit and objective of the Code to be Reorganisation and Insolvency Resolution , specifically omitting the word Recovery . The Parliament has made a conscious effort to ensure that there is a significant difference between Resolution and Recovery - Section 65(1) of the Code does not expressly mention Debt Recovery Action under for any purpose other than resolution of insolvency.. , keeping in view the factual occurrence of the events of this particular matter, we hold that the intent may not be a malafide intent , but is nevertheless a fundamental attempt to obtain an edge/ advantage / an upper hand in recovering their dues . A Recovery Proceeding of this nature does fall within the scope and ambit of the words for any purpose other than Resolution , as defined under Section 65 (1) of the Code - this Appeal is allowed and the Order of the Adjudicating Authority is set aside.
Issues Involved:
1. Whether the Section 7 Application was admitted against a solvent company. 2. Whether the initiation of Insolvency Proceedings falls within the ambit of the scope, objective, and spirit of the Insolvency and Bankruptcy Code (IBC), which is 'Resolution' and not 'Recovery'. 3. Whether the Adjudicating Authority should assess if the intent of the Applicant is primarily for 'Recovery of the dues'. Detailed Analysis: 1. Admission of Section 7 Application against a Solvent Company: The Appellant, a shareholder and ex-director of the Corporate Debtor, challenged the admission of the Section 7 Application by the Adjudicating Authority. The Authority observed that the default was evidenced by dishonoured cheques amounting to Rs. 87,50,000/- and bank statements showing transfers to the Corporate Debtor. The Appellant argued that the money in question was not a financial debt but was deposited to open and operate joint depots for selling goods. The Appellant also contended that the Section 7 Application lacked documents proving the amount as a loan and did not establish the terms and conditions of the purported loan. 2. Scope and Objective of IBC €“ 'Resolution' vs. 'Recovery': The Tribunal emphasized that the IBC's objective is 'Resolution' and not 'Recovery'. The Tribunal referred to the Supreme Court's judgment in 'Vidarbha Industries Power Limited vs. Axis Bank Limited', which clarified that the Adjudicating Authority should consider the overall financial health and viability of the Corporate Debtor, not just the existence of a debt and default. The Tribunal noted that the second Respondent accepted an amount of Rs. 67,90,000/- with 6% interest, which led to the closure of one of the cases under Section 138 of the NI Act. The Tribunal highlighted that the Adjudicating Authority is not a debt collection forum and that the IBC is not meant to penalize a solvent company for non-payment of dues. 3. Intent of the Applicant €“ 'Recovery' vs. 'Resolution': The Tribunal examined whether the intent behind the initiation of CIRP was for 'Recovery' or 'Resolution'. It was noted that the second Respondent had accepted interest at 6% per annum but was now claiming 18% per annum. The Tribunal referred to the Preamble of the IBC and various judgments emphasizing that the IBC is meant for 'Reorganisation' and 'Insolvency Resolution', not 'Recovery'. The Tribunal held that the initiation of CIRP in this case was with an intention for 'Recovery' of dues, opposing the spirit of the IBC. The Tribunal also referred to Section 65(1) of the IBC, which penalizes fraudulent or malicious initiation of proceedings for purposes other than resolution of insolvency. Conclusion: The Tribunal allowed the appeal, setting aside the order of the Adjudicating Authority. It was held that the initiation of CIRP was primarily for recovery of dues, which falls within the scope of Section 65(1) of the IBC. The Tribunal ordered the closure of proceedings and allowed the first Respondent Company to function independently through its Board of Directors. The second Respondent was advised to avail other remedies in accordance with the law to recover its dues.
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