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2024 (11) TMI 1351 - AT - IBCAdmission of section 7 application - Respondent No. 1 and Respondent No. 2 are related parties, who in collusion and connivance with the ex- management/promotor/director/shareholder of Respondent No. 1 i.e. Respondent No. 3 to 5 initiated the CIRP - HELD THAT - The Respondent No. 3 who happened to be a director and shareholder in all three companies, namely, Navayuga, Respondent No. 1 and Respondent No. 2. In Navyuga he is director and 21.77% shareholder, in Respondent No. 1 he was a Promotor and director till 2015 and 33.34 % shareholder and in Respondent No. 2 he is a director 66.66% shareholder which shows that this case shall come within Section 5(24)(m)(i) and (iii) of the Code as Respondent No. 3 is controlling more than 20% of the voting share of these companies and also the assignor. It has been held by the Hon ble Supreme Court in the case of Phoenix ARC (P) Ltd. 2021 (2) TMI 91 - SUPREME COURT that amount disbursed to third party that too by the related party will not qualify as a financial debt under the Code. It has also been held in the case of Hytone Merchants Pvt. Ltd. 2021 (7) TMI 60 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI that even if Section 7 of the Code ingredients are fulfilled then also if collusion is proved CIRP can be set aside. The Appellant has specifically averred in para 33 of the appeal paper book about the presence of Respondent No. 3 in all three companies as shareholder and director which has not been denied by Respondent No. 2 and 3 in their reply, firstly, there is no parawise reply filed and secondly in the reply the emphasis is more on the issue as to how the provision of Section 5(24) is attracted about which an inference can be drawn that the allegation of the Appellant about Respondent No. 3 is correct and once he was the director/promotor 33.34% shareholder in Respondent No. 1 and Director in both Navayuga and Respondent No. 2 with 21.77% and 66.66% shareholder, it cannot be said that he was not a related party especially when it is incorporated in the financial statement of the CD much less Note 3 of the audit report that long term borrowings the amount in question, is taken from the related parties. The collusion between Respondent No. 1 and Respondent No. 2 can be ascertained from such circumstances. There are no doubt that the petition filed by Respondent No. 2 against Respondent No. 1 was collusive and for a purpose other than for the resolution of insolvency and hence the impugned order by which Respondent No. 2 has pushed Respondent No. 1 into CIRP is hereby set aside. Appeal allowed.
Issues Involved:
1. Alleged collusion between Respondent No. 1 and Respondent No. 2 in initiating the Corporate Insolvency Resolution Process (CIRP). 2. Determination of whether Respondent No. 1 and Respondent No. 2 are related parties under the Insolvency and Bankruptcy Code, 2016 (Code). 3. Validity of the assignment agreement and its registration. 4. Maintainability of the appeal by the Appellant. 5. Jurisdiction of NCLT/NCLAT to inquire into allegations of fraud and collusion. Issue-wise Detailed Analysis: 1. Alleged Collusion in Initiating CIRP: - The Appellant alleged that the initiation of CIRP by Respondent No. 2 against Respondent No. 1 was collusive, intended to defraud the Appellant and other creditors. The Appellant argued that Respondent No. 3, who had significant control over all three companies involved, orchestrated the initiation of CIRP for purposes other than resolving insolvency, which is prohibited under Section 65 of the Code. The Tribunal found that the collusion was evident due to the lack of contestation by Respondent No. 1 and the absence of an appeal against the admission order, indicating that the proceedings were merely an eyewash. 2. Determination of Related Parties: - The Appellant contended that Respondent No. 1 and Respondent No. 2 are related parties as defined under Section 5(24) of the Code, due to common shareholding and directorial positions held by Respondent No. 3. The audit report of Respondent No. 1 listed the debt as loans and advances from related parties, supporting the Appellant's claim. The Tribunal agreed that the presence of Respondent No. 3 in all three companies, with significant shareholding and directorial roles, established a related party relationship, reinforcing the allegation of collusion. 3. Validity of the Assignment Agreement: - The Appellant challenged the validity of the assignment agreement dated 10.02.2020, arguing it was not registered and insufficiently stamped, thus questioning the legitimacy of the debt transfer. The Tribunal noted that the agreement was executed on a Rs. 100 stamp paper, which was inadequate for the amount involved, raising doubts about the authenticity and enforceability of the agreement. 4. Maintainability of the Appeal: - The Appellant's standing to file the appeal was contested by Respondents, citing that allegations of collusion should be raised before the Adjudicating Authority (NCLT) under Section 65 of the Code. However, the Tribunal referenced the Supreme Court's decision in Embassy Property Developments Pvt. Ltd. v. State of Karnataka, affirming that NCLT and NCLAT have jurisdiction to inquire into allegations of fraud and collusion, thereby validating the maintainability of the appeal. 5. Jurisdiction of NCLT/NCLAT: - The Tribunal emphasized that NCLT and NCLAT possess the authority to investigate fraudulent initiation of CIRP under Section 65 of the Code. The Tribunal referenced the Supreme Court's decision, which clarified that fraudulent initiation of CIRP falls within the jurisdiction of NCLT/NCLAT, and such allegations should be addressed within the insolvency framework rather than bypassing it through alternative remedies. Conclusion: The Tribunal concluded that the initiation of CIRP by Respondent No. 2 against Respondent No. 1 was collusive and intended for purposes other than resolving insolvency. The impugned order admitting the application under Section 7 of the Code was set aside, and the appeal was allowed, with no costs awarded. The Tribunal's decision underscores the importance of scrutinizing the bona fides of insolvency proceedings to prevent misuse of the insolvency process.
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