2025 (1) TMI 891 - AT - IBC

Maintainability of Section 7 application filed against the Corporate Debtor - whether Section 7 application was filed collusively and with mala-fide intention by the Appellants which was good enough to attract Section 65 of the IBC and consequential recall of the initiation of CIRP of the Corporate Debtor? - Respondent had already transferred its entire share-holding - Respondent not being a share-holder of the Corporate Debtor it had no locus to file the application - HELD THAT - There are no quarrel with the proposition of the Appellants that in terms of Section 7 of the IBC, what is required to be seen is the existence of a debt and default of the said debt. Once a debt becomes due or payable and there is incidence of non-payment of the said debt in full or part, CIRP may be triggered by the Financial Creditor as long as the amount in default is above the threshold limit. Be that as it may, Section 65 of the IBC is an enabling provision within the statutory framework of IBC whereby even if a Section 7 application has been filed or has been admitted, it vests jurisdiction on the Adjudicating Authority to examine an application under Section 65, if a prima facie case is made out to show that the Section 7 application had been filed fraudulently or with malicious intent and for purpose other than resolution of insolvency or liquidation. In the present case too, there are no error on the part of the Adjudicating Authority to consider the Section 65 application filed by the Respondent No.1 on being prima facie satisfied that the Section 7 application seeking initiation of CIRP proceedings had been filed by suppression of relevant material for purposes other than insolvency resolution. The Appellants have not repelled the allegations on merits but have simply dismissed them by holding them as hyper-technical, irrelevant and obnoxious without adequate substantiation - No justification has also been provided by the Appellants as to how the Appellants inspite of being ineligible to advance the alleged loans had done so. That this tantamount to violation of Section 186 of the Companies Act has also not been denied. While there is no quarrel over the fact that Section 7 vests rights on the financial creditors to initiate CIRP proceedings against the defaulting Corporate Debtor, however, debt and default cannot always be seen in isolation. There will be no unmindful of the fact that the Adjudicating Authority is also required to take care that the provisions of Section 7 of IBC are not misused or abused in any manner either by the financial creditor or the promoters of the Corporate Debtor to take undue advantage at the cost of insolvency resolution. Present is a case where the promoters of the Corporate Debtor and the Financial Creditors in trying to create a non-existent financial debt out of routine business entries, have ended up unwittingly committing lapses which lapses when seen cumulatively points to a web of conspiracy and collusion on their part to create a contrived situation of debt and default. Conclusion - The bonafide of the Appellants in the filing of the Section 7 application is clearly doubtful. Viewed from the angle of the totality of circumstances, the findings of the Adjudicating Authority that the insolvency proceedings resulting in the order dated 17.05.2022 were initiated fraudulently and with malicious intent for a purpose other than the resolution of the insolvency of the Corporate Debtor, is neither dehors the records nor unwarranted. When such fraudulent CIRP proceedings are initiated, the Adjudicating Authority has jurisdiction under the IBC to consider the allegations of fraudulent and malicious initiation of CIRP proceedings in terms of Section 65 and recall the CIRP admission order. There are no good reasons which warrant any interference in the impugned order. The Appeal is found to lack merit and is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The judgment primarily revolves around the following core legal questions:

• Whether the Section 7 application filed against the Corporate Debtor was initiated fraudulently and with malicious intent, thereby attracting the provisions of Section 65 of the Insolvency and Bankruptcy Code (IBC).
• Whether the Adjudicating Authority had the jurisdiction to entertain a Section 65 application post the admission of a Section 7 application, and whether it could recall the order initiating Corporate Insolvency Resolution Proceedings (CIRP).
• Whether the alleged loan agreements constituted genuine financial transactions or were fabricated to initiate CIRP.
• Whether the procedural and statutory discrepancies pointed out by the Respondent No.1 were sufficient to establish fraud and collusion in the filing of the Section 7 application.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Fraudulent and Malicious Intent in Filing Section 7 Application

• Legal Framework and Precedents: Section 65 of the IBC provides that if an insolvency application is filed with fraudulent or malicious intent for purposes other than resolution, it can be dismissed. The Tribunal referenced several judgments to establish the legal principle that fraudulent initiation of CIRP is impermissible.
• Court's Interpretation and Reasoning: The Tribunal found that the Section 7 application was filed not for genuine insolvency resolution but to pre-empt the outcome of an Oppression and Mismanagement Petition (OMP) that was likely to restore control to Respondent No.1.
• Key Evidence and Findings: The discrepancies in loan agreements, such as incorrect addresses, mention of IBC before its enactment, and verbatim duplication, were highlighted. The Tribunal noted that these discrepancies were not adequately rebutted by the Appellants.
• Application of Law to Facts: The Tribunal applied Section 65, concluding that the initiation of CIRP was based on fabricated documents, thus attracting the provision's applicability.
• Treatment of Competing Arguments: The Appellants argued that the existence of debt and default sufficed for CIRP initiation. However, the Tribunal emphasized the importance of genuine intent and absence of fraud.
• Conclusions: The Tribunal concluded that the Section 7 application was filed with fraudulent intent, warranting the recall of the CIRP initiation.

Issue 2: Jurisdiction to Entertain Section 65 Application Post Admission of Section 7

• Legal Framework and Precedents: The Tribunal referred to precedents that allow for the examination of fraudulent intent even after the admission of a Section 7 application.
• Court's Interpretation and Reasoning: The Tribunal asserted its jurisdiction to entertain Section 65 applications post-admission to prevent abuse of the insolvency process.
• Key Evidence and Findings: The Tribunal noted that the Section 7 application was filed without disclosing the ongoing OMP, which was a material fact.
• Application of Law to Facts: The Tribunal found that the non-disclosure of material facts and the fraudulent nature of the loan agreements justified the exercise of jurisdiction under Section 65.
• Treatment of Competing Arguments: The Appellants contended that the Section 7 order had attained finality. The Tribunal, however, emphasized the need to prevent misuse of the IBC.
• Conclusions: The Tribunal held that it was within its jurisdiction to recall the CIRP initiation order upon finding fraudulent intent in the Section 7 application.

Issue 3: Authenticity of Loan Agreements

• Legal Framework and Precedents: Genuine financial transactions are a prerequisite for triggering CIRP under Section 7 of the IBC.
• Court's Interpretation and Reasoning: The Tribunal found that the alleged loan agreements were fabricated and antedated, lacking genuine intent.
• Key Evidence and Findings: The Tribunal highlighted inconsistencies in the loan agreements, such as incorrect addresses, absence of board resolutions, and non-stamping.
• Application of Law to Facts: The Tribunal applied the principles of genuine financial transactions, concluding that the agreements were not bona fide.
• Treatment of Competing Arguments: The Appellants argued that the loan agreements were valid despite discrepancies. The Tribunal found these explanations inadequate.
• Conclusions: The Tribunal concluded that the loan agreements were not genuine, supporting the finding of fraud.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "The Adjudicating Authority has jurisdiction under the IBC to consider the allegations of fraudulent and malicious initiation of CIRP proceedings in terms of Section 65 and recall the CIRP admission order."
• Core Principles Established: The judgment reinforces the principle that insolvency proceedings must be initiated with genuine intent and that fraudulent applications can be dismissed under Section 65.
• Final Determinations on Each Issue: The Tribunal upheld the termination of CIRP, finding that the Section 7 application was filed fraudulently and with malicious intent. It affirmed its jurisdiction to entertain the Section 65 application and recall the CIRP initiation order.