2020 (8) TMI 456 - AT - Insolvency and Bankruptcy

Replacemnet of Resolution Professional - Collusion between Creditor and Debtor to initiate CIRP - Related Party - Recall of order - levy of penalty - Jurisdiction of Adjudicating Authority - It is the case of the Appellant that the Appellant- Bank of India is a secured creditor which did not trigger any Corporate Insolvency Resolution Process against the Corporate Debtor but Laxmi Kantha Rao Thota (Respondent No.3), who is a related party of the Corporate Debtor , filed an application under Section 7 of the I B Code in connivance with the Corporate Debtor . HELD THAT - The Adjudicating Authority has failed to exercise jurisdiction vested in it. The material irregularity brought to our notice in the resolution proceeding goes to the root of the matter and the impugned order cannot be sustained. This is notwithstanding the fact that the order of admission of application under Section 7 has not been assailed in appeal. Once it was brought to the notice of the Adjudicating Authority that the initiation of the Corporate Insolvency Resolution Process was at the instance of Respondent No.3, who was allegedly a related party on the date of filing of application as also on the date of admission of such application, fraudulently i.e. with intent to defraud the Appellant being the Sole Secured Financial Creditor of the Corporate Debtor , the Adjudicating Authority should not have abdicated its duty by deferring the decision on application under Section 65 of the I B Code preferred by the Appellant until final hearing despite recording findings and making observations that the provisions of the I B Code had been blatantly infracted by the Interim Resolution Professional by excluding Appellant from the purview of the Committee of Creditors . Admittedly, the Resolution Process has failed to fructify and the Adjudicating Authority is considering the recommendation for liquidation of the Corporate Debtor . It is queer that the pivotal issue remains to be determined while the Corporate Debtor may go into liquidation leaving the Appellant remediless, which would result in great miscarriage of justice. It is for this Appellate Tribunal to step in and ensure that such miscarriage of justice is prevented. The impugned order cannot be sustained - Matter restored before the Adjudicating Authority - Certain period to be excluded. - Appeal allowed.

Issues Involved:
1. Allegation of fraudulent intent and malicious filing of the application under Section 7 of the Insolvency and Bankruptcy Code, 2016.
2. Status of Respondent No.3 as a 'related party'.
3. Exclusion of the Appellant from the Committee of Creditors.
4. Determination of voting shares within the Committee of Creditors.
5. The role and conduct of the Interim Resolution Professional.
6. Adjudicating Authority's deferral of the decision on collusion and related party status.

Issue-wise Detailed Analysis:

1. Allegation of Fraudulent Intent and Malicious Filing:
The Appellant, 'Bank of India', contends that the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code) filed by Respondent No.3 was done fraudulently with malicious intent, not for the resolution of the 'Corporate Debtor'. The Appellant argues that this warrants the imposition of a penalty under Section 65 of the I&B Code. The Appellant claims that Respondent No.3, a 'related party' to the 'Corporate Debtor', filed the application in collusion with the 'Corporate Debtor' to defeat the legitimate interests of the Appellant and nullify actions taken under Section 34 of the SARFAESI Act, 2002.

2. Status of Respondent No.3 as a 'Related Party':
The Appellant emphasizes that Respondent No.3 is a 'related party' as he is the husband of Mrs. Archana Thota, a former Director of the 'Corporate Debtor'. The resignation of Mrs. Archana Thota as Director was submitted on 30th November 2018 and accepted on 1st December 2018. The Appellant argues that despite this resignation, Respondent No.3's status as a 'related party' should be scrutinized, as the application under Section 7 was filed while Mrs. Archana Thota was still a Director.

3. Exclusion of the Appellant from the Committee of Creditors:
The Appellant asserts that the first Committee of Creditors (CoC) meeting was conducted in its absence, and the claim of Respondent No.3 was accepted, giving him voting rights. The Appellant points out the irregularity in the CoC meeting and claims that in the second CoC meeting, Mrs. Archana Thota, a related party, was assigned a voting share of 42.96%.

4. Determination of Voting Shares within the Committee of Creditors:
The Appellant filed I.A. No. 461 of 2019 under Section 65 of the I&B Code, seeking to recall the order of admission and investigate collusion between Respondent Nos. 1 and 3. The Adjudicating Authority deferred the decision on collusion but directed a fresh determination of voting shares, resulting in the Appellant being allotted 63.95% and Respondent No.3, 36.05%. The Appellant challenged this determination, arguing that it was insufficient to replace the Resolution Professional.

5. The Role and Conduct of the Interim Resolution Professional:
The Appellant criticizes the Interim Resolution Professional (IRP) for excluding it from the CoC, despite being the sole secured financial creditor. The IRP's actions are seen as a violation of statutory provisions, and the Appellant argues that the IRP's conduct should be scrutinized for potential collusion with the 'Corporate Debtor' and Respondent No.3.

6. Adjudicating Authority's Deferral of the Decision on Collusion and Related Party Status:
The Appellant argues that the Adjudicating Authority erred in deferring the decision on the collusion and related party status of Respondent No.3. The deferral adversely impacted the Appellant's voting share and ability to replace the Resolution Professional. The Appellant contends that the Adjudicating Authority should have addressed these pivotal issues promptly to prevent miscarriage of justice.

Conclusion:
The Appellate Tribunal finds that the Adjudicating Authority failed to exercise its jurisdiction properly by deferring the decision on the collusion and related party status. The Tribunal sets aside the impugned order dated 27th November 2019 and directs the Adjudicating Authority to reconsider I.A. No. 785 of 2019, specifically addressing the status of Respondent No.3 as a 'related party' and whether the initiation of the Corporate Insolvency Resolution Process was fraudulent. The Tribunal emphasizes the need to prevent miscarriage of justice and ensures that the period of judicial intervention and lockdown is excluded from the resolution process period.

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