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2021 (7) TMI 60 - AT - Insolvency and BankruptcyMaintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditors - intent of Resolution of Insolvency - malicious intent, or malafides? - Is Application filed collusively - correctness of rejection of application relying on Section 65 of the Code - Doctrine of Corporate Veil - HELD THAT - The Learned Counsel for the Appellant submits that the Adjudicating Authority had no discretion except to admit the Application filed under Section 7 of the Code. It is emphasised that Section 7 (5) of the Code leaves no discretion to the Court where other ingredients of Section 7 are fulfilled. Section 7 (5) of the Code provides that where the Adjudicating Authority is satisfied that in default has occurred and the Application under Sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed Resolution Professional, it may, by order, admit such Application. Discretion of Adjudicating Authority in relying on section 65 of IBC - HELD THAT - The use of the phrase 'it may' under Sub-section (5) of section 7 itself leaves the scope of discretion exercised by the Adjudicating Authority in admitting or rejecting the Application. Section 7 (5) (a) lays down parameters about general conditions to admit an Application. However, in the given situation where it appears that Application is filed collusively not with the purpose of Insolvency Resolution but otherwise, then despite fulfilling all the conditions of Section 7(5) of the Code, the Adjudicating Authority can exercise its discretion in rejecting the Application relying on Section 65 of the Code. Based on the law laid down by Hon'ble Supreme Court in SWISS RIBBONS PVT. LTD. AND ANR. VERSUS UNION OF INDIA AND ORS. 2019 (1) TMI 1508 - SUPREME COURT , it is clear that even if the Application filed under Section 7 meets all the requirements, then also the Adjudicating Authority has exercise discretion carefully to prevent and protect the Corporate Debtor from being dragged into the Corporate Insolvency Resolution Process mala fide. Thus, the Code prescribes penalties under Section 65 and 75. Furthermore, Section 65 explicitly says that if any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for resolution of Insolvency or liquidation, as the case may, the Adjudicating Authority may impose a penalty - it is clear that the Adjudicating Authority should be very cautious in admitting the Application so that Corporate Debtor cannot be dragged into Corporate Insolvency Resolution Process with mala fide for any purpose other than the resolution of the Insolvency. Therefore, to protect the Corporate Debtor from the mala fide Initiation of CIRP, the law has provided a penalty under sections 65 and 75 of the Code. Before admitting the Application, every precaution is necessary to be exercised so that the insolvency process is not misused for any other purposes other than the resolution of Insolvency. Doctrine of Corporate Veil - HELD THAT - The doctrine of piercing the corporate veil stands as an exception to the principle that the Company is a legal entity separate and distinct from a shareholder with its own legal rights and obligations. It seems to disregard the separate personality of Company and attribute the acts of the Company to those who are allegedly in direct control of its operation - The concept of the corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. Where, therefore, the corporate character is employed for the purpose of committing illegality or for defrauding others, the Court would ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned. Even if the petition complies with all requirements of Section 7 of the Insolvency and Bankruptcy Code, 2016, it is filed collusively, not with the intention of Resolution of Insolvency but otherwise. Therefore, it is not mandatory to admit the Application to save the Corporate Debtor from being dragged into Corporate Insolvency Resolution Process with mala fide - thus, the Adjudicating Authority decided that the petition is filed in collusion with the Corporate Debtor and thereby rejected the Petition filed U/S 7 of the Code. Appeal dismissed.
Issues Involved:
1. Whether the petition under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016, was complete and met all legal requirements. 2. Whether the petition was filed collusively with malicious intent, not for the resolution of insolvency. 3. Whether the Adjudicating Authority had the discretion to reject the petition despite it meeting all the requirements under Section 7(5) of the IBC. 4. Application of Section 65 of the IBC regarding fraudulent or malicious initiation of proceedings. Detailed Analysis: Issue 1: Completeness of the Petition The Appellant, a Financial Creditor, filed a petition under Section 7 of the IBC against the Corporate Debtor for defaulting on an unsecured loan of ?3 lakhs. The Adjudicating Authority acknowledged that the petition was complete in all respects, showing the Corporate Debtor was in default of a debt due and payable, and the default amount exceeded the minimum threshold stipulated in Section 4(1) of the IBC. Despite this, the Adjudicating Authority dismissed the petition. Issue 2: Alleged Collusion and Malicious Intent The Adjudicating Authority observed that the Corporate Debtor, with a net worth of ?15,36,39,015 and having given a corporate guarantee of ?482,42,00,000, was unlikely to be unable to repay a loan of ?3 lakhs. This led to the suspicion that the petition was filed in collusion with the Corporate Debtor. The Corporate Debtor admitted to financial difficulties due to investments in companies undergoing insolvency processes, but the Adjudicating Authority found this explanation insufficient to justify the non-payment of ?3 lakhs. Issue 3: Discretion to Reject the Petition The Appellant argued that under Section 7(5) of the IBC, if the petition is complete and default is established, the Adjudicating Authority has no discretion but to admit the petition. However, the Adjudicating Authority, citing the Supreme Court's judgment in Swiss Ribbons (P) Ltd. v. Union of India, emphasized the need to prevent the misuse of the insolvency process. It held that even if a petition meets all requirements, it can be rejected if filed with malicious intent or collusively. Issue 4: Application of Section 65 of the IBC Section 65 of the IBC provides for penalties if the insolvency resolution process is initiated fraudulently or with malicious intent. The Adjudicating Authority, supported by the Supreme Court's interpretation, held that it has the discretion to reject a petition to prevent the misuse of the insolvency process. The Authority found plausible grounds for collusion between the Financial Creditor and the Corporate Debtor, given the latter's significant net worth and corporate guarantees, and thus rejected the petition. Conclusion: The Adjudicating Authority's decision to reject the petition was based on the suspicion of collusion and malicious intent, despite the petition being complete and meeting all legal requirements. The Authority exercised its discretion under Section 65 of the IBC to prevent the misuse of the insolvency process. The appeal was dismissed, with no order as to costs.
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