2022 (9) TMI 172 - AT - Insolvency and Bankruptcy

Rejection of application for initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditors - Shell/fictitious companies - existence of financial debt or not - HELD THAT - On examination of the impugned order and material available on record there is serious doubt on the actual entity of the appellants as company incorporated for doing legal business. There is serious doubt on the so called companies lending to the corporate debtor. The appellants are under the serious cloud of shell/fictitious companies. Of course without proper detailed enquiry or investigation, a specific finding may not be recorded on the issue but facts remain that there was lack of existence of financial debt. Accordingly, it is difficult to find any defect in the impugned order. The impugned order assigns detailed reasons and discussing every fact the Learned Adjudicating Authority has rightly rejected the application filed by the Appellants under Section 7 of the IB Code. Simply rejection of this Appeal may not serve the purpose. Instead it is intended to dismiss the present appeal with imposing heavy cost. There are many circumstances which have been discussed suggests that either lending loan by the appellants were only paper transaction/sham transaction or said loans were shown to be repaid within one or two days from the date of lending. In case of Appellant No.1, this fact has already been established and noticed - it is considered that the appellants have abused the process of the Court and as such it is a fit case which can be dismissed with imposition of a cost of Rs.1 lakh. The Appellants are directed to deposit the cost of Rs.1 lakh in the account of Prime Minister s National Relief Fund within one month from the date of this order - The Appeal stands dismissed with cost of Rs.1 lakh on the Appellants.

Summary

Issues Involved:
1. Rejection of the application under Section 7 of the Insolvency & Bankruptcy Code, 2016 (IB Code) by NCLT.
2. Examination of the existence of corporate debt and default.
3. Analysis of the agreements and transactions between the parties.
4. Consideration of the assessment order by the Income Tax Department.
5. Determination of the genuineness of the financial transactions.
6. Examination of the delay in raising claims by the appellants.
7. Evaluation of the forensic audit report.
8. Imposition of costs for abuse of the court's process.

Issue-wise Detailed Analysis:

1. Rejection of the Application under Section 7 of IB Code by NCLT:
The appellants challenged the NCLT's order dated 13.06.2022, which rejected their application under Section 7 of the IB Code. The NCLT dismissed the application after examining whether there was an existence of default or not.

2. Examination of the Existence of Corporate Debt and Default:
The appellants provided Inter Corporate Deposits to the respondent, Burnpur Cement Ltd, through agreements dated 14.04.2014, 13.10.2014, and 15.12.2014. The NCLT found that although TDS was deducted on interest for the financial years 2014-15 and 2015-16, there was no evidence of interest payment or TDS deduction thereafter. The appellants issued demand notices in 2020, after a lapse of several years, which raised doubts about the legitimacy of their claim. The Tribunal concluded that the claim was barred by the law of limitation.

3. Analysis of the Agreements and Transactions Between the Parties:
The agreements were examined, revealing that the contents were almost identical except for the names and addresses of the parties. The agreements lacked a fixed repayment period and stated that the loan amounts would be repaid on demand. The NCLT noted that the appellants' registered offices were the same, raising further doubts about the legitimacy of the transactions.

4. Consideration of the Assessment Order by the Income Tax Department:
The NCLT considered the assessment order dated 31.12.2018, which found that the transactions were not genuine and were part of a tax evasion scheme involving shell companies. The Income Tax Department had added Rs. 3,30,00,000 as income of the corporate debtor, concluding that the loans were arranged affairs and not genuine unsecured loans.

5. Determination of the Genuineness of the Financial Transactions:
The NCLT found that the financial transactions did not appear genuine. The agreements were identically worded, and there was no explanation for the purpose of the loans. The appellants were not registered as NBFCs or under the Bengal Money Lenders Act, 1940, and had common directors and registered offices, which further raised doubts.

6. Examination of the Delay in Raising Claims by the Appellants:
The NCLT noted that the appellants did not take any action to seek repayment or check the status of their outstanding amounts for over four years, which was inconsistent with the conduct expected of a bona fide lender. This unexplained delay cast serious doubts on the genuineness of their claims.

7. Evaluation of the Forensic Audit Report:
The forensic audit report dated 14.01.2021 revealed that the corporate debtor had repaid/adjusted unsecured loans during FY 2015-16 and 2016-17, amounting to preferential transactions. The NCLT considered this report along with the assessment order and other facts, concluding that the transactions were not bona fide financial debts.

8. Imposition of Costs for Abuse of the Court's Process:
The NCLT found that the appellants had abused the court's process by making sham transactions and raising claims after a significant delay. The Tribunal dismissed the appeal with a cost of Rs. 1 lakh, to be deposited in the Prime Minister's National Relief Fund within one month. The appellants were directed to submit proof of deposit within 10 days thereafter.

Conclusion:
The NCLT dismissed the application under Section 7 of the IB Code, finding that the appellants' claims were not genuine and were barred by the law of limitation. The Tribunal imposed a cost of Rs. 1 lakh on the appellants for abusing the court's process.