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TMI Blog2018 (1) TMI 505X X X X Extracts X X X X X X X X Extracts X X X X ..... the Corporate Applicant recording its prima facie view and intent to punish the Corporate Applicant, the impugned order dated 8th May, 2017 cannot be upheld having been passed in violation of rules of natural justice. For the reasons aforesaid, the impugned order dated 8th May, 2017 passed in C.P.is set aside. The case is remitted back to the Adjudicating Authority for admission of the application under Section 10, if the application is otherwise complete. In case it is incomplete, the Adjudicating Authority will grant time to the appellant to remove the defects. At this stage, it is desirable to state that the Central Government in Form 1 or 5 or 6 of the ‘Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016’, has not provision for the parties to state whether any winding up proceeding has been initiated or liquidation order has been passed against the Corporate Debtor or not. No provision has been made there in for the parties to state whether any of clause of Section 11 is attracted or not. Non-disclosure of such relevant facts in the relevant Form 6, may be a ground to reject the application but a person can plead that the Form does not stipula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vency Resolution Process ? and (ii) Whether the penalty imposed by the Adjudicating Authority under Section 65 of the I B Code is legal or not? 3. The brief facts of the case are that the appellant - Corporate Debtor /Corporate Appellant filed an application under Section 10 in Form 6 for initiation of Corporate Insolvency Resolution Process against it on the ground that it has failed to pay the debt due to financial creditors and other creditors. On notice, Punjab National Bank (Financial Creditor) appeared and alleging the suppression of facts on the ground that the appellant has not disclosed the full facts and has not furnished full particulars in relation to the assets mortgaged or the securities furnished to the financial creditors. It was also alleged that the legal proceeding in respect of certain properties includes Khari Baoli property has been entangled by the owners themselves. In view of such submission the application preferred by the appellant has been rejected. 4. Before discussing the stand taken by appellant (Corporate Debtor), it is desirable to notice the stand taken by Respondent - Punjab National Bank. 5. According to the respondent Punjab Nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 016, titled as Sh. Jagat Nath Mahto v. Vedika Overseas Tradex (P.) Ltd. Ors. is pending consideration before the Learned ASCJ, Karkardooma Court, Delhi and that the next date of hearing is fixed for 12.05.2017 and incidentally, it is pointed by the Financial Creditor that the plaintiff in the above said suit allegedly also happens to be someone close to the directors/ promoters of the petitioner company, namely, a driver working in one of the sister concerns in which both Ms. Ritu Garg and Mr. Anurag Garg, being the Directors of the petitioner company are also involved. The claim of the said person who happens to be a driver as stated above is that he is occupying the said Defence Enclave property on tenancy and that he has also been paying rent in relation to the same and in the circumstances, his possession should not be disturbed except under due process of law. Learned Counsel for the Bank also points out that the above said suit came to be filed in collusion with the Directors of the applicant company on 10.05.2016 after the issue of notice under Section 13(2) of the SARFAESI Act, 2002 by the bank to the corporate debtor and its Directors and guarantors. 13. A similar s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s averred by the Banks that it is clear that the Corporate debtor and directors also being guarantors are trying to avoid making lawful payments of the dues owed to the Bank and also thwarting the Bankers from realizing the securities by initiating several legal proceedings in different courts and Forums with the sole motive of removing their personal properties from the clutches of law and that the instant action before this Tribunal is yet another attempt in the same direction. 8. Learned counsel appearing on behalf of the appellant submitted that the application under section 10 in Form 6 was filed with the following documents : (i) List of financial creditors and operational creditors as per the balance sheet for the year 2015-16. (ii) Details of the security created by the Directors of the Corporate Applicant for the loan obtained by the bank. (iii) the company master data (iv) books of accounts/balance sheets evidencing the default to the creditors. (v) details of identifiable assets in the name of Directors of the company who stood as guarantors to the loans obtained from the bank (vi) details of guarantee given by the guarantors in relation to the deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Answering Respondent proves to be false in wake of the prayer made in the afore-mentioned Civil Suit, which includes the ground floor (@ pg.377 of the Appeal) Single storied house at 83, Defence Enclave, Vivek Marg, Delhi 110 092 Civil Suit for permanent and mandatory injunction bearing No. 9398/2016 titled as Sh. Jagar Nath Mehto v. Vedika Overseas Tradex Ltd. before Ld. ASCJ, Karkardooma Court, Delhi filed by Shri Mehto alleging that he was induced as tenant in the property after appointment as a driver in the company of which Sh. Anurag and Ms. Ritu Garg are directors. An S.A. under Section 17 of SARFAESI Act is also pending before Ld. DRT-II. House No. D-3A, Dayanand Block, Delhi 110 092 A Securitization Application filed under Section 17 of the SARFAESI Act, 2002 by Sh. Anurag Gar titled as Anurag Garg v. Punjab National bank Ors. Bearing S.A. No. 120/2016 pending adjudication 13. It was further submitted that the appellant is not precluded in law to initiate proceedings under the provisions of SARFAESI Act, 2002 as has been initiated and the appellant is duty bound t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive legal framework for timely resolution of insolvency and bankruptcy would support development of credit markets and encourage entrepreneurship. It would also improve Ease of Doing Business, and facilitate more investments leading to higher economic growth and development. 3. The Code seeks to provide for designating the NCLT and DRT as the Adjudicating Authorities for corporate persons and firms and individuals, respectively, for resolution of insolvency, liquidation and bankruptcy. The Code separates commercial aspects of insolvency and bankruptcy proceedings from judicial aspects. The Code also seeks to provide for establishment of the Insolvency and Bankruptcy Board of India (Board) for regulation of insolvency professionals, insolvency professional agencies and information utilities. Till the Board is established, the Central Government shall exercise all powers of the Board or designate any financial sector regulator to exercise the powers and functions of the Board. Insolvency professionals will assist in completion of insolvency resolution, liquidation and bankruptcy proceedings envisaged in the Code. Information Utilities would collect, collate, authenticate and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditors and debtor, and protect the rights of all creditors. The professional will ensure the reduction of asymmetry of information between creditors and debtor in the resolution process. II. The Code will enable symmetry of information between creditors and debtors. 5. The law must ensure that information that is essential for the insolvency and the bankruptcy resolution process is created and available when it is required. 6. The law must ensure that access to this information is made available to all creditors to the enterprise, either directly or through the regulated professional. 7. The law must enable access to this information to third parties who can participate in the resolution process, through the regulated professional. III. The Code will ensure a time-bound process to better preserve economic value. 8. The law must ensure that time value of money is preserved, and that delaying tactics in these negotiations will not extend the time set for negotiations at the start. IV. The Code will ensure a collective process. 9. The law must ensure that all key stakeholders will participate to collectively assess viability. The law mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process may be triggered by the corporate debtor itself or a financial creditor or operational creditor. A distinction is made by the Code between debts owed to financial creditors and operational creditors. A financial creditor has been defined under Section 5(7) as a person to whom a financial debt is owed and a financial debt is defined in Section 5(8) to mean a debt which is disbursed against consideration for the time value of money. As opposed to this, an operational creditor means a person to whom an operational debt is owed and an operational debt under Section 5(21) means a claim in respect of provision of goods or services. 28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor - it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed. (3) The financial creditor shall, along with the application furnish- (a) record of the default recorded with the information utility or such other record or evidence of default as may be specified; (b) the name of the resolution professional proposed to act as an interim resolution professional; and (c) any other information as may be specified by the Board. (4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub- section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3). (5) Where the Adjudicating Authority is satisfied that- (a) a 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; or (b) default has not occurred or the application under sub-section (2) is incomplete or any disciplinary proceeding is pendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 10. Therefore we, hold that the law laid down by the Hon ble Supreme Court in Innoventive Industries Ltd. (supra) is applicable for Section 10 also, wherein the Hon ble Supreme Court observed as The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority . 21. In an application under Section 10, the financial creditor or operational creditor , may dispute that there is no default or that debt is not due and is not payable in law or in fact. They may also oppose admission on the ground that the Corporate Applicant is not eligible to make application in view of ineligibility under Section 11 of the I B Code. The Adjudicating Authority on hearing the parties and on perusal of record, if satisfied that there is a debt and default has occurred and the Corporate Applicant is not ineligible under Section 11, the Adjudicating Authority has no option but to admit the application, unless it is incomplete, in which case the Corporate Applicant is to be grante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. In fact, once the application under Section 10 is admitted, all such related proceedings, including suits for recovery of moveable or immovable property of the Corporate Debtor and other proceeding cannot proceed further in any Court or Tribunal or Authority in view of order of moratorium as may be declared under Section 13 and prohibition that may be imposed under Section 14 of I B Code. 25. Similarly, if any action has been taken by a Financial Creditor under Section 13(4) of the SARFAESI Act, 2002 against the Corporate Debtor or a suit is pending against Corporate Debtor under Section 19 of DRT Act, 1993 before a Debt Recovery Tribunal or appeal pending before the Debt Recovery Appellate Tribunal cannot be a ground to reject an application under Section 10, if the application is complete. 26. Any proceeding under Section 13(4) of the SARFAESI Act, 2002 or suit under Section 19 of the DRT Act, 1993 pending before Debt Recovery Tribunal or appeal pending before Debt Recovery Appellate Tribunal cannot proceed in view of the order of moratorium as may be passed. 27. It is also desirable to refer to Section 238 of the I B Code, as quoted below : 238. Prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,- (a) for clause (23), the following clause shall be substituted, namely:- xxx xxx xxx (23) Company Liquidator means a person appointed by the Tribunal as the Company Liquidator in accordance with the provisions of section 275 for the winding up of a company under this Act ; (b) after clause (94) , the following clause shall be inserted, namely:- (94A) winding up means winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable. 31. By aforesaid amendment, the legislatures have made it clear that the word winding up mentioned in the Companies Act, 2013 is synonymous to the word liquidation as mentioned in the I B Code. 32. In view of the provisions aforesaid, we hold that, if any winding up proceeding has been initiated against the Corporate Debtor by the Hon ble High Court or Tribunal or liquidation order has been passed, in such case the application under Section 10 is not maintainable. However, mere pendency of a petition for winding up, where no order of winding up or order of liquidation has been passed, cannot be ground to reject the application under Section 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liquidation, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees in terms of sub-section (1) of Section 65. Similarly, if any person such as Corporate Applicant initiates voluntary liquidation proceedings with the intent to defraud any person, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees but may extend to one crore rupees in terms of sub-section (2) of Section 65. 37. From the aforesaid provision, it is clear that for imposition of penalty under Section 65, the Adjudicating Authority on the basis of record is required to form prima facie opinion that the person (Financial Creditor / Corporate Applicant / Operational Applicant) has filed the petition for initiation of proceeding fraudulently or with malicious intent for the purpose other than the resolution of the insolvency or liquidation or that voluntary liquidation proceedings has been filed with the intent to defraud any person. 38. No such penalty under sub-section (1) or (2) of Section 65 can be imposed by the Adjudicating Authority without recording opinion f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liquidation order has been passed against the Corporate Debtor or not. No provision has been made there in for the parties to state whether any of clause of Section 11 is attracted or not. 44. Non-disclosure of such relevant facts in the relevant Form 6, may be a ground to reject the application but a person can plead that the Form does not stipulate to disclose any ineligibility under Section 11. Therefore, we are of the view that the Central Government should make necessary amendment in the relevant Form 6 appended to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, which will enable the Adjudicating Authority to decide at the time of admission whether any fact has been suppressed or the person has come with the clean hand or not. We hope and trust that appropriate modification of the relevant Rules and Forms shall be made by the Central Government. 45. In the meantime, the Adjudicating Authority may direct the Financial Creditors / Corporate Applicant to file an affidavit giving declaration in terms of Section 11 of the I B Code and to state whether any winding up proceeding has been initiated or liquidation order has been passed by any ..... X X X X Extracts X X X X X X X X Extracts X X X X
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