2023 (8) TMI 1399 - AT - Insolvency and Bankruptcy

Maintainability of application filed under Section 7 of the Insolvency and Bankruptcy Code 2016 - time limitation - HELD THAT - In the present case the Adjudicating Authority has recorded a finding in favour of the Respondent that on 11.07.2017 when the first petition was filed by the alleged Financial Creditor the date of recalling of the financial assistance in terms of clause 4 of the MOU dated 02.05.2012. However this finding cannot be accepted the date of default cannot be 11.07.2017 which in fact the date of filing of the petition under Section 7 of the Code because the date of default has to be mentioned in the petition and only thereafter the application is filed under Section 7 of the Code. It means that the date of default has to be before the date of filing of application under Section 7 of the Code and the date of filing cannot be presumed to be the date of default. As a matter of fact the Adjudicating Authority while answering the contention of the Corporate Debtor that the application under Section 7 was not within limitation has observed that therefore it can be said that the financial assistance was recalled on 11.07.2017. Since the instant petition was filed on 16.03.2018 it cannot be said that the same is barred by limitation. The application filed under Section 7 is not found to be within the period of limitation because the last payment was admittedly made on 27.02.2015. The application under Section 7 was filed on 16.03.2018 which is apparently beyond the period of three years and was barred by limitation had the date of default not been taken as 11.07.2017 by the Adjudicating Authority as the date of recall of the financial assistance. Counsel for the Appellant has referred to Section 65 of the Code which provides in the punishment for fraudulent and malicious initiation of proceedings and contended that it is a case where there was collusion for the purpose of obtaining order of admission in regard to the initiation of CIRP against the Corporate Debtor. This aspect should have been looked into by the Adjudicating Authority and should not have brushed aside only on the ground that it is not required to look into for the purpose of consideration of admission of the CP. In the end even after taking into consideration the MOU dated 02.05.2012 which is the basis of the order of admission having been passed by the Adjudicating Authority and relied upon heavily by the alleged Financial Creditor the application under Section 7 could not have been filed until and unless the financial assistance given by the Financial Creditor to the Corporate Debtor has been recalled which is a fact conspicuous by its absence in these proceedings - looking from any angle the order of admission passed by the Adjudicating Authority is found to be patently illegal. Appeal allowed.

Summary

Issues Involved:
1. Maintainability of the application under Section 7 of the Insolvency and Bankruptcy Code, 2016.
2. Limitation period for filing the application.
3. Validity and relevance of the Memorandum of Understanding (MOU) dated 02.05.2012.
4. Allegations of fabrication and forgery of documents.
5. Collusion and fraudulent initiation of proceedings under Section 65 of the Code.

Summary:

1. Maintainability of the application under Section 7 of the Insolvency and Bankruptcy Code, 2016:
The appeal was filed by the former Directors of the Corporate Debtor against the order admitting an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, filed by the alleged Financial Creditor. The Corporate Debtor contended that the application was not maintainable as there was no cause of action available with the alleged Financial Creditor to file the application due to the absence of a date of default.

2. Limitation period for filing the application:
The Corporate Debtor argued that the application was barred by limitation as the last payment was made on 27.02.2015 and the application under Section 7 was filed on 16.03.2018, beyond the three-year limitation period. The Adjudicating Authority had taken the date of default as 11.07.2017, which was the date of filing the first petition, and concluded that the application was within the limitation period. However, the Tribunal found this reasoning flawed, stating that the date of default must precede the filing date of the application.

3. Validity and relevance of the Memorandum of Understanding (MOU) dated 02.05.2012:
The alleged Financial Creditor introduced the MOU dated 02.05.2012 in the second application, which was not part of the first application. The Tribunal noted that the MOU stipulated that the financial assistance would be repaid when recalled by the Financial Creditor. The Tribunal found that there was no evidence of any recall of the financial assistance, making the application under Section 7 premature and not maintainable.

4. Allegations of fabrication and forgery of documents:
The Corporate Debtor contended that the MOU was fabricated and had not been part of the initial application. The Adjudicating Authority dismissed these allegations, stating that they were not relevant for the admission of the application under the Code. However, the Tribunal emphasized that the veracity of the MOU should have been scrutinized, especially given the identical addresses of the Corporate Debtor and Financial Creditor and the familial relationship between their directors.

5. Collusion and fraudulent initiation of proceedings under Section 65 of the Code:
The Tribunal highlighted the potential collusion between the parties to fraudulently initiate proceedings under the Code, referencing Section 65, which deals with punishment for fraudulent and malicious initiation of proceedings. The Tribunal criticized the Adjudicating Authority for not addressing this issue adequately.

Conclusion:
The Tribunal found the order of admission passed by the Adjudicating Authority to be patently illegal, set it aside, and allowed the appeal without imposing any costs. Any pending applications in this appeal were also closed.