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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.
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