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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 ..... as the 'Adjudicating Authority Rules') has been rejected. The Adjudicating Authority has also imposed penalty of Rs. Ten Lakhs on the appellant - Corporate Debtor under Section 65 of the I & B Code. 2. The questions involved in this appeal are : (i) Whether non-disclosure of facts beyond the statutory requirement under the I & B Code read with relevant form, prescribed under the Insolvency and Bankruptcy (Application to Adjudicating Authority), Rules, 2016 can be a ground to dismiss an application for initiation of Corporate Insolvency 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 particul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant of which are quoted below: "12. In addition to the above details which have not been fully disclosed in the petition, Learned Counsel also contends that in relation to the Defence Enclave property of its objection statement, which property is also in the personal name of the Directors of the company, is also caught in the web of legal entanglement deliberately created by the directors of the petitioner in relation to the said property, as a civil suit again for permanent and mandatory injunction being No.9398/2016, 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 occupyi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s come to this sorry state of affairs only due to the deliberate actions of the Directors of the corporate debtor and the way in which the Directors have managed the company. This situation has not arisen out of the business cycle as contended by the Corporate Debtor. It is also averred by the objector Bank that the Corporate Debtor is under enquiry by Department of Revenue Intelligence (DRI)." 7. Having noticed the aforesaid facts, the Adjudicating Authority observed as follows : "14. From the above facts, it is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew Delhi. Civil Suit titled "Mayank Maheshwari v. Anurag Garg" registered as CS DJ/000094/2017 before Ld. Tis Hazari Courts seeking declaration, mandatory and permanent injunction. An S.A. under Sec.17 of SARFAESI Act, 2002 also filed by Mr. Mayank Maheshwari in collusion with Mr. Anurag is pending adjudication before Lf. DRT. The contention of the Appellant that the suit is with respect to the basement and mezzanine floor, which are not mortgaged with 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 Applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the priority of payment of government dues and to establish an Insolvency and Bankruptcy Fund, and matters connected therewith or incidental thereto. An effective 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can negotiate the assessment of viability with the confidence that the debtors will not take any action to erode the value of the enterprise. The professional will have the power and responsibility to monitor and manage the operations and assets of the enterprise. The professional will manage the resolution process of negotiation to ensure balance of power between the 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 bette ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 3(11), which in turn tells us that a debt means a liability of obligation in respect of a "claim" and for the meaning of "claim", we have to go back to Section 3(6) which defines "claim" to mean a right to payment even if it is disputed. The Code gets triggered the moment default is of rupees one lakh or more (Section 4). The corporate insolvency resolution 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corporate debtor before the Adjudicating Authority when a default has occurred. Explanation.-For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor. (2) The financial creditor shall make an application 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- &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty. (5) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (4) of this section." 20. Under both Section 7 and Section 10, the two factors are common i.e. the debt is due and there is a default. Sub-section (4) of Section 7 is similar to that of sub-section (4) of 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 Adjudic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 10, if all the information in terms of Section 10 of the I & B Code and Form 6 has been supplied by a Corporate Applicant/Corporate Debtor and the application is otherwise complete. Non-mentioning of suit(s) pending between the parties cannot termed to be suppression of facts nor can be a ground to reject the application. 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 SARFA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quidation order", against a Corporate Debtor. The word 'winding up' has not been mentioned therein. For the said reason by Section 255 read with Schedule 11 of the I & B Code, in Section 2 of the Companies Act, 2013 for clause (23), the following clause has been substituted : "1. In section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (11) of Section 5 is read with Section 65 it is clear that if a 'Financial Creditor', or 'Corporate Applicant' or 'Operational Creditor' makes an application to the Adjudicating authority for initiating Corporate Resolution Process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or 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 init ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Adjudicating Authority will grant time to the appellant to remove the defects. 43. 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. 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 releva ..... X X X X Extracts X X X X X X X X Extracts X X X X
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