TMI Blog2021 (7) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e A.I.S. Cheema] The Officiating Chairperson And [V. P. Singh] Member (Technical) For the Appellant : Mr Shaunak Mitra and Mr Sarad Singhania, Advocates For the Respondent : Ms Swati Sood, Advocate JUDGMENT [ Per; V. P. Singh, Member (T) ] This Appeal emanates from the order dated 2nd February, 2021, passed by the Adjudicating Authority/National Company Law Tribunal, Kolkata Bench, Kolkata in CP (IB) No. 2192/KB/2019, whereby the Adjudicating Authority has rejected the Application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (in short 'I B Code'). The original status of the Parties in the Company Petition represents them in this Appeal for the sake of convenience. 2. The brief facts of the case are as follows: (a) The Appellant had given an unsecured loan of ₹ 3 lakhs to the Respondent / Corporate Debtor for six months carrying interest @ 15% per annum, on 15th February 2019. This was under request for financial assistance by the Respondent / Corporate Debtor. (b) The Appellant is a Financial Creditor of the Respondent viz. Satabadi Investment Consultants Private Limited. As stated above, the Appellant had filed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... default of a debt due and payable. The default amount was more than the minimum threshold stipulated in Section 4 (1) of the Code. 4. The Adjudicating Authority has overreached and exceeded its authority and jurisdiction in passing the impugned order. Accordingly, the impugned order is liable to be set aside. Accordingly, the Section 7 Application should be admitted by commencing the Corporate Insolvency Resolution Process (CIRP) regarding the Respondent Corporate Debtor. 5. In paragraph 9 of the impugned order, there is a definite finding by the Adjudicating Authority that the Section 7 Application was complete in all respects. Consequently, there was existing default, also meeting the minimum threshold under IBC. In the circumstances, under Section 7(5) of IBC, the Adjudicating Authority had no further discretion to exercise in the matter and ought to have admitted the Section 7 Application. However, the Adjudicating Authority, instead of following the mandate of Section 7(5) of IBC, has proceeded with an unjustified and roving enquiry of its own (without even affording any opportunity to the Appellant to make any submissions in such regard) to hold that the Section 7 Appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observations of the Hon'ble Supreme Court, which leaves no room for doubt that there is no discretion to reject if there is default and the Application is complete. 13. However, in passing the impugned order, the Adjudicating Authority has acted in derogation of the settled principles of law. Therefore, Ex-facie, the impugned order deserves to be set aside on this ground alone, especially after the Adjudicating Authority has arrived at the factual finding that debt was due, default by the Corporate Debtor, and the Application was complete in all respects. Furthermore, there were no facts on record to warrant the exercise of discretion to reject the Application. 14. Section 7 (4) of the Code is also relevant since the same categorically provides that the Adjudicating Authority is required to 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) . This evidences the scope of an adjudication of the Adjudicating Authority, i.e. adjudication is to be made on the evidence disclosed and on record. The Adjudicating Authority is not empowered to initiate a roving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estments, where the Corporate Debtor has no chance of getting its money back, and the amounts are reflected in the accounts as per the accounting standard since the same cannot be immediately written off. The Corporate Debtor has disclosed that the said two companies are under CIRP and in liquidation, respectively, under the provisions of the Code. The Appellant/Financial Creditor has also enquired ascertained that even in respect of Kohinoor Newsprint, Application for liquidation is already filed. In short, the net worth of the Corporate Debtor stands substantially eroded after 31st March 2019. 20. Further, it is pertinent to mention that the Appellant/Financial Creditor has no relation or connection with the Corporate Debtor. Even the Adjudicating Authority has not found any relationship or connection. Thus the conclusion drawn by the Adjudicating Authority of collusion existing between Financial Creditor and the Corporate Debtor is unwarranted, unfounded and bereft of any basis. There are no particulars to support the finding of collusion. A finding of collusion cannot be the outcome of guesswork, which is exactly the case in the impugned order and that too, without even givi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aggering economic and business exigencies, the same could not be fulfilled, and the amount was not returned timely. Moreover, the Corporate Debtor Company had made several other commitments and investments, and it was in no current position to pay back the recalled amount. 27. As per the order dated 4th April 2021, necessary clarifications were sought regarding the balance-sheet with regards to its mention in the Order of National Company Law Tribunal, dated 4th January 2021, where it is mentioned that the net worth of the Company's ₹ 15,36,39,015 as per the financial statements of 2018-2019. The Respondent contends that the Application was filed during the said period 2019-2020. But at the present situation, when the Hon'ble Tribunal passed the order, and that is on or about 4th January 2021, the condition of the Company had starkly deteriorated, and the Respondent Company was not in a condition to pay back the same. Additionally, it will be evident from the entries in the balance sheet of the Respondent herein that the Corporate Debtor has made substantial investments in M/S Kohinoor Pulp and Paper Private Limited and M/S Kohinoor Paper and Newsprint Private Limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such Application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the Application shall be deemed to be withdrawn before its admission.] 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 Auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rupees. Judgements Referred 29. Hon'ble Supreme Court in case of Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 : 2017 SCC OnLine SC 1025 : (2018) 1 SCC (Civ) 356 at page 438 held: 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 a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in Part III, particulars of the financial debt in Part IV and documents, records and evidence of default in Part V. Under Rule 4(3), the applicant i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its creation, its estimated value as per the creditor; (b) Certificate of registration of charge issued by the Registrar of Companies (if the corporate debtor is a company); (c) Order of a court, Tribunal or arbitral panel adjudicating on the default; (d) Record of default with the information utility; (e) Details of succession certificate, or probate of a will, or letter of administration, or court decree (as may be applicable), under the Indian Succession Act, 1925; (f) The latest and complete copy of the financial contract reflecting all amendments and waivers to date; (g) A record of default as available with any credit information company; (h) Copies of entries in a bankers book in accordance with the Bankers Books Evidence Act, 1891. 54. It is clear from these sections that information in respect of debts incurred by financial debtors is easily available through information utilities which, under the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 (Information Utilities Regulations), are to satisfy themselves that information provided as to the debt is accurate. This is done by giving notice to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judicating authority's satisfaction under Section 7(5) of the Code, the corporate debtor is served with a copy of the Application filed with the adjudicating authority and has the opportunity to file a reply before the said authority and be heard by the said authority before an order is made admitting the said Application. 59. What is also of relevance is that in order to protect the corporate debtor from being dragged into the corporate insolvency resolution process mala fide, the Code prescribes penalties. Thus, Section 65 of the Code reads as follows: 65. Fraudulent or malicious initiation of proceedings.- (1) If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of Insolvency, or liquidation, as the case may be, 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. (2) If, any person 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 le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 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. 34. 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. 35. Hon'ble Supreme Court in Swiss ribbons (P) Ltd v Union of India, (2019) 4 SCC 17 held; Para 55. ***** A conjoint reading of all these Rules makes it clear that at the stage of the adjudicating authority's satisfaction under Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udicating Authority has exercise discretion carefully to prevent and protect the Corporate Debtor from being dragged into the Corporate Insolvency Resolution Process mala fide. 38. Therefore, 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. 39. Thus, 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. 40. It is pertinent to men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r punishment or fraudulent or malicious initiation of proceedings. It does not mean that Section 65 will not be applicable to prevent such fraudulent or malicious initiation of proceedings. When a statute makes a provision for punishment for any wrong, it also contains deemed power to prevent it. Therefore it cannot be said that section 65 will be applicable only after initiation of the Corporate Insolvency Resolution Process fraudulently or with malicious intent. 45. Based on the above discussion, we believe that 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. 46. In the instant case, the Adjudicating Authority has observed that on perusal of the master debt of the Corporate Debtor it is seen that the Corporate Debtor has given a corporate guarantee of ₹ 482,42,00,000. On further enquiry and perusal of the financial statements for the Financial Year 2018-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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