If Petition is filed collusively, requirements of Section 7 of IBC isn’t enough

The Appellant ‘Hytone Merchants Private Limited’ which is a company within the meaning of the Companies Act, 2013, having its registered Office at: 87, Diamond Harbour Road, Kolkata – 700038, West Bengal is the Appellant whereas the respondent ‘Satabadi Investment Consultants Private’ is a company within the meaning of the Companies Act, 2013, having its registered Office at: 235/2Ac AJC Bose Road, Kolkata – 700020, West Bengal. The matter was heard in, National Company Law Appellate Tribunal, Principal Bench, New Delhi headed by Justice A.I.S. Cheema who held that, 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. In the circumstances stated above, the hon’ble believed that the Appeals sans merit and were dismissed.

Background/Facts of the Case

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 'IBC').

The Appellant had given an unsecured loan of Rs.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. The Appellant is a Financial Creditor of the Respondent viz.  Satabadi Investment Consultants Private Limited. As stated above, the Appellant had filed the section 7 Application against the Respondent on account of default committed by the Respondent / Corporate Debtor in repaying loan amount advanced by the Appellant. The Respondent/ Corporate Debtor acknowledged receipt of the unsecured loan amount and also issued a demand promissory note. However, the Respondent Corporate Debtor defaulted to repay the dues.

The Appellant had issued a demand notice dated 16th October 2019 recalling the unsecured loan, but the Respondent Corporate Debtor failed to clear the outstanding dues despite the same. The existence of debt and default are admitted. In fact, in the Reply Affidavit filed by the Respondent/ Corporate Debtor, there is a definite admission of default.  The section 7 Application was complete in all respects and met all requirements under IBC and Regulations thereunder. However, in the impugned order dated 2nd February 2021, despite finding and ascertaining that there was indeed the existence of default and that the section 7 Application was complete in all respects, the Adjudicating Authority proceeded to dismiss the section 7 Application. The Adjudicating Authority rejected the Application filed under section 7 of the Code. Accordingly, being aggrieved by the said order, this Appeal is filed.

Contentions

The learned Counsel for the Appellant submits that by the impugned order dated 2nd February 2021, the Adjudicating Authority has dismissed the Appellant/ Financial Creditor's section 7 Application against the Corporate Debtor despite holding that; the Application was complete in all respects as required by law, and the Application clearly showed that the Corporate Debtor was in default of a debt due and payable. The default amount was more than the minimum threshold stipulated in section 4(1) of the Code. 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.

There is no basis for the finding in the impugned order that the Section 7 Application is a product of collusion between the parties. The Adjudicating Authority has referred to the master data of the Corporate Debtor and the financial statements for 2018-19 to come to the finding of collusion. However, in doing so, the Adjudicating Authority has grossly exceeded its jurisdiction and authority and/or has acted without authority or jurisdiction. Neither the Master Data nor the financial statements of the Corporate Debtor, as referred to in paragraph 9 of the impugned order, were even part of the records in the section 7 Application. It is to be noted that master data appearing on page 11 of the section 7 Application did not show the corporate guarantee amount as in paragraph 9 of the impugned order.

The Adjudicating Authority has misdirected itself in ignoring the materials on record, categorically showing the existence of default. Instead, the Adjudicating Authority has proceeded to refer to and rely on purported documents that were not on record to arrive at a finding of purported collusion without giving any opportunity to the Appellant to make submissions in this regard. The impugned order has been passed in contravention of law, the provisions of IBC and Regulations thereunder. The Adjudicating Authority has acted in excess and/or without jurisdiction in passing the impugned order without appreciating the facts and records of the case.

Under section 7(5), it is submitted that there is no discretion vested to the Adjudicating Authority to reject a section 7 Application if the default has occurred and the Application is complete.

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 enquiry dehors the records.

The only sole reason given in the impugned order to reject the section 7 Application is based on an erroneous assumption regarding the financial position of the Corporate Debtor, which is arrived based on the Corporate Debtor’s financial statement for 2018-2019 (which were anyway not on record before the Adjudicating Authority) and the Corporate Debtor's Master Data available on the MCA portal.

It is further submitted that the Corporate Debtor's financial statement for 2018-19 was not part of the records. Still, the Appellant/ Financial Creditor also was not given any opportunity to address such issues at all. This amounts to a violation of principles of natural justice since the Adjudicating Authority has arrived at an erroneous inference based on the irrelevant records, and that too, without allowing the Appellant/ Financial Creditor to make submissions regarding the same.

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 giving the Appellant/Financial Creditor opportunity to make any submissions on such issue, and thus, the impugned order of rejection is in violation of natural justice.

Without prejudice, section 65 of the Code also does not and cannot apply to the facts of the case, firstly because there is no connection between the parties. Secondly, the Appellant/Financial Creditor has demonstrated the existence of default recognised by the Adjudicating Authority. Consequently, the scheme of the Code has been ignored by the Adjudicating Authority.

The net effect of the impugned order is that the Appellant/ Financial Creditor, which has a genuine and established claim against Corporate Debtor, has been made to suffer for the Corporate Debtor's failure to make payment of the defaulted amount.

The reference by the Adjudicating Authority to the corporate guarantee mentioned in the Corporate Debtor's master data (page 40 of the Appeal) is also totally irrelevant. Assuming that any such guarantee exists, the same is a liability of the Corporate Debtor. Therefore, it is not even mentioned in the impugned order as to the relevance of the same.

Respondent/Corporate Debtor's submission

The Corporate Debtor submits that an unsecured loan of ₹three lakhs was sought from the Appellant/ Financial Creditor for six months carrying interest at the rate of 15% per annum on 15th February 2019. But due to business losses and economic recession, the Company was not able to recover and thus was unable to pay back such loan. The impugned order alleges of existing collusion, mentioned in the impugned order, is vehemently disagreed disputed as there has been proper disbursement of a sum of ₹ three lakhs.

It was taken as a loan, and by a demand notice dated 16th October 2019, the Appellant had recalled the unsecured loan, which is explained herein. However, due to staggering 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.

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 Limited. M/S Kohinoor Pulp and Paper Private Limited are under liquidation, and M/S Kohinoor Paper and Newsprint Private Limited are under the Corporate Insolvency Resolution Process. In the said matter, an application has already been filed for initiation of the liquidation process; the Corporate Debtor herein being an unsecured Financial Creditor, there is no chance of getting said money back. As per standard accounting practices, the Respondent herein is bound to show said receivable in its accounts and cannot write it off.

Conclusion

This appeal was arising out of order dated 2nd February 2021, passed by the Adjudicating Authority/ National Company Law Tribunal, Kolkata Bench, Kolkata in CP (IB) No. 2192/KB/2019] on the issue, Whether the petition complying with all requirements of section 7(5) of the Insolvency and Bankruptcy Code, 2016, but if it appears that the Application is filed collusively, not with the intention of Resolution of Insolvency, and so with malicious intent, or malafide, then whether the Application can be rejected relying on section 65 of the Code? The judgment based on Statutory provisions included, Persons who may initiate corporate insolvency resolution process, Initiation of Corporate Insolvency Resolution Process by Financial Creditor, Fraudulent or malicious initiation of proceedings while referring judgment based on, Hon'ble Supreme Court in case of Innoventive Industries Ltd. v. ICICI Bank, REED 2017 SC 08563 &, Hon’ble Supreme Court in Swiss Ribbons (P) Ltd. v. Union of India, REED 2019 SC 01504.