Adjudicating Authority Can Terminate CIRP under Section 65 of the IBC if a Section 7 Application is Found to be Fraudulent or Malicious
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NCLAT held that the Adjudicating Authority can terminate the Corporate Insolvency Resolution Process under Section 65 of the IBC if it is found that the Section 7 application was filed with fraudulent or malicious intent.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka, reviewed an appeal and held that the Adjudicating Authority is empowered under Section 65 of the IBC to terminate a CIRP if it finds that the Section 7 application was filed with fraudulent or malicious intent. The Tribunal observed that ordinary business transactions mischaracterized as financial debt to misuse the insolvency process, along with collusion, falsification of records, and non-compliance with statutory requirements, can justify the recall of a CIRP admission order.
In a significant ruling, the National Company Law Appellate Tribunal (NCLAT) dismissed an appeal filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC), challenging the termination of the Corporate Insolvency Resolution Process (CIRP) against Sharp Eye Advertising Pvt. Ltd. The appeal arose from the order dated 12.06.2024 passed by the Adjudicating Authority (NCLT, New Delhi Bench-II), whereby it had allowed an application under Section 65 of the IBC filed by Rockman Advertising (Respondent No. 1), and consequently terminated the CIRP initiated on 17.05.2022 based on Section 7 applications filed by Acute Daily Media Pvt. Ltd. and other financial creditors. The Respondent alleged that the Section 7 proceedings were initiated with malicious intent and in collusion with the promoters of the Corporate Debtor, and sought to demonstrate that the initiation of insolvency proceedings was a pre-emptive step to block the Respondent from regaining control after a favorable order in an Oppression and Mismanagement Petition.
The Appellants relied on audit reports, loan agreements, and the affidavit of the Resolution Professional (RP) to assert that a genuine financial debt and default existed. However, the statutory auditor’s reports for the relevant financial years contradicted the existence of such loans, revealing no interest-bearing borrowings or borrowing costs in the Corporate Debtor’s financials. Additionally, the increase in the Corporate Debtor’s deposits coinciding with the alleged loan amount raised suspicions of collusion. The Appellants also failed to reconcile the lack of accrued interest income in their own balance sheets, and could not rebut allegations that the documentation was fabricated to meet the financial threshold of Section 4 of the IBC.
The RP’s independent findings, as directed by the Adjudicating Authority, further highlighted material inconsistencies, including discrepancies in board resolutions, missing statutory approvals, and the absence of stamp duty on the loan agreements. The RP’s report confirmed that no board resolutions authorizing the loans were found in the statutory records, and the statutory auditors had not acknowledged the existence of such loans or interest payments in the financial statements. The RP observed that the claims lacked verifiable financial substance, thereby casting doubt on their legitimacy. The Appellants’ reliance on ledger entries and balance sheet acknowledgments was found to be insufficient to overcome the evidentiary gaps and contradictions highlighted by the RP.
The NCLAT agreed with the findings of the Adjudicating Authority and noted that the Section 7 petition was pursued with the intention to misuse the insolvency process. The Tribunal emphasized that the material discrepancies between audit reports, statutory filings, and the loan documentation, coupled with the lack of interest income and absence of regulatory compliance under the Companies Act, 2013, particularly Section 186(2)(a), substantiated the claim of a fraudulent initiation of CIRP. The Tribunal reiterated that proceedings under the IBC must not be used as a tool for settling disputes arising from collusive or mala fide transactions.
Ultimately, the NCLAT concluded that the Appellants had filed the Section 7 application with malicious intent, misrepresenting ordinary business transactions as financial debt to invoke the IBC mechanism. It upheld the Adjudicating Authority’s jurisdiction under Section 65 to terminate a CIRP initiated fraudulently, and found that the Appellants failed to substantiate the existence of a valid financial debt. The appeal was accordingly dismissed, and the Tribunal affirmed the need to preserve the integrity of the insolvency process against its misuse through collusive and deceptive practices.
Mr. Krishnendu Datta, Sr. Advocate with Mr. Akhil Nene and Mr. Shivam Gautam, Advocates, represented the Appellants.
Mr. Sakal Bhushan and Mr. Vasu Bhushan, Advocates, appeared for Respondent No. 1.
Ms. Eshna Kumar, Mr. Harpreet Singh Malhotra and Mr. Lakshmi Kant, Advocates, appeared for Respondent No. 3 to Respondent No.10.
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