INITIATION OF CORPORATE INSOLVENCY RESOLUTION PROCESS WITH MALICIOUS INTENT

Section 65(1) of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides that if, any person initiates the insolvency resolution process (‘CIRP’ for short) 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 Rs.1 lakh, but may extend to Rs.1 crore.

In Pramila Bajoria and Ors. Versus Eastern Housing Udyog Finance Limited and Ors. - 2026 (2) TMI 441 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI, the respondent, in this case, is the Financial Creditor. The appellants are the erstwhile shareholders of the corporate debtor Aruttipore Tea Company Limited. The corporate debtor obtained a loan of Rs.2.5 crores from the financial creditor for business purposes. The corporate debtor did not pay the dues.  Therefore, the Financial Creditor issued a notice directing the corporate debtor to repay the amount. This recall notice was issued on 10.09.2020. On 19.08.2021 an agreement was entered into between the Corporate Debtor and Financial Creditor to induct the nominee of the Financial Creditor in the Board of the Corporate Debtor.

The Financial Creditor filed an application before the Adjudicating Authority for the initiation of CIRP against the corporate debtor under Section 7 of the Code. The Adjudicating Authority heard the parties and reserved for orders. The Corporate Debtor offered a settlement agreement with the financial creditor. The said agreement was made on 13.04.2022. The Corporate Debtor, according to the settlement agreement would pay Rs.2.49 crores towards full and final settlement. At the time of entering the agreement the corporate debtor would pay Rs.15 lakhs and would pay the balance amount in 12 equal instalments. Based on the settlement agreement, the Adjudicating Authority dismissed the Section 7 petition on 25.04.2022. 

The Corporate Debtor issued cheques to the Financial Creditor towards the repayment of its loan which were returned unpaid.  The Financial Creditor filed a suit in Calcutta High Court. The High Court appointed a receiver. In the meantime, section 7 petition was filed before the Adjudicating Authority.  As already indicated the Adjudicating Authority dismissed the petition since the settlement agreement was entered into between the parties. 

Since the terms of the  agreement were not adhered to by the Corporate Debtor, the Financial Creditor filed again a section 7 petition for the initiation of CIRP before the Adjudicating Authority.  The Adjudicating Authority admitted the said petition.

The appellants, the erstwhile shareholders of the Corporate Debtor filed the present appeal before the NCLAT against the order of Adjudicating Authority admitting the CIRP application on the ground of fraud under Section 65 of the Act.

The appellants submitted the following before the Appellate Authority-

• Section 7 petition was initiated by the Financial Creditor fraudulently and maliciously in connivance with the Corporate Debtor.
• The loan recall noticed dated 10.09.2020 was issued by the Financial Creditor, which was signed by one Atish Kumar Shaw, authorized signatory of Financial Creditor, who has also affirmed the affidavit in reply filed by the Corporate Debtor to the application filed under Section 7.
• The Financial Creditor and the Corporate Debtor, both were acting through same individuals, which clearly indicate collusion between the parties.
• The said individual appeared for the corporate debtor before the Adjudicating Authority and also issued notices on behalf of the financial creditors.
• The section 7 petition has been filed to defeat the settlement agreement entered into between the corporate debtor and financial creditor.
• The appellants did not aware of the order passed by the Adjudicating Authority, admitting Section 7 application filed by the financial creditor since they exited from the corporate debtor.
• The initiation was both collusive and malafide and the Adjudicating Authority committed error in rejecting the application.

The Financial Creditor submitted the following before the Appellate Authority-

• In December 2023 criminal proceedings were initiated against the appellant and corporate debtor in which the appellant noticed the order of Adjudicating Authority admitting the Section 7 petition filed by the Financial Creditor.  Therefore, it is not correct on the part of the appellants that they did not award of the order passed by the Adjudicating Authority.
• The appellants ought to file appeal against the admission order under Section 7 of the Code.  But no appeal has been filed.
•  The debt and default occurred during the time when Corporate Debtor was under the management of the Appellants. 
• The default having been committed in making the payment as per the Settlement Agreement, the second CIRP was initiated.
• Mr. Atish Kumar Shaw, who has filed reply on behalf of the Corporate Debtor, was only on account of the Board Resolution, authorizing Mr. Shaw to file the reply.
• Mr. Atish Kumar Shaw was practicing Chartered Accountant and was professionally associated with the Financial Creditor and the Corporate Debtor. 
• The Board Resolution and the Power of Attorney, authorising Atish Kumar Shaw, both were signed by Appellant No.2. 
• The Adjudicating Authority has considered all facts of the case in detail and has rightly rejected the application filed by the Appellants.

The NCLAT heard the submissions of the parties to the present appeal. The NCLAT analysed the order passed by the Adjudicating Authority and also the Settlement Agreement entered into between the appellants and the Financial Creditor. The NCLAT did not accept the contents of the appellants that the petition filed under Section 7 of the Code is malicious and fraudulent. The NCLAT observed that the default was committed by the Corporate Debtor at the time when Appellants were in the management of the Corporate Debtor.  The Corporate Debtor having by Board Resolution authorized Mr. Atish Kumar Shaw to appear before the NCLT, no objection can be taken on behalf of the Ex-Directors of the Corporate Debtor that Mr. Atish Kumar Shaw could not have filed reply in Section 7 application. Giving loan recall notice on behalf of the Financial Creditor, cannot be a reason to hold that initiation of Section 7 application by Financial Creditor was fraudulent and malicious.   The Board Resolution authorizing Mr. Atish Kumar Shaw on behalf of the Corporate Debtor is subsequent to issuance of loan recall notice, hence, had there any objection with regard to Mr. Atish Kumar Shaw to represent the Corporate Debtor, the Board of the Corporate Debtor would not have passed the resolution. 

The NCLAT did not find that the initiation of CIRP has to be held malafide and fraudulent. The NCLAT held that the appellant has not produced any material that satisfies the strict standard of proof required under Section 65. Therefore, the NCLAT held that the Adjudicating Authority did not commit any error in rejecting application Section 65 application filed by the Appellant praying for rejection of Section 7 proceedings and recall of admission order dated15.12.2023.