Dismissal of fraudulent Insolvency petition under Section 7 of IBC triggers show cause notices

The court dismissed the petition filed under Section 7 of the Insolvency and Bankruptcy Code, finding it was filed fraudulently with malicious intent. Show cause notices were issued against the petitioner Financial Creditors under Section 65 of the IBC. The court emphasized that the IBC should not be used in cases of financial fraud, especially when it involves public interest and retail investors. The order was communicated to SEBI and the Central Government, with further proceedings scheduled for August 7, 2018.

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Issues Involved:
1. Default in payment of debentures.
2. Corporate Insolvency Resolution Process (CIRP) initiation.
3. Financial fraud allegations.
4. Jurisdiction and applicability of Insolvency and Bankruptcy Code (IBC).
5. Public interest and implications of moratorium under IBC.

Issue-wise Detailed Analysis:

1. Default in Payment of Debentures:
The Corporate Debtor issued debentures amounting to Rs. 81,34,000 to the applicants, which were to be repaid on the redemption date along with monthly income in some cases. The Corporate Debtor initially made some payments but later defaulted, resulting in an outstanding amount of Rs. 96,15,553. Despite constant reminders, the debtor failed to repay, leading the Financial Creditors to file the petition under Section 7 of the Insolvency & Bankruptcy Code, 2016.

2. Corporate Insolvency Resolution Process (CIRP) Initiation:
The Financial Creditors filed the petition to initiate CIRP against the Corporate Debtor. The declaration from the Insolvency Professional was received, and the application was claimed to be complete and in conformity with Section 7 of the Code. The Corporate Debtor did not oppose the petition, stating that CIRP would be in the interest of debenture holders and the debtor.

3. Financial Fraud Allegations:
The Amicus Curiae report indicated that the Corporate Debtor committed financial fraud by issuing secured debentures of Rs. 31.79 crores with inadequate security and possibly diverting funds to group companies and associates. The company’s financial statements were not filed for several years, raising suspicions of illegal disposal of assets and financial irregularities.

4. Jurisdiction and Applicability of Insolvency and Bankruptcy Code (IBC):
The Tribunal considered whether insolvency application could be entertained in a case involving financial fraud. It was noted that the provisions of the IBC are intended for resolving insolvency and not for cases involving financial fraud or irregularities. The Corporate Debtor's actions resembled a Ponzi scheme, and the Tribunal emphasized that the IBC should not be used to interfere in cases of financial fraud.

5. Public Interest and Implications of Moratorium under IBC:
The Tribunal highlighted the public interest involved, as the debentures were issued to over 3000 retail investors. The moratorium under IBC would halt the execution of orders for immediate repayment, harming the interests of retail investors. The Tribunal stressed that the IBC's benevolent scheme for resolution should not be applied to cases of corporate fraud. Additionally, the Tribunal noted that financial service providers are excluded from the IBC's ambit, and the Corporate Debtor, engaged in accepting deposits without proper registration, should not benefit from the IBC.

Conclusion:
The Tribunal concluded that the petition was filed fraudulently with malicious intent to initiate CIRP and benefit from the moratorium. Therefore, the petition was dismissed, and show cause notices under Section 65 of the IBC were issued against the petitioner Financial Creditors. The order was communicated to SEBI and the Central Government, with further proceedings scheduled.

Order:
The petition filed under Section 7 of the IBC was dismissed, and show cause notices under Section 65 of the IBC were issued against the petitioner Financial Creditors. The case was listed for further proceedings on 7th August 2018.

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