2020 (10) TMI 1255 - Tri - Insolvency and Bankruptcy

Application Dismissed: Collusion in CIRP Process

The Tribunal dismissed the application to initiate Corporate Insolvency Resolution Process (CIRP) due to collusion between the Financial Creditor and the ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditors - Non-performing assets - existence of debt and dispute or not - HELD THAT:- As per the practice MCA Data of the Corporate Debtor is required to be filed alongwith application filed under Section 7 of the Insolvency & Bankruptcy Code, 2016, which was not attached initially, hence, this matter was fixed for clarification for filing of the same. The MCA Data filed by the Financial Creditor showed an open charge in favour of the Bank of Baroda (the Sole Secured Financial Creditor). Such loan has been taken in the year October 2018. It is also noted that the Bank has initiated proceedings against the Corporate Debtor for recovery of outstanding debt after declaring the account of the Corporate Debtor as 'Non-Performing Assets' on 02.08.2019, which also means that default in repayment of interest on cash credit and/or principal borrower amount happened almost immediately after getting the money from the bank. It is evident that this is a case where Bank has classified account of the Corporate Debtor as NPA within a period of less than one year after sanction and disbursement of the same and that too in a case of facility of nature of cash credit, which is given for working capital requirements of business entity. Such action by Bank by itself raises serious questions about the credibility and intention of the Corporate Debtor. When the factual position as regards to the financial transaction between the Financial Creditor and Corporate Debtor coupled with the financial facility obtained by the Corporate Debtor by the Bank and declaration of the same as NPA are read together, the only inevitable conclusion which could be reached without any difficulty is that the Financial Creditor has helped the Corporate Debtor to obtain loan from the Bank particularly when no material of whatsoever nature has been brought on record by the Financial Creditor to show that money was indeed given to Corporate Debtor for genuine business purpose and it made sincere efforts to realise its money which was due. Application dismissed - List this issue for hearing on 14.12.2020. Issues Involved:1. Default in repayment of outstanding debt.2. Nature of transactions between Financial Creditor and Corporate Debtor.3. Financial Creditor's business activities.4. Collusive application for Corporate Insolvency Resolution Process (CIRP).5. Penalty under Section 65 of the Insolvency & Bankruptcy Code, 2016.Issue-wise Detailed Analysis:1. Default in repayment of outstanding debt:An application was filed by the Financial Creditor under Section 7 of the Insolvency & Bankruptcy Code, 2016, to initiate the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor due to a default in paying an outstanding debt of Rs. 10,50,000/-. The date of default was stated as 30th September, 2019. The Corporate Debtor admitted the debt in an affidavit and expressed no objection to the Tribunal admitting the petition.2. Nature of transactions between Financial Creditor and Corporate Debtor:The Tribunal noted that the Financial Creditor is a partnership firm engaged in the business of Paddy Milling and boiling, trading & manufacturing of Rice, and other agricultural produce. The transactions between the Financial Creditor and the Corporate Debtor were scrutinized, revealing that many transactions were squared up on the same date or within a short period. For instance, transactions on 16/04/2018 and 19/04/2018 were settled on the same day or within two days, respectively. The pattern of these transactions led to the conclusion that they were likely entered into to create turnover/volume in the Corporate Debtor's account to facilitate the sanctioning of a cash credit limit by the bank.3. Financial Creditor's business activities:The Financial Creditor was not primarily engaged in granting loans on interest. The partnership deed allowed borrowing funds but did not explicitly provide for lending money to third parties. The Tribunal observed that the transactions did not align with the Financial Creditor's business activities, suggesting that the funds were not genuinely required for the Corporate Debtor's business purposes.4. Collusive application for Corporate Insolvency Resolution Process (CIRP):The Tribunal concluded that the application was collusive. The Financial Creditor appeared to have assisted the Corporate Debtor in obtaining a loan from the bank. The Corporate Debtor's account was declared a Non-Performing Asset (NPA) shortly after the loan was sanctioned, and the bank took possession of the Corporate Debtor's property. These actions raised serious questions about the Corporate Debtor's credibility and intentions. The Tribunal determined that the Financial Creditor and Corporate Debtor were colluding to seek benefits under the Insolvency & Bankruptcy Code, 2016, such as the moratorium under Section 14 and other advantages under Sections 31 and 53.5. Penalty under Section 65 of the Insolvency & Bankruptcy Code, 2016:Given the collusive nature of the application, the Tribunal dismissed the application and directed the Registry to issue a notice to the Financial Creditor under Section 65 of the Insolvency & Bankruptcy Code, 2016. The Financial Creditor was required to present their case as to why a penalty should not be imposed on both parties under this section. The issue was listed for hearing on 14.12.2020.Conclusion:The Tribunal dismissed the application for initiating CIRP, citing collusion between the Financial Creditor and the Corporate Debtor. It also initiated proceedings to consider imposing penalties on both parties under Section 65 of the Insolvency & Bankruptcy Code, 2016.