Collusive insolvency petition rejected where advances lacked genuine lending character and were squared up almost immediately.

A Section 7 insolvency application was found to be collusive because the transaction pattern did not show a genuine financial debt or default. The Tribunal examined the applicant's business, the partnership deed, and the course of dealings, noting that the advances were short-lived, often squared up within days, and aligned with the corporate debtor's efforts to secure banking facilities. On that material, it held there was no satisfactory basis to treat the advances as bona fide lending for business purposes and dismissed the petition.

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Issues: Whether the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 was maintainable on the facts, or whether the transactions between the parties showed a collusive arrangement lacking a genuine financial debt and default.

Analysis: The application was tested against the nature of the applicant's business, the partnership deed, and the pattern of transactions between the parties. The recorded dealings were short-lived, frequently squared up on the same day or within a few days, and coincided with the corporate debtor's efforts to obtain banking facilities. On the material placed, the Tribunal found no satisfactory basis to treat the advances as genuine lending for business purposes. The sequence of transactions, together with the banking developments and the near-immediate stress on the borrower account, led to the conclusion that the petition was filed to create the appearance of debt and default.

Conclusion: The Section 7 application was held to be collusive and was dismissed.

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