2018 (1) TMI 505 - AT - Insolvency and Bankruptcy

Appellate Tribunal Overturns Order on Corporate Insolvency Application, Emphasizes Essential Admission Factors

The Appellate Tribunal set aside the Adjudicating Authority's order rejecting an application for Corporate Insolvency Resolution Process due to ... Admission under Section 10 of the I&B Code - Requirement of disclosures in Form 6 of the Adjudicating Authority Rules - Scope of Adjudicating Authority's scrutiny at the admission stage - Suppression of facts / 'clean hands' as ground for rejection - Ineligibility under Section 11 of the I&B Code - Imposition of penalty under Section 65 of the I&B Code - Prima facie satisfaction and audi alteram partem before imposing penalty - Moratorium under Sections 13 and 14 and their effect on other proceedings - Overriding effect of Section 238 of the I&B CodeAdmission under Section 10 of the I&B Code - Requirement of disclosures in Form 6 of the Adjudicating Authority Rules - Scope of Adjudicating Authority's scrutiny at the admission stage - Suppression of facts / 'clean hands' as ground for rejection - Whether non-disclosure of facts beyond the statutory requirement in Form 6 can be a ground to reject an application under Section 10. - HELD THAT: - The Adjudicating Authority's power at the admission stage under Section 10 is confined to the records and particulars prescribed by Section 10 and Form 6. The law in Innoventive Industries (applied to Section 10) requires that where default is shown and the application is complete, the Adjudicating Authority must admit the application unless incompleteness is shown and cured within time. Facts unrelated to the requirements of Section 10 or Form 6 cannot be treated as suppression of facts or lack of clean hands to justify rejection. Exceptions exist where ineligibility under Section 11 is attracted (for example, ongoing CIRP, liquidation order, or completed CIRP within statutory period), in which case nondisclosure of such disqualifying facts may justify rejection. Pendency of independent civil suits, actions under SARFAESI or DRT proceedings between third parties or not required to be disclosed in Form 6 do not constitute grounds to deny admission; once admitted, moratorium provisions would operate to stay such proceedings. The Adjudicating Authority erred in rejecting the appellant's Section 10 application on the basis of non-disclosure of collateral suits and related proceedings that were not mandated to be disclosed in Form 6. [Paras 22, 23, 24, 32, 34]Non-disclosure of facts beyond the requirement of Section 10 and Form 6 is not a ground to reject the application; only disqualifications under Section 11 or incompleteness of the prescribed form can justify rejection.Imposition of penalty under Section 65 of the I&B Code - Prima facie satisfaction and audi alteram partem before imposing penalty - Requirement of recording reasons for prima facie view - Whether the penalty imposed by the Adjudicating Authority on the corporate applicant under Section 65 was legal. - HELD THAT: - Section 65 permits imposition of a penalty where an application is initiated 'fraudulently' or 'with malicious intent' or voluntary liquidation is initiated with intent to defraud. The Adjudicating Authority must form a prima facie opinion, record reasons for that view and afford the concerned person a reasonable opportunity of hearing before imposing penalty; Section 424 of the Companies Act (procedural protections) applies. In the present case the Adjudicating Authority neither recorded any prima facie reasons to show fraud or malicious intent nor gave notice and opportunity to be heard before imposing the penalty. Absent such recorded prima facie findings and compliance with audi alteram partem, the penalty cannot be sustained. [Paras 37, 38, 39, 40, 41]The penalty imposed under Section 65 is unsustainable for want of recorded prima facie reasons and failure to afford a hearing; the penalty was set aside.Admission under Section 10 of the I&B Code - Requirement of disclosures in Form 6 of the Adjudicating Authority Rules - Remedial direction as to further proceedings following appellate conclusion. - HELD THAT: - Having held that the Adjudicating Authority erred in rejecting the Section 10 application on extraneous grounds and that the penalty was improperly imposed, the matter is remitted to the Adjudicating Authority for admission of the application if it is otherwise complete. If the application is incomplete, the Adjudicating Authority must grant the appellant time to cure defects. The Tribunal also suggested that the Central Government may amend Form 6 to require declarations relevant to Section 11, and in the interim the Adjudicating Authority may direct affidavits declaring whether any disqualification under Section 11 exists. [Paras 42, 43, 44, 45]Matter remitted to the Adjudicating Authority to admit the application if complete or to allow rectification of defects; no order as to costs.Final Conclusion: The impugned order rejecting the Section 10 application and imposing penalty under Section 65 is set aside. The Adjudicating Authority is directed to admit the application if otherwise complete or permit rectification of defects; the penalty is quashed for failure to record prima facie reasons and to afford a hearing. The Tribunal suggested amendment of Form 6 to elicit relevant Section 11 disclosures and permitted interim affidavits on that aspect. Issues Involved:1. Whether non-disclosure of facts beyond the statutory requirement under the I & B Code read with relevant form, prescribed under the Insolvency and Bankruptcy (Application to Adjudicating Authority), Rules, 2016 can be a ground to dismiss an application for initiation of Corporate Insolvency Resolution Process.2. Whether the penalty imposed by the Adjudicating Authority under Section 65 of the I & B Code is legal or not.Issue-wise Detailed Analysis:1. Non-disclosure of Facts Beyond Statutory Requirement:The appellant, Unigreen Global Private Limited, filed an application under Section 10 of the Insolvency & Bankruptcy Code, 2016 (I & B Code) for initiation of Corporate Insolvency Resolution Process (CIRP) due to its failure to pay debts owed to financial and other creditors. The application was rejected by the Adjudicating Authority on the grounds of non-disclosure of full particulars regarding assets mortgaged or securities furnished to financial creditors, and ongoing legal proceedings involving certain properties.The respondent, Punjab National Bank (PNB), alleged that the appellant suppressed facts and did not disclose full particulars of assets, including properties entangled in legal proceedings. The Adjudicating Authority noted that the directors of the appellant company were involved in multiple legal proceedings to remove properties from the accountability of creditors, which were not disclosed in the application.The Appellate Tribunal observed that under Sections 7 and 10 of the I & B Code, the essential factors are the existence of debt and default. The Tribunal emphasized that the application must be admitted if it is complete, and any extraneous factors unrelated to the resolution process should not be considered grounds for rejection. The Tribunal held that non-disclosure of facts unrelated to Section 10 and Form 6 cannot be termed as suppression of facts or grounds to reject the application. The Tribunal also noted that once the application is admitted, related proceedings cannot proceed further due to the moratorium under Sections 13 and 14 of the I & B Code.2. Legality of Penalty Imposed Under Section 65 of the I & B Code:The Adjudicating Authority imposed a penalty of Rs. Ten Lakhs on the appellant under Section 65 of the I & B Code, which deals with penalties for initiating insolvency resolution process or liquidation proceedings fraudulently or with malicious intent.The Appellate Tribunal noted that for imposing a penalty under Section 65, the Adjudicating Authority must form a prima facie opinion that the application was filed fraudulently or with malicious intent. The Tribunal found no evidence on record to suggest that the appellant suppressed facts or acted with fraudulent or malicious intent. The Tribunal also observed that the Adjudicating Authority did not provide the appellant with a reasonable opportunity to explain its case before imposing the penalty, thus violating the principles of natural justice.Conclusion:The Appellate Tribunal set aside the impugned order dated 8th May, 2017, passed by the Adjudicating Authority, and remitted the case back for admission of the application under Section 10, if it is otherwise complete. The Tribunal directed that if the application is incomplete, the Adjudicating Authority should grant time to the appellant to remove the defects. The Tribunal also suggested that the Central Government amend the relevant forms to include provisions for disclosing any ineligibility under Section 11 of the I & B Code to prevent future issues of non-disclosure. The appeal was allowed without any order as to costs.