2022 (3) TMI 116 - AT - Insolvency and Bankruptcy

Tribunal Remands Case for Fraud Investigation under Insolvency Code

The Tribunal remanded the case back to the Adjudicating Authority to investigate allegations of fraud and collusion under Section 65 of the Insolvency and ... Maintainability of application - initiation of CIRP - fraudulent or malicious initiation of proceedings - existence of debt and default or not - Section 65 of I&B Code - HELD THAT:- It is not in dispute that there is no ‘debt’ and ‘default which is the basic requirement of the Section 7 of the Code. However, the ‘Adjudicating Authority’ has the inherent power to restrict the perpetuation of applications motivated by fraud or malice under section 65 of the code - The Hon’ble Apex Court has also observed in ‘Embassy property development Pvt. Ltd’ [2019 (12) TMI 188 - SUPREME COURT] has held that if the CIRP had been initiated by one and the same person taking different avatars not for the genuine purpose of Resolution Insolvency or Liquidation but for the collateral purpose of cornering the mine and mining lease the same would fall squarely within the mischief by Section 65(1) of the Code. The Adjudicating Authority has jurisdiction to enquire into the allegation of fraud and so also with this Appellate Tribunal. There are several issues (violation of dealership agreement, vis a vis invocation of code for default concurrently happening under floorplan financing agreement of dealership agreement provided by same BMW Group Company) raised by the Appellant on Respondent No.2- BMW India Pvt. Ltd discreetly covering Respondent No.3- BMW India Financial Services Pvt. Ltd. Since, some collusion seems to be apparently existing to thwart the claim of the Corporate Debtor and other related issues. Impugned order dated 04th June, 2020 has not dealt with this IA and has dismissed on the ground that BMW India Pvt. Ltd/R2 in the IA No.300 of 2018 is not a party in the main petition no.167 of 2017. Although IBC is a summary proceeding but if large business houses with multiple business arms are allowed to disrupt on its whims & fancies small business firm then how IBC can promote entrepreneurship which is also its objective. Matter remanded back in respect of IA 300 of 2018 to the ‘Adjudicating Authority’ to go into the details of the allegations & decide either way by giving reasonable & proper opportunity to all the parties involved - application disposed off. Issues Involved:1. Fraudulent initiation of insolvency proceedings under Section 65 of the Insolvency and Bankruptcy Code, 2016.2. Existence and default of debt by the Corporate Debtor.3. Alleged collusion and malicious intent by BMW India Pvt. Ltd. and BMW India Financial Services Pvt. Ltd.4. Jurisdiction and authority of the Adjudicating Authority to investigate allegations of fraud.5. Procedural and substantive compliance with Section 7 of the Code.Detailed Analysis:1. Fraudulent initiation of insolvency proceedings under Section 65 of the Insolvency and Bankruptcy Code, 2016:The Appellant alleged that BMW India Financial Services Pvt. Ltd. (R3) fraudulently initiated insolvency proceedings against the Corporate Debtor (CD) to stifle legitimate claims and control the Committee of Creditors (CoC). The Appellant contended that BMW India Pvt. Ltd. (R2) induced the CD into dealership agreements and investments, only to later allow other dealers to operate in Gujarat, causing financial distress to the CD. The Adjudicating Authority rejected the Appellant's claims under Section 65, stating that R2 was not a party to the main petition and had no locus in the matter. However, the Tribunal found that the Adjudicating Authority failed to adequately address the allegations of fraud, collusion, and malicious intent, necessitating a remand for further investigation.2. Existence and default of debt by the Corporate Debtor:The Adjudicating Authority confirmed the existence of debt and default by the CD, fulfilling the requirements under Section 7 of the Code. The CD had availed financial facilities from the Petitioner, with defaults occurring from 10.04.2016 onwards. The Tribunal found that the debt and default were not in dispute, and the petition filed on 13.11.2017 was within the limitation period. The Tribunal emphasized that the Adjudicating Authority has the inherent power to prevent the perpetuation of applications motivated by fraud or malice under Section 65 of the Code.3. Alleged collusion and malicious intent by BMW India Pvt. Ltd. and BMW India Financial Services Pvt. Ltd.:The Appellant argued that R2 and R3, both part of the BMW group, colluded to initiate insolvency proceedings to thwart the CD's claims and force liquidation. The Appellant cited judgments, including 'Beacon Trusteeship Limited Vs. Earthcon Infracon Pvt. Ltd.' and 'Embassy Property Vs. State of Karnataka,' to support the need for the Adjudicating Authority to investigate allegations of collusion and fraud. The Tribunal noted that the Adjudicating Authority failed to adequately address these allegations, and the matter required further examination.4. Jurisdiction and authority of the Adjudicating Authority to investigate allegations of fraud:The Tribunal highlighted that the Adjudicating Authority has the jurisdiction to investigate allegations of fraud under Section 65 of the Code. The Tribunal cited the 'Embassy Property Development Pvt. Ltd.' case, which affirmed that the Adjudicating Authority can inquire into fraudulent initiation of proceedings. The Tribunal emphasized that the Adjudicating Authority must ensure that the Code is not used for malicious purposes and must protect the interests of the Corporate Debtor.5. Procedural and substantive compliance with Section 7 of the Code:The Tribunal found that the Adjudicating Authority had recorded its satisfaction with the compliance of Section 7 requirements, including the completeness of the insolvency application and the proposal of an Interim Resolution Professional (IRP). The Tribunal noted that the Appellant's objections were primarily related to business dealings with R2 and not with the Financial Creditor (FC). The Tribunal emphasized that the Code's objective is to ensure the revival and continuation of the Corporate Debtor, and the Adjudicating Authority must prevent its misuse.Conclusion:The Tribunal concluded that the Adjudicating Authority failed to adequately address the allegations of fraud and collusion. The Tribunal remanded the matter back to the Adjudicating Authority to investigate the allegations under Section 65 of the Code and provide a reasoned order. The appeal was partially allowed, setting aside para 18.2 of the impugned order dated 04.06.2020, and the matter was remanded for further investigation. The Tribunal emphasized the need to protect the Corporate Debtor from malicious and fraudulent proceedings and ensure the Code's objective of revival and continuation.