Tribunal Upholds Dismissal of Section 9 Application under IBC, Cites Sham Transaction

The Appellate Tribunal upheld the Adjudicating Authority's decision to dismiss a Section 9 Application under the IBC by an Operational Creditor, claiming a debt of Rs. 57,25,000 as a process fee for procuring a loan for the Corporate Debtor. The Tribunal found the transaction between related parties in 2015 to be a sham, leading to the refusal to initiate CIRP. Additionally, the parties were issued a show-cause notice under Section 65(1) of the IBC for colluding with malicious intent. The Appeal was dismissed, affirming the refusal to initiate CIRP and upholding the show-cause notice for further proceedings.

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Issues:
1. Dismissal of Section 9 Application by Adjudicating Authority
2. Allegations of sham transaction between related parties
3. Validity of show-cause notice under Section 65(1) of IBC

Issue 1: Dismissal of Section 9 Application by Adjudicating Authority
The Appellate Tribunal heard an appeal against the Adjudicating Authority's order dismissing a Section 9 Application under the IBC by an Operational Creditor, claiming a debt of Rs. 57,25,000 as a process fee for procuring a loan for the Corporate Debtor. The Adjudicating Authority deemed the transaction between related companies in 2015 as a sham, leading to the dismissal of the CIRP initiation. The Appeal challenged this decision, arguing that the present management was unaware of the Director's related party status. However, the Tribunal upheld the Adjudicating Authority's decision, stating that the debt was doubtful and correctly refused to initiate CIRP.

Issue 2: Allegations of Sham Transaction Between Related Parties
The Tribunal noted that both the Applicant and the Corporate Debtor had a common Director, making them related parties at the time of the transaction. The Adjudicating Authority found that the transaction was a sham, as the Director procured a loan for his company and charged a procurement fee. This led to the conclusion that the parties colluded to initiate the CIR Process with malicious intent, rather than for insolvency resolution, which is impermissible under the IBC. Consequently, a show-cause notice was issued under Section 65(1) of the IBC to explain why penalties should not be imposed.

Issue 3: Validity of Show-Cause Notice under Section 65(1) of IBC
Regarding the show-cause notice issued under Section 65(1) of the IBC, both parties filed replies. The Tribunal emphasized that the Adjudicating Authority must consider these replies independently of the impugned order while deciding on penalties under Section 65. The Appeal was ultimately dismissed, subject to the observations made regarding the show-cause notice. The Tribunal affirmed the Adjudicating Authority's decision to refuse CIRP initiation based on the suspicious debt and upheld the issuance of the show-cause notice for further proceedings.

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