2022 (8) TMI 235 - AT - Insolvency and Bankruptcy

IBC: Solvent Companies Protected from Insolvency Proceedings

The Tribunal held that initiating insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code for debt recovery purposes against a ... Financial debt - default - Section 7(5)(a) discretion - use of IBC for recovery vs resolution - fraudulent or malicious initiation of proceedingsFinancial debt - default - Section 7(5)(a) discretion - use of IBC for recovery vs resolution - fraudulent or malicious initiation of proceedings - Whether the Adjudicating Authority, while admitting a petition under Section 7 of the Code, is confined to determining existence of a debt and default or must also consider whether the creditor's objective in initiating CIRP is recovery rather than resolution, and whether admission should be refused where initiation is essentially for recovery. - HELD THAT: - The Tribunal applied the principles in Vidarbha Industries (as explained with reference to Swiss Ribbons, Mobilox and other precedents) and held that the word 'may' in Section 7(5)(a) confers discretion upon the Adjudicating Authority. The existence of a financial debt and a default gives a financial creditor the right to apply for CIRP but does not automatically oblige admission in all circumstances. Relevant factors, including the viability of the corporate debtor, the purpose and intent behind initiation of proceedings and whether the creditor is using the Code as an instrument of debt recovery rather than for genuine insolvency resolution, are matters for the Adjudicating Authority to consider. The Tribunal noted the factual matrix: cheques issued as security, one cheque matter compounded after payment pursuant to NI Act proceedings with interest accepted at 6% by the creditor, partial settlement before the Trial Court, the corporate debtor being a going concern and viable, and the creditor's insistence on higher interest subsequently. On these facts the Tribunal found that the initiation of CIRP was, in substance, an attempt at recovery or to obtain an advantage rather than an exercise directed at bona fide resolution. The Tribunal held that such use falls within the ambit of 'for any purpose other than the resolution of insolvency' under Section 65(1) and that admission under Section 7 could be refused in such circumstances. Applying its discretion, the Tribunal set aside the Adjudicating Authority's order admitting the Section 7 petition and directed closure of the CIRP proceedings, while leaving open the creditor's other remedies for recovery under law. [Paras 4, 11, 13, 16, 17]Admission under Section 7 was set aside because, on the facts, initiation of CIRP was primarily for recovery rather than resolution; the Adjudicating Authority must apply its discretion under Section 7(5)(a) and may refuse admission where the proceeding is an inappropriate use of the Code.Final Conclusion: The appeal is allowed. The impugned order admitting the Section 7 petition is set aside; all consequential orders (appointment of IRP, moratorium, freezing of accounts, constitution of CoC etc.) are vacated and the corporate debtor is restored to its board and management. The financial creditor remains free to pursue other remedies available in law for recovery of its dues. 1. ISSUES PRESENTED and CONSIDEREDThe primary issue considered by the Tribunal was whether the Section 7 Application under the Insolvency and Bankruptcy Code, 2016, admitted against a solvent company, was appropriate given the circumstances that the company had issued cheques as security for a loan, and one cheque amount had already been paid following a court order. The Tribunal also examined whether the initiation of insolvency proceedings was aligned with the Code's objective of 'Resolution' rather than 'Recovery'.2. ISSUE-WISE DETAILED ANALYSISRelevant legal framework and precedents: The Tribunal examined Section 7 of the Insolvency and Bankruptcy Code, 2016, which provides the framework for initiating insolvency proceedings against a corporate debtor. The Tribunal also considered precedents set by the Supreme Court, including the interpretation of Section 7(5)(a) of the Code, as discussed in the case of Vidarbha Industries Power Limited v. Axis Bank Limited, and the distinction between 'Resolution' and 'Recovery' as emphasized in various judgments.Court's interpretation and reasoning: The Tribunal emphasized that the purpose of the Insolvency and Bankruptcy Code is to facilitate the resolution of insolvent debtors rather than to serve as a tool for debt recovery. The Tribunal noted that the Code's objective is to reorganize and resolve insolvency, not to penalize solvent companies for non-payment of dues. The Tribunal highlighted that the use of insolvency proceedings for debt recovery contradicts the spirit of the Code.Key evidence and findings: The Tribunal noted that the corporate debtor had issued two cheques as security for a loan, one of which had been paid following a court order. The Tribunal found that the second respondent had accepted a payment with interest at 6% per annum, which led to the closure of one of the cases under Section 138 of the Negotiable Instruments Act. The Tribunal also considered the financial health and viability of the corporate debtor, which was described as a going concern with commercial prospects.Application of law to facts: The Tribunal applied the legal principles established in the Vidarbha Industries case, emphasizing that the initiation of insolvency proceedings should not be used as a substitute for debt recovery actions. The Tribunal concluded that the intent behind the Section 7 Application was primarily for recovery rather than resolution, which is contrary to the Code's objectives.Treatment of competing arguments: The Tribunal considered the arguments of both parties. The appellant argued that the Section 7 Application was filed as a pressure tactic and that the amount in question was not a financial debt. The second respondent contended that the debt was acknowledged in the corporate debtor's books and that the Section 7 Application was rightly admitted. The Tribunal found merit in the appellant's argument that the proceedings were intended for recovery rather than resolution.Conclusions: The Tribunal concluded that the Section 7 Application was filed with the intent of recovering dues rather than resolving insolvency. The Tribunal held that such use of insolvency proceedings is inappropriate and contrary to the Code's objectives.3. SIGNIFICANT HOLDINGSThe Tribunal held that the initiation of insolvency proceedings under Section 7 of the Code should not be used for debt recovery purposes. The Tribunal emphasized that the Code is designed for the resolution of insolvent debtors and not for penalizing solvent companies. The Tribunal set aside the order of the Adjudicating Authority admitting the Section 7 Application, thereby releasing the corporate debtor from the proceedings.The Tribunal preserved the following crucial legal reasoning: 'The Hon'ble Supreme Court in a catena of Judgements has held that IBC tackles 'Insolvency and Bankruptcy' and that it is not the objective of the IBC that CIRP should be initiated to penalise a Solvent Company for non-payment of dues. The scope and objective of IBC is to bring about 'Resolution' of an Insolvent Debtor and is definitely not a 'Recovery Proceeding'.'The Tribunal concluded that the proceedings were initiated with the intent of recovery, which falls outside the scope of the Code's objectives. The Tribunal allowed the appeal, set aside the order of the Adjudicating Authority, and released the corporate debtor from the rigors of insolvency proceedings.