2023 (3) TMI 646 - AT - Insolvency and Bankruptcy

Appellate Tribunal allows application under Section 65 post filing under Sections 7, 9, or 10

The Appellate Tribunal overturned the National Company Law Tribunal's decision, ruling that an application under Section 65 of the Insolvency & ... Mainability of applicable u/s 65 while the application for initiation of CIRP is pending before NCLT - Fraudulent or malicious initiation of proceedings - Application filed under Section 65 of the Insolvency & Bankruptcy Code, 2016, has been dismissed on the ground that such an application would be maintainable only after the main petition is admitted and CIRP is initiated - whether an application filed under Section 65 of the Code is maintainable after the filing of the application under Section 7, 9 or 10 of the Code or could be maintainable only after the admission of such an application? HELD THAT:- The application under Section 65 has been filed at the stage of initiation of the proceedings for the purpose of CIRP and is not maintainable after the admission of the application as has been held by the Learned Tribunal. The question posed herein before, is answered in favour of the Appellant and against the Respondents. It is hereby held that in case where application is filed under Section 65 of the Code, it would be maintainable after the application is filed either under Section 7, 9 or 10 of the Code. The view taken by the Learned Tribunal that the said application would be maintainable only after admission and initiation of the CIRP proceedings is totally fallacious and is hereby overruled. The present appeal is hereby allowed - the impugned order is hereby set aside and the matter is remanded back to the Learned Tribunal to proceed further after taking into consideration the fact that the application of the Appellant is maintainable . ISSUES PRESENTED AND CONSIDERED 1. Whether an application under Section 65 of the Insolvency & Bankruptcy Code is maintainable after the filing of an application under Sections 7, 9 or 10 (i.e., upon initiation of proceedings) or only after admission of that application and commencement of CIRP. 2. Whether the term 'initiates' in Section 65 must be read to mean the date of admission/commencement of CIRP or the date of filing/'initiation date' as defined in Section 5(11). 3. Whether the applicant (a homebuyer/interested third party) has locus standi to file an application under Section 65 of the Code (left open for determination by the Tribunal on remand). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Maintainability of Section 65 application: legal framework - Legal framework: Section 65 permits the Adjudicating Authority to impose penalties where 'any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent...'. Definitions relevant are 'initiation date' (Section 5(11)) - the date on which an eligible applicant makes an application to the Adjudicating Authority for initiating CIRP - and 'insolvency commencement date' (Section 5(12)) - the date of admission of such application. - Precedent treatment: The Supreme Court in Ramesh Kymal has drawn the distinction between 'initiation' (filing) and 'commencement' (admission) of CIRP, holding initiation is the date of filing the application to the Adjudicating Authority, while the insolvency commencement date is the date of admission. - Interpretation and reasoning: The Tribunal below held Section 65 applications are maintainable only after admission/commencement of CIRP, construing 'initiates' to mean the point at which CIRP is initiated post-admission. The Appellate Tribunal found this to be erroneous, observing that the plain statutory definitions in Section 5(11) and 5(12) show distinct meaning: 'initiation' refers to filing, not admission. The Court relied on the Supreme Court's reasoning in Ramesh Kymal to affirm that initiation occurs on filing; thus a Section 65 application can be filed after the related Section 7/9/10 application has been filed (i.e., at the initiation stage), and need not await admission/commencement. - Ratio vs. Obiter: Ratio - Section 65 is maintainable once the application under Sections 7/9/10 is filed (initiation date), not only after admission (insolvency commencement date). Obiter - comments on procedural handling by the Tribunal and broader policy considerations are ancillary. - Conclusion: The Court answered the question in favour of applicants seeking relief under Section 65 at the initiation stage; the Tribunal's contrary view is overruled. The Section 65 application is maintainable after filing of the Section 7, 9 or 10 petition and need not await admission/commencement. Issue 2 - Interpretation of the term 'initiates' in Section 65 - Legal framework: Statutory definitions in Section 5(11) and Section 5(12) distinguish initiation date and insolvency commencement date; Section 65 uses the verb 'initiates'. - Precedent treatment: Ramesh Kymal clarifies that 'initiation of CIRP' denotes the date of filing the application by an eligible applicant; NCLAT and the Supreme Court have applied this definition in construing temporal effects of other provisions. - Interpretation and reasoning: The Court held that the word 'initiates' in Section 65 must be read with Section 5(11) (the statutory definition of 'initiation date'), and therefore refers to the act of making an application to the Adjudicating Authority. The Learned Tribunal's reading that 'initiates' equated to the commencement date (admission) failed to consider these definitions and was thus erroneous. The Court emphasized statutory context and legislative definitions to determine meaning rather than isolated literalism. - Ratio vs. Obiter: Ratio - 'initiates' in Section 65 is to be understood as the filing/initiation date under Section 5(11); this interpretation governs maintainability timing. Obiter - reliance on policy background of other provisions (e.g., Section 10-A in Ramesh Kymal) is explanatory, not essential to the decision. - Conclusion: 'Initiates' in Section 65 refers to the filing/initiation of the insolvency resolution process (Section 5(11) meaning) and not to the insolvency commencement date (admission under Sections 7/9/10). Issue 3 - Locus standi of the applicant to file Section 65 application - Legal framework: Section 65 speaks of 'any person' initiating proceedings fraudulently or maliciously; procedural rules under Section 60(1) and Rule 11 may allow intervention/impleadment by interested parties. - Precedent treatment: The judgment cites general principles but does not decide locus; the Court refrains from preemptive determination and refers the issue to the Tribunal for adjudication with opportunity to parties. - Interpretation and reasoning: The Appellate Tribunal declined to decide locus standi on appeal, holding that the Learned Tribunal must examine the objection to locus standi (raised by respondents) in accordance with law and after affording the applicant an opportunity. The Appellate Tribunal's remit was limited to the maintainability timing of Section 65 applications; factual and legal determinations concerning standing and merits are remanded. - Ratio vs. Obiter: Obiter in respect of locus standi as the Court expressly reserved the issue for the Tribunal; the binding ratio does not extend to a final ruling on standing. - Conclusion: The question of the applicant's locus standi to maintain a Section 65 application is left open and remanded to the Tribunal to decide in accordance with law after hearing the parties. Remedial and procedural outcome (connected to above issues) - The Tribunal's order dismissing the Section 65 application on the ground of premature filing (i.e., that such application is maintainable only after admission/commencement) is set aside. - The matter is remanded to the Tribunal to proceed on the basis that the Section 65 application is maintainable following filing of the Section 7/9/10 petition; the Tribunal must consider raised objections (including locus standi) and decide them in accordance with law after giving an opportunity to the applicant. Cross-references - The conclusions on Issues 1 and 2 are interdependent: the construction of 'initiates' (Issue 2) is dispositive of the maintainability timing (Issue 1). The decision in Ramesh Kymal is treated as directly persuasive and controlling for that interpretive point.