2024 (7) TMI 1320 - AT - Insolvency and Bankruptcy

Company's Section 10 IBC application rejected for wilful defaulter status and duplicitous conduct

NCLAT dismissed an appeal challenging rejection of a Section 10 IBC application for initiating CIRP. The appellant company was declared a wilful defaulter ... Rejection of application u/s 10 of IBC - Seeking to initiate Corporate Insolvency Resolution Proceedings (CIRP) - It is the case of the Appellant that the Section 10 application was complete in all respect and all statutory prescriptions to file Section 10 application had been met - whether the Adjudicating Authority committed any error in rejecting the Section 10 application? - HELD THAT:- It is noticed that much before the Section 10 application was filed by the Appellant, the Respondent Bank had issued notices to the Appellant for personal hearing before declaring the Appellant to be a wilful defaulter. It is also found that the Adjudicating Authority took notice of the fact that the Appellant Company failed to appear before the Respondent Bank in spite of notices having been issued to them twice and gave a slip to the proceedings initiated by the Wilful Defaulter Identification Committee of the Respondent Bank. Even after being declared a defaulter, the Appellant continued not to respond to the notices issued by the Respondent Bank. The Appellant Company was selectively approaching the Bank requesting for some reprieve but was deliberately avoiding the Bank in the proceedings being conducted for being a wilful defaulter. This glaring duplicity in the conduct of the Appellant as pointed out by the Respondent Bank has also been taken cognisance of by the Adjudicating Authority in concluding that the Appellant has come before it with unclean hands. It does not escape notice that the Appellant was trying to embroil the Respondent Bank in multiple layers of litigation. It is an undisputed fact that the Appellant had filed securitization application SA-365 of 2019 before the DRT, Lucknow for stay on the auction of its properties by the Respondent Bank. Apart from moving the securitization application before the DRT, the Appellant had also knocked at the doors of the Hon’ble Allahabad High Court by filing a Writ petition - the Appellant made incessant efforts to put a spanner in the recovery proceedings initiated by the Respondent Bank and finally resorted to filing the Section 10 application. There is no quarrel over the fact that Section 10 vests rights on the Corporate Debtor to resolve their insolvency. However, one cannot lose sight of the fact that this protective umbrella over the assets of the Corporate Debtor is not misused or abused in a manner so as to become a tool for deriving undue advantage at the cost of insolvency resolution which objective unequivocally resonates in the preambular aspirations of the IBC - the Adjudicating Authority rightly deprecated the Appellant Company for having filed the application under Section 10 of IBC after unsuccessfully trying at pre-empting recovery proceedings undertaken by the Respondent Bank. The Adjudicating Authority agreed upon that the bonafide of the Appellant in filing of the Section 10 application was doubtful and that the filing was done for reasons other than insolvency resolution and therefore deserves to be dismissed. There are no good reasons which warrants any interference in the impugned order - appeal dismissed. Issues Involved:1. Validity of the Adjudicating Authority's rejection of the Section 10 application under the Insolvency and Bankruptcy Code (IBC).2. Procedural compliance and completeness of the Section 10 application.3. Impact of SARFAESI proceedings on the Section 10 application.4. Allegations of misuse of the IBC process by the Corporate Debtor.Detailed Analysis:1. Validity of the Adjudicating Authority's Rejection of the Section 10 Application:The core issue was whether the Adjudicating Authority erred in rejecting the Section 10 application filed by the Corporate Debtor. The Tribunal noted that the Adjudicating Authority had considered the fact that the Corporate Debtor had defaulted on its loan repayment and had been declared a wilful defaulter by the Respondent Bank. The Tribunal found that the Corporate Debtor had made multiple attempts to stall the recovery proceedings, including filing a securitization application before the Debts Recovery Tribunal (DRT) and a writ petition before the High Court. The Tribunal agreed with the Adjudicating Authority that the Corporate Debtor's actions indicated a lack of bona fides and an attempt to misuse the IBC process to avoid debt repayment rather than to resolve insolvency.2. Procedural Compliance and Completeness of the Section 10 Application:The Appellant contended that the Section 10 application was complete in all respects and met all statutory requirements. The Tribunal acknowledged that the procedural prescriptions for filing the Section 10 application were met. However, the Tribunal emphasized that completeness alone does not guarantee admission if the application is filed with ulterior motives. The Tribunal noted that the Adjudicating Authority had found the Corporate Debtor's conduct to be duplicitous, as it selectively approached the Bank for reprieve while avoiding the proceedings for being a wilful defaulter.3. Impact of SARFAESI Proceedings on the Section 10 Application:The Tribunal examined the timeline of events and found that the SARFAESI proceedings initiated by the Respondent Bank had preceded the filing of the Section 10 application. The Respondent Bank had issued notices under Sections 13(2) and 13(4) of the SARFAESI Act and had taken possession of the Corporate Debtor's properties before the Section 10 application was filed. The Tribunal agreed with the Adjudicating Authority that the pendency of SARFAESI proceedings could not be ignored and that the Corporate Debtor's attempt to use the IBC process to stall the auction was an abuse of the law.4. Allegations of Misuse of the IBC Process by the Corporate Debtor:The Tribunal found that the Corporate Debtor had filed the Section 10 application not for genuine insolvency resolution but to preempt the recovery proceedings by the Respondent Bank. The Tribunal noted that the Corporate Debtor had avoided appearing before the Bank's Wilful Defaulter Identification Committee and had made efforts to settle the debt while simultaneously trying to stall the recovery proceedings. The Tribunal concluded that the Corporate Debtor's actions were not in line with the objective of the IBC, which is to revive the Corporate Debtor rather than push it into corporate death.Conclusion:The Tribunal upheld the Adjudicating Authority's decision to reject the Section 10 application, finding no merit in the appeal. The Tribunal emphasized that the IBC process should not be misused to avoid debt repayment and that the Corporate Debtor had acted in bad faith. The appeal was dismissed with no costs.