Corporate debtor's Section 10 IBC application cannot be rejected solely for filing after SARFAESI proceedings initiation

NCLAT Principal Bench allowed appeal against rejection of corporate debtor's Section 10 IBC application. Lower court had dismissed the application finding malicious and fraudulent intent to delay bank's SARFAESI proceedings under Section 13(2). NCLAT held that mere filing of Section 10 application after initiation of SARFAESI proceedings cannot establish fraudulent intent without additional evidence. Court ruled that prior SARFAESI proceedings alone cannot preclude Section 10 application filing, as this would contradict IBC's intent. Section 65 application by bank was wrongly allowed. Matter remanded to adjudicating authority for fresh consideration.

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Issues Involved:
1. Whether the application under Section 10 of the Insolvency and Bankruptcy Code (IBC) was filed with malicious and fraudulent intent.
2. Whether the initiation of proceedings under the SARFAESI Act by the State Bank of India (SBI) precludes the filing of an application under Section 10 of the IBC.
3. Whether the Adjudicating Authority erred in allowing the application under Section 65 of the IBC and imposing a penalty on the Appellant.

Issue-wise Detailed Analysis:

1. Malicious and Fraudulent Intent under Section 10 of the IBC:
The primary issue was whether the Appellant filed the application under Section 10 of the IBC with malicious and fraudulent intent. The Adjudicating Authority dismissed the Section 10 application, invoking Section 65 of the IBC, on grounds that it was filed to delay and halt recovery proceedings initiated by SBI. The Appellant argued that the mere initiation of proceedings under the SARFAESI Act cannot be the basis for concluding malicious intent. The Tribunal emphasized that for proving fraudulent and malicious intent, there must be deceit and injury, and the act must be done intentionally without just cause or excuse. The Tribunal found no sufficient material or foundation in the SBI's Section 65 application to substantiate claims of fraudulent or malicious intent by the Appellant.

2. Impact of SARFAESI Proceedings on Section 10 IBC Applications:
The Tribunal considered whether ongoing SARFAESI proceedings preclude the filing of a Section 10 application. The Appellant contended that the right to file under Section 10 is statutory and cannot be negated by SARFAESI proceedings. The Tribunal referred to precedents, emphasizing that SARFAESI proceedings or actions under the Debt Recovery Tribunal Act do not obstruct the filing of a Section 10 application, provided the application is complete and there is a debt and default. The Tribunal noted that the mere existence of SARFAESI proceedings does not imply the Section 10 application was filed with malicious intent.

3. Error in Allowing Section 65 Application and Imposing Penalty:
The Tribunal examined whether the Adjudicating Authority erred in allowing the Section 65 application filed by SBI and imposing a penalty on the Appellant. The Tribunal found that the Adjudicating Authority's decision was primarily based on the initiation of SARFAESI proceedings, which is insufficient to prove malicious and fraudulent intent. The Tribunal highlighted that something more is required to prove such intent, beyond the initiation of SARFAESI proceedings. The Tribunal concluded that the Adjudicating Authority committed an error in allowing the Section 65 application and rejecting the Section 10 application solely on this basis.

Conclusion:
The Tribunal allowed the Appeal, setting aside the order dated 30.09.2024, which allowed IA No.1955 of 2024 and rejected the Section 10 application. The Tribunal revived the company petition filed under Section 10 to be reconsidered by the Adjudicating Authority afresh. The Tribunal clarified that it has not expressed any opinion on the merits of the Section 10 application, leaving it to the Adjudicating Authority to decide in accordance with the law. The Appeal was allowed with no order as to costs.

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