CIRP admission set aside under Section 7 due to collusion between related creditor and debtor companies with common director

NCLAT Principal Bench set aside CIRP admission under Section 7, finding collusion between creditor and debtor companies. The tribunal determined that a common director holding 21.77% and 66.66% shares in creditor companies and 33.34% in debtor company constituted related parties under Section 5(24)(m). Citing Phoenix ARC precedent, amounts disbursed by related parties don't qualify as financial debt. The tribunal found creditor's petition was collusive rather than for genuine insolvency resolution, as evidenced by shared directorship and financial statements showing related party borrowings. Appeal allowed, CIRP order set aside.

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Issues Involved:

1. Alleged collusion between Respondent No. 1 and Respondent No. 2 in initiating the Corporate Insolvency Resolution Process (CIRP).
2. Determination of whether Respondent No. 1 and Respondent No. 2 are related parties under the Insolvency and Bankruptcy Code, 2016 (Code).
3. Validity of the assignment agreement and its registration.
4. Maintainability of the appeal by the Appellant.
5. Jurisdiction of NCLT/NCLAT to inquire into allegations of fraud and collusion.

Issue-wise Detailed Analysis:

1. Alleged Collusion in Initiating CIRP:
- The Appellant alleged that the initiation of CIRP by Respondent No. 2 against Respondent No. 1 was collusive, intended to defraud the Appellant and other creditors. The Appellant argued that Respondent No. 3, who had significant control over all three companies involved, orchestrated the initiation of CIRP for purposes other than resolving insolvency, which is prohibited under Section 65 of the Code. The Tribunal found that the collusion was evident due to the lack of contestation by Respondent No. 1 and the absence of an appeal against the admission order, indicating that the proceedings were merely an eyewash.

2. Determination of Related Parties:
- The Appellant contended that Respondent No. 1 and Respondent No. 2 are related parties as defined under Section 5(24) of the Code, due to common shareholding and directorial positions held by Respondent No. 3. The audit report of Respondent No. 1 listed the debt as loans and advances from related parties, supporting the Appellant's claim. The Tribunal agreed that the presence of Respondent No. 3 in all three companies, with significant shareholding and directorial roles, established a related party relationship, reinforcing the allegation of collusion.

3. Validity of the Assignment Agreement:
- The Appellant challenged the validity of the assignment agreement dated 10.02.2020, arguing it was not registered and insufficiently stamped, thus questioning the legitimacy of the debt transfer. The Tribunal noted that the agreement was executed on a Rs. 100 stamp paper, which was inadequate for the amount involved, raising doubts about the authenticity and enforceability of the agreement.

4. Maintainability of the Appeal:
- The Appellant's standing to file the appeal was contested by Respondents, citing that allegations of collusion should be raised before the Adjudicating Authority (NCLT) under Section 65 of the Code. However, the Tribunal referenced the Supreme Court's decision in Embassy Property Developments Pvt. Ltd. v. State of Karnataka, affirming that NCLT and NCLAT have jurisdiction to inquire into allegations of fraud and collusion, thereby validating the maintainability of the appeal.

5. Jurisdiction of NCLT/NCLAT:
- The Tribunal emphasized that NCLT and NCLAT possess the authority to investigate fraudulent initiation of CIRP under Section 65 of the Code. The Tribunal referenced the Supreme Court's decision, which clarified that fraudulent initiation of CIRP falls within the jurisdiction of NCLT/NCLAT, and such allegations should be addressed within the insolvency framework rather than bypassing it through alternative remedies.

Conclusion:
The Tribunal concluded that the initiation of CIRP by Respondent No. 2 against Respondent No. 1 was collusive and intended for purposes other than resolving insolvency. The impugned order admitting the application under Section 7 of the Code was set aside, and the appeal was allowed, with no costs awarded. The Tribunal's decision underscores the importance of scrutinizing the bona fides of insolvency proceedings to prevent misuse of the insolvency process.

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