NCLAT rejects challenge to insolvency proceedings despite claims of fraudulent initiation and limited defaults

NCLAT dismissed appeal challenging CIRP initiation. Appellant argued only two EMI defaults occurred and CIRP was fraudulently initiated. Tribunal found financial creditor entitled to initiate proceedings under IBC upon default occurrence. Corporate debtor's balance sheet showed revenue of Rs.33,447,942 against expenses of Rs.65,936,603, resulting in losses, contradicting fraud allegations. Appellant's claim was already admitted in CIRP proceedings. Court held insufficient evidence to prove fraudulent initiation and no substantial grounds existed for recalling admission order. Appeal dismissed with delay condoned.

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ISSUES:

1. Whether delay in filing the appeal can be condoned on the ground of late receipt of the impugned order.
2. Whether an application for recall of admission order under Sections 49, 66, and 69 of the Insolvency and Bankruptcy Code (IBC) can be allowed on the basis of alleged fraudulent initiation of the Corporate Insolvency Resolution Process (CIRP).
3. Whether default of only two Equated Monthly Installments (EMIs) and existence of revenue in the Corporate Debtor's balance sheet can constitute sufficient grounds to recall the admission of the Section 7 application.
4. Whether mere allegations without substantiation can warrant invocation of Section 65 of the IBC for fraudulent initiation of CIRP.
5. The legal effect of admitted claims in CIRP proceedings on the application to recall the admission order.

RULINGS / HOLDINGS:

1. The delay of 14 days in filing the appeal was condoned as there was "sufficient cause" shown, specifically that the impugned order was received late by letter dated 13.08.2024 on 27.08.2024, and thereafter steps were taken promptly.
2. The application for recall of the admission order was rightly rejected because the applicant "could not prove that there was fraudulent initiation of CIRP" and the claim of ?5,25,93,585/- was admitted, indicating no ground to recall the Section 7 application.
3. The fact that there were only two defaults of EMI payments and presence of revenue in the balance sheet does not preclude the Financial Creditor from initiating Section 7 proceedings, as default was committed and the remedy under the IBC was rightly invoked.
4. "Bald allegations without substantiating the same qua fraudulent initiation of the CIRP" cannot warrant invocation of Section 65 of the Code; mere difference in claimed amounts or lack of due diligence by the Financial Creditor does not amount to fraudulent initiation.
5. The admitted claim by the applicant in the CIRP proceedings is a strong ground for dismissal of the recall application, as participation and admission of claim imply acceptance of the process and no fraud.

RATIONALE:

1. The Court applied the provisions of the Insolvency and Bankruptcy Code, particularly Sections 7, 49, 65, 66, and 69, and emphasized that the IBC provisions "shall override the provisions of any other applicable law."
2. The Court relied on the settled legal principle that an application to recall an admission order requires "sufficient grounds" and that unsubstantiated allegations of fraud are insufficient.
3. The Court examined the financial statements submitted, noting that the Corporate Debtor had negative profit and higher expenses than revenue, which did not support claims of financial health or fraudulent initiation.
4. The Court recognized that the Financial Creditor, being an NBFC engaged in lending business, was entitled to initiate CIRP upon default, and lack of due diligence or minor defaults do not invalidate the initiation.
5. The decision reflects a strict approach to prevent misuse of recall applications and to uphold the integrity of CIRP once claims are admitted and the process is ongoing.

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