2026 (1) TMI 20 - AT - IBC

Related-party creditor's CIRP bid against company challenged by shareholders; appeal held maintainable, admission set aside for fraud/collusion

Shareholders challenged admission of CIRP under s.7 IBC and dismissal of their application under ss.60(5) and 65 IBC, raising maintainability and fraud. ... Maintainability of appeal - Appellants as shareholders have locus standi of filing appeal or not - initiation of CIRP has been done fraudulently or not. Maintainability of the Appeal - HELD THAT:- The arguments presented by Respondent do not come in the way of the Appellant to be considered as an aggrieved person. The Code doesn’t bar the Appellant to file an appeal. Section 61 of the Code clearly states that notwithstanding anything to the contrary contained under the Companies Act, 2013, “any person aggrieved” by the order of the AA under this part may prefer an appeal to the NCLAT. The shareholders are the Appellant in this case and they are aggrieved by the order of the AA and interpreting the law in it widest terms and not in a restricted manner, it is concluded that the appellants have the locus to file an appeal and their appeal is maintainable. Even otherwise, it is found that there are serious allegations of fraudulent initiation of CIR proceedings, which should be looked into. Is CIRP initiated fraudulently? - HELD THAT:- The admission of insolvency has been done in a very mechanical manner. It is not noted in the impugned order that the two entities namely Respondent No.1 and 2 are managed, owned and governed by the same management and they are related parties, which though not barred yet would require deeper scrutiny. The Board of Directors of the two companies is also more or less identical and they have common members of Audit Committee. The fact that the said companies are related is not even disputed. All these facts would have a bearing on the insolvency initiation - the CIRP initiation order dated 02.01.2025 does not reflect that the aspect of related parties (Directors and Shareholders) was considered by the bench - there is a pre-determined course of action to ensure insolvency against the Corporate Debtor succeeds. It is also noted that the rejection of the resolution by shareholders at the AGM, including the related party transaction was not mentioned in the order. All this indicates collusiveness between the FC and CD. Respondent No.2, admittedly disclosed the Company Petition filed by Respondent No.1 to its shareholders only in January 2025, despite the fact that the Company Petition was filed in October 2024. We note that the same is contrary to Regulation 30 read with Schedule III (Item 16) of the SEBI LODR, which requires disclosure of any application being filed by a financial creditor for initiation of CIRP. It raises serious doubts about the intentions of both FC and CD and closes the options of other shareholders to agitate timely. It is for this reason the Appellant could file the Application belatedly upon becoming aware of the said proceedings. This indicates beginning of covering of fraud played by the common management of Respondent No.1 and Respondent No.2. The pleadings relate to a fraud basis which CIRP has been initiated and for arriving at a conclusion, sufficient material exists on record - there are nothing beyond the pleadings. Thus, when Appellant has made out a case for fraudulent initiation of CIR proceedings and both the FC and the CD are related parties, we unhesitatingly conclude that Appellants are aggrieved person and have the locus to file the Appeal and the Appeal is maintainable - it is also concluded that FC and CD being related parties have collusively filed the Section 7 application and got CD admitted into CIR Proceedings and this is case of a fraudulent initiation of CIR proceedings - It is also concluded that the filing of Section 7 in this case is not for resolution of the Corporate Debtor but for some other purpose. Had the purpose been the resolution of the CD, the offer of settlement of Corporate Debtor could have been accepted by FC, especially when both have the same management. CD could have explored Section 10 route under the code. This is a sure way of wiping out major shareholding. There are no hesitation to come to a conclusion that Adjudicating Authority erred in dismissing the Appellant’s Application under Sections 60(5) and 65 of the Code, despite clear evidence that the Section 7 proceedings were collusive device between related parties to wipe out the interests of public shareholders of Respondent No.1. The CIRP proceedings under Section 7 of the Code against Respondent No. 2-CD set aside - a cost of ₹ 25 lakhs is imposed against Respondent No. 1 – Financial Creditor - matter referred to IBBI to look into the facts and circumstances of the case and also the conduct of the Resolution Professional. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether shareholders who challenged dismissal of an application alleging fraudulent/malicious initiation of insolvency proceedings under Section 60(5) read with Section 65 of the Insolvency and Bankruptcy Code, 2016, have locus standi as 'any person aggrieved' and whether the appeal is maintainable. (ii) Whether, on the facts found, the insolvency proceedings initiated under Section 7 were collusive between a related-party financial creditor and the corporate debtor and thus amounted to fraudulent or malicious initiation for a purpose other than insolvency resolution, warranting setting aside of the insolvency admission and imposition of penalty/cost under Section 65. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Locus standi / maintainability of the appeal by shareholders Legal framework (as discussed by the Court): The Court considered Section 61 of the Code using the expression 'any person aggrieved' and the nature of CIRP as proceedings in rem, as discussed in the judgment. The Court also addressed whether earlier tribunal views restricting shareholder standing applied to an appeal arising from dismissal of an application under Section 60(5) read with Section 65. Interpretation and reasoning: The Court distinguished decisions holding that shareholders cannot challenge admission of CIRP in their individual capacity, because the present appeal arose from dismissal of an application specifically invoking Section 60(5) and Section 65 alleging collusive/fraudulent initiation. The Court accepted that 'any person aggrieved' under Section 61 is to be read widely in the insolvency context, and reasoned that where collusion between the financial creditor and corporate debtor is alleged, public shareholders may be the only stakeholders effectively positioned to challenge such initiation. The Court held that the Code does not bar such an appeal and that serious allegations of fraudulent initiation warranted appellate scrutiny. Conclusion: The Court held the shareholders were 'aggrieved persons', had locus standi, and the appeal was maintainable. Issue (ii): Whether the Section 7 insolvency initiation was collusive and fraudulent/malicious under Section 65 Legal framework (as discussed by the Court): The Court applied Section 65(1) of the Code, which permits imposition of penalty where insolvency resolution is initiated fraudulently or with malicious intent for a purpose other than resolution. The Court treated Section 65 as enabling the setting aside of proceedings where initiation itself is found to be a collusive device. Interpretation and reasoning: The Court relied on the sequence of events and record-based indicators to conclude collusion: (a) the financial creditor and corporate debtor were admitted related parties with common management; (b) initiation under Section 7 followed immediately after shareholder rejection of key resolutions at the annual general meetings, including resolutions concerning related party transactions and director appointments; (c) the corporate debtor did not genuinely oppose admission and a settlement proposal was made and rejected despite common management on both sides, indicating a predetermined course to ensure admission; (d) the insolvency admission was found to have proceeded mechanically without reflecting consideration of the related-party nature and common governance, even though these facts had bearing on initiation; (e) the record showed inconsistency between the alleged loan agreement terms (including interest) and disclosures in annual reports/audited statements indicating nil interest and describing the advance as operational in nature, and even the adjudicating authority noted mismatch between agreement contents and accounting/audited statements; (f) the Court treated delayed disclosure of the Section 7 filing to shareholders as raising serious doubt about intent, because it curtailed timely challenge by shareholders. The Court concluded that the related-party creditor route under Section 7 was used to evade the shareholder-approval safeguard that would apply to a voluntary initiation route, and that the overall design was to wipe out public shareholding rather than to seek genuine insolvency resolution. The Court rejected the contention that the allegations were mere suspicion or beyond pleadings, finding sufficient material on record and that fraudulent initiation was the core issue before both forums. Conclusions: The Court held that the Section 7 application was filed collusively by related parties, that CIRP was initiated fraudulently/maliciously for a purpose other than resolution, and that the adjudicating authority erred in dismissing the Section 60(5)/Section 65 application. The Court therefore set aside the insolvency proceedings admitted under Section 7, imposed cost/penalty of Rs. 25 lakhs on the financial creditor under Section 65, and directed referral to the regulator to examine the facts and conduct of the resolution professional and for examination of company affairs by the appropriate authority.