IBC s.7 insolvency petition challenged as fraudulent: s.65 plea and creditor substitution must be heard together, dismissal set aside

Whether an application seeking initiation of proceedings under s.65 IBC could be dismissed independently of the pending s.7 IBC insolvency application. The Appellate Tribunal held that the s.65 plea, alleging fraudulent or malicious initiation, should be kept open and adjudicated by the Adjudicating Authority contemporaneously with determination of the s.7 application, particularly when an application for substitution of the financial creditor by an assignee was also pending. Consequently, the impugned order dismissing the s.65 application was set aside, the application was revived, and it was directed to be heard along with the substitution application at the time of final decision on the s.7 petition.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether the Tribunal's dismissal of the application seeking action under Section 65 of the Code (including the consequential prayer to dismiss the Section 7 application) ought to be interfered with, and whether that Section 65 plea should instead remain open for adjudication along with the pending Section 7 application.

(ii) Whether the Section 65 application, once revived, should be directed to be heard together with the pending substitution/assignment application, at the time of final decision on the Section 7 application.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Setting aside dismissal of the Section 65 application and keeping the Section 65 plea open for decision with the Section 7 application

Interpretation and reasoning: The Court recorded consensus between counsel that the impugned dismissal should be set aside and that the request for initiation of proceedings under Section 65 should remain open to be adjudicated by the Tribunal while deciding the Section 7 application. The Court accepted this position and confined appellate interference only to the extent necessary to undo the dismissal, without entering into merits of the allegations or the underlying insolvency dispute.

Conclusions: The dismissal order was set aside to the limited extent it dismissed the Section 65 application; the Section 65 application stood revived. The Court expressly refrained from making any observation on the merits of the dispute.

Issue (ii): Direction to hear the revived Section 65 application along with the substitution/assignment application at the time of deciding the Section 7 application

Interpretation and reasoning: Since the substitution/assignment request was pending and the parties agreed that the Section 65 plea should be considered while deciding the Section 7 application, the Court directed consolidated consideration by the Tribunal. It also contemplated hearing the assignee in the substitution/assignment application in place of the original financial creditor for purposes of deciding the pending matters together.

Conclusions: The revived Section 65 application was directed to be heard by the Tribunal along with the pending substitution/assignment application at the time of final adjudication of the Section 7 application. The appeal was closed on this limited basis, with parties left to bear their own costs.

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