2026 (1) TMI 432 - HC - IBC

Civil suit challenging CIRP initiation over disputed debt, assignment and forged documents barred; plaint rejected under O.VII R.11 CPC.

The dominant issue was whether a civil suit challenging initiation of CIRP on grounds of absence of legally enforceable debt, invalid assignment, and ... CIRP - Existence of legally enforceable debt for initiation of proccedings or not - Validity of assignment deed, and authenticity of documents - Plaintiff claims of complete discharge of its obligations - seeking exemption from mandatory pre-institution mediation under Section 12A of the Commercial Courts Act, 2015 - whether the instant suit is barred by the provisions of the IBC? - HELD THAT:- The rationale for the judicial authorities to dwell upon “that which was” is to stress upon the fundamental shift brought about by the enactment of the IBC. The Code, as it came to be enacted, marked a decisive break from the earlier insolvency framework, replacing a fragmented regime with a time-bound process aimed at maximising the value of the corporate debtor. In Punjab National Bank v. James Hotels Ltd. upon the corporate debtor claiming that the financial creditor had committed fraud, the NCLT directed the Registrar of Companies, Punjab and Chandigarh (ROC) to preserve C.C.T.V. footages related to the visitors entering the premises of the ROC. This order of the NCLT was assailed before the Appellate Tribunal in James Hotels Ltd. v. Punjab National Bank [2017 (9) TMI 2054 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI] on the grounds that the NCLT lacked competence to pass such an order. The NCLAT, while dismissing the appeal, found that fraudulent or malicious initiation of proceedings as also fraudulent bank trading can be adjudicated upon by the NCLT. In Zaggle Prepaid Ocean Services Pvt. Ltd. v. Freebie Solutions Pvt. Ltd. [2019 (12) TMI 1699 - NATIONAL COMPANY LAW TRIBUNAL HYDERABAD], the applicant/corporate debtor filed an application under Rule 131 read with Rule 11 of the NCLT Rules, 2016 while relying upon Section 60(5) of the IBC, and disputed the demand of the creditor claiming it had submitted forged invoices, and further that it had used the seal of the corporate debtor to pass off fabricated invoices as genuine ones. It was further claimed that the acts of the creditor amounted to forgery, criminal intimidation and extortion. Adjudicating upon this issue, the NCLT directed the creditor to produce the original invoices, the veracity of which, was disputed. The High Court of Telangana in Ramky Infrastructure Ltd. v. Hi-reach Construction Equipments (P) Ltd. [2024 (2) TMI 1619 - TELANGANA HIGH COURT] had an occasion to adjudicate upon a Civil Revision filed by the corporate debtor assailing an order of NCLT, Hyderabad dismissing its application under Section 65 of the IBC. Before the NCLT, the corporate debtor had claimed, that a ledger statement filed by the creditor was never issued by the corporate debtor and that the seal/signature on it are fabricated and forged. The NCLT found that it did not have powers to adjudicate upon the issue of forgery and fabrication of the concerned documents. Thus, under Section 65 of the Code, the tribunal can delve into issues of fraud and collusion concerning the initiation of CIRP. The said powers are vested with the tribunal in order to prevent attempts being made to pollute the sanctity of insolvency or liquidation proceedings by invoking its jurisdiction with an ulterior objective and by indulging in fraudulent or malicious act to achieve the same - Though the power to determine the veracity of the information supplied by a given party is intrinsic to Section 65, a specific facet of it has also been separately dealt with under Section 75. Scope of section 75 of IBC - HELD THAT:- From a combined reading of the discussion pertaining to Sections 65 and 75, it can safely be concluded that — first, the NCLT has powers to delve into allegations of fraud and malicious initiation of CIRP under Section 65 of the Code; second, the NCLT and NCLAT have, actively, been utilising these powers to adjudicate upon issues concerning forgery, fraud, and collusion; and third, in furtherance of the powers to adjudicate upon fraud and malicious intent, the NCLT can delve into questions concerning the veracity/truthfulness of statements, information and documents. Residuary powers of NCLT u/s 60(5)(c) - HELD THAT:- The NCLT is strengthened u/s 60(5)(c) of the IBC, to determine questions of law and facts arising out of, or in relation to, the insolvency resolution of the corporate debtor. The scope of the words used in the said provision are broad, intended to encompass, all issues incidental and ancillary to the insolvency resolution proceedings. It intends to arm the NCLT with the requisite powers to arrive at a comprehensive adjudication of issues stemming from, or surrounding, the insolvency resolution or liquidation of the corporate debtor. It also aligns with the core objective behind the codification of IBC, which is to consolidate the laws and prevent scattering of connected or overlapping matters. The rational for the breadth of Section 60(5)(c) of the IBC was discussed by the Supreme Court in GUVNL [2021 (3) TMI 340 - SUPREME COURT], wherein the Court stressed upon the objective of the IBC, namely to create a unified code and fora for the insolvency resolution process, and held that disputes bearing a nexus with the insolvency of the corporate debtor are covered by Section 60(5)(c). While Sections 65 and 75 are punitive in nature, the effect of positive findings on issues adjudicated under these provisions, may extend beyond the mere imposition of penalties. If for instance initiation of CIRP has been found to be fraudulent, and on the basis of a forged assignment deed, while penalty would naturally be imposed; broader consequences may also ensue pertaining to the very continuation of the CIRP. It would, without doubt, be absurd if the NCLT, after reaching the conclusion that the initiation of the corporate insolvency process has been, inter alia, fraudulent, or that the very basis on which debt was sought to be proven is in fact forged/fraudulent, insists on continuing with the CIRP. In the context of Sections 65, 75 and 60(5)(c), it is clear that the NCLT Rules, 2016 can be invoked in order to delve into disputed questions of facts, which warrant a thorough examination of evidence. The provisions under the IBC and the NCLT Rules, 2016 cumulatively, leave no manner of doubt that the NCLT is institutionally equipped, both in terms of jurisdiction and procedure, to adjudicate complex disputes involving allegations of fraud, forgery, fabrication of documents, collusion and other serious factual controversies that may arise in connection with the initiation of CIRP. The reliance placed by the plaintiff on paras. 28 and 29 of Tata Consultancy Services Ltd. v. SK Wheels Pvt. Ltd. [2021 (11) TMI 798 - SUPREME COURT] which holds that Section 60(5)(c) of the IBC can be attracted only for a dispute connected with the insolvency of the corporate debtor also does not support its stance. In the instant case, the plaintiff’s grievance is the filing of the Section 7 Petition by defendant no. 1. There is not an iota of doubt that the instant dispute has arisen in connection with the insolvency of the corporate debtor. Scope of Section 7 and its effect on the ouster provisions - HELD THAT:- There is no quarrel with the position of law submitted by the learned counsel. The law as laid down by the Supreme Court in Innoventive Industries Limited v. ICICI Bank and Anr. [017 (9) TMI 58 - SUPREME COURT] still holds the field. A pre-existing dispute pertaining to the validity of a financial debt, cannot be gone into by the NCLT while adjudicating upon a Section 7 application. Upon being satisfied that a default has occurred, irrespective of whether the debt in relation to which the default is claimed is disputed, there is no option left but to admit the Section 7 application. The conclusion which this Court has reached is not that under Section 7 of the IBC, the NCLT has powers to adjudicate upon fraud, forgery or the validity of an assignment deed but that the said powers are found in Sections 65, 75, 60(5)(c) of the IBC read with the relevant NCLT Rules, 2016. It is important to stress that the application of the ouster clauses under Sections 63 and 231 of the Code is not contingent upon the stage at which the NCLT is to adjudicate a given matter - The mere fact that a particular issue is to adjudicated upon at a subsequent stage, would not vest a right in favour of party, to seek its adjudication, and seek reliefs in relation to it, before a different forum, and thereby escape the specialised statutory scheme. In the considered view of this Court, the present plaint is a textbook example of a proceeding which, though clothed as a civil declaratory action, is in reality an impermissible collateral attack on the jurisdiction and functioning of the NCLT under the IBC. Entertaining such a suit would amount to judicially endorsing forum shopping and procedural circumvention - The amount so deposited shall be utilized by the DSLSA for providing counselling/psychological support to the victims of offences under the Protection of Children from Sexual Offences Act, 2012. The application filed by the defendant no. 1, under Order VII Rule 11 of the CPC is allowed. The plaint is rejected. Issues: (i) Whether the civil suit seeking declarations and injunctions assailing the existence of debt, validity of assignment and alleged forgery, filed by the plaintiff after institution of a Section 7 petition, is barred by the Insolvency and Bankruptcy Code, 2016 and therefore liable to be rejected under Order VII Rule 11 CPC.Analysis: The Court examined the statutory scheme of the IBC and relevant NCLT Rules, focusing on ouster clauses in Sections 63 and 231 which exclude civil court jurisdiction in matters vested in the NCLT. The Court analysed Sections 65 and 75 (dealing with fraudulent or malicious initiation and false information) and Section 60(5)(c) (residuary jurisdiction) and concluded these provisions, read with the NCLT Rules, empower the NCLT to inquire into allegations of fraud, forgery, collusion, and to determine the veracity of documents and assignments that underpin a Section 7 petition. The Court distinguished authorities relied on by the plaintiff by reference to the breadth of NCLT's jurisdiction under the IBC, and observed that while Section 7 provides limited scrutiny at admission, substantive inquiries into fraud/forgery/validity of assignment fall within Sections 65, 75 and Section 60(5)(c) and can be adjudicated by the NCLT using its procedural powers (summoning witnesses, directing production of documents, recording and cross-examining evidence). The plaint's reliefs (declarations of discharge of debt, denial of assignment, mandatory accounting and injunctions restraining enforcement) were held to be, in substance, a collateral attempt to pre-empt or interdict the statutory insolvency process and therefore to lack jurisdictional competence in the civil court.Conclusion: The civil suit is barred by the IBC and the plaint is rejected; decision is in favour of the Respondent.