TaxTMI 
TaxTMI 
2018 (1) TMI 505
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....rity) Rules, 2016 (hereinafter referred to as the 'Adjudicating Authority Rules') has been rejected. The Adjudicating Authority has also imposed penalty of Rs. Ten Lakhs on the appellant - Corporate Debtor under Section 65 of the I & B Code. 2. The questions involved in this appeal are : (i) Whether non-disclosure of facts beyond the statutory requirement under the I & B Code read with relevant form, prescribed under the Insolvency and Bankruptcy (Application to Adjudicating Authority), Rules, 2016 can be a ground to dismiss an application for initiation of Corporate Insolvency Resolution Process ? and (ii) Whether the penalty imposed by the Adjudicating Authority under Section 65 of the I & B Code is legal or not? 3. The brief facts of the case are that the appellant - Corporate Debtor /Corporate Appellant filed an application under Section 10 in Form 6 for initiation of Corporate Insolvency Resolution Process against it on the ground that it has failed to pay the debt due to financial creditors and other creditors. On notice, Punjab National Bank (Financial Creditor) appeared and alleging the suppression of facts on the ground that the appellant h....
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.... by the Adjudicating Authority in the impugned order dated 8th May, 2017, relevant of which are quoted below: "12. In addition to the above details which have not been fully disclosed in the petition, Learned Counsel also contends that in relation to the Defence Enclave property of its objection statement, which property is also in the personal name of the Directors of the company, is also caught in the web of legal entanglement deliberately created by the directors of the petitioner in relation to the said property, as a civil suit again for permanent and mandatory injunction being No.9398/2016, titled as Sh. Jagat Nath Mahto v. Vedika Overseas Tradex (P.) Ltd. & Ors. is pending consideration before the Learned ASCJ, Karkardooma Court, Delhi and that the next date of hearing is fixed for 12.05.2017 and incidentally, it is pointed by the Financial Creditor that the plaintiff in the above said suit allegedly also happens to be someone close to the directors/ promoters of the petitioner company, namely, a driver working in one of the sister concerns in which both Ms. Ritu Garg and Mr. Anurag Garg, being the Directors of the petitioner company are also involved. The claim of ....
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....mission, has been made only in line with the RBI guidelines and the Corporate debtor has come to this sorry state of affairs only due to the deliberate actions of the Directors of the corporate debtor and the way in which the Directors have managed the company. This situation has not arisen out of the business cycle as contended by the Corporate Debtor. It is also averred by the objector Bank that the Corporate Debtor is under enquiry by Department of Revenue Intelligence (DRI)." 7. Having noticed the aforesaid facts, the Adjudicating Authority observed as follows : "14. From the above facts, it is averred by the Banks that it is clear that the Corporate debtor and directors also being guarantors are trying to avoid making lawful payments of the dues owed to the Bank and also thwarting the Bankers from realizing the securities by initiating several legal proceedings in different courts and Forums with the sole motive of removing their personal properties from the clutches of law and that the instant action before this Tribunal is yet another attempt in the same direction." 8. Learned counsel appearing on behalf of the appellant submitted that the application under se....
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....details of the mortgaged property were supressed by the appellant : PROPERTY Shop No. 467-468, Ground & First Floor, Katra Ishwar Bhavan, Khari Baoli, New Delhi. Civil Suit titled "Mayank Maheshwari v. Anurag Garg" registered as CS DJ/000094/2017 before Ld. Tis Hazari Courts seeking declaration, mandatory and permanent injunction. An S.A. under Sec.17 of SARFAESI Act, 2002 also filed by Mr. Mayank Maheshwari in collusion with Mr. Anurag is pending adjudication before Lf. DRT. The contention of the Appellant that the suit is with respect to the basement and mezzanine floor, which are not mortgaged with the Answering Respondent proves to be false in wake of the prayer made in the afore-mentioned Civil Suit, which includes the ground floor (@ pg.377 of the Appeal) Single storied house at 83, Defence Enclave, Vivek Marg, Delhi - 110 092 Civil Suit for permanent and mandatory injunction bearing No. 9398/2016 titled as "Sh. Jagar Nath Mehto v. Vedika Overseas Tradex Ltd." before Ld. ASCJ, Karkardooma Court, Delhi filed by Shri Mehto alleging that he was induced as tenant in the property after appointment as a driver in the company of which Sh. Anurag and Ms. Ritu ....
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.... 2. The objective of the Insolvency and Bankruptcy Code, 2015 is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the priority of payment of government dues and to establish an Insolvency and Bankruptcy Fund, and matters connected therewith or incidental thereto. An effective legal framework for timely resolution of insolvency and bankruptcy would support development of credit markets and encourage entrepreneurship. It would also improve Ease of Doing Business, and facilitate more investments leading to higher economic growth and development. 3. The Code seeks to provide for designating the NCLT and DRT as the Adjudicating Authorities for corporate persons and firms and individuals, respectively, for resolution of insolvency, liquidation and bankruptcy. The Code separates commercial aspects of insolvency and bankruptcy proceedings from judicial aspects. The Code ....
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....up a calm period for insolvency resolution where the debtor can negotiate in the assessment of viability without fear of debt recovery enforcement by creditors. 4. The law must appoint a resolution professional as the manager of the resolution period, so that the creditors can negotiate the assessment of viability with the confidence that the debtors will not take any action to erode the value of the enterprise. The professional will have the power and responsibility to monitor and manage the operations and assets of the enterprise. The professional will manage the resolution process of negotiation to ensure balance of power between the creditors and debtor, and protect the rights of all creditors. The professional will ensure the reduction of asymmetry of information between creditors and debtor in the resolution process. II. The Code will enable symmetry of information between creditors and debtors. 5. The law must ensure that information that is essential for the insolvency and the bankruptcy resolution process is created and available when it is required. 6. The law must ensure that access to this information is made availab....
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....e scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. Default is defined in Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and payable, which includes non-payment of even part thereof or an instalment amount. For the meaning of "debt", we have to go to Section 3(11), which in turn tells us that a debt means a liability of obligation in respect of a "claim" and for the meaning of "claim", we have to go back to Section 3(6) which defines "claim" to mean a right to payment even if it is disputed. The Code gets triggered the moment default is of rupees one lakh or more (Section 4). The corporate insolvency resolution process may be triggered by the corporate debtor itself or a financial creditor or operational creditor. A distinction is made by the Code between debts owed to financial creditors and operational creditors. A financial creditor has been defined under Section 5(7) as a person to whom a financial debt is owed and a financial debt is defined in Section 5(8) to mean a debt which is disbursed against consideration for the time valu....
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....porate debtor within 7 days of admission or rejection of such application, as the case may be." 18. At this stage, it is desirable to compare the provisions of Section 7 with Section 10 of the I & B Code. Section 7 is as follow: "7. (1) A financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred. Explanation.-For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor. (2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed. (3) The financial creditor shall, along with the application furnish- (a) record of the default recorded with the information utility or such other record or evidence of default as may be specified; (b) the name of the resolution professional proposed to act as an interim resol....
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....sp;(b) the resolution professional proposed to be appointed as an interim resolution professional. (4) The Adjudicating Authority shall, within a period of fourteen days of the receipt of the application, by an order- (a) admit the application, if it is complete; or (b) reject the application, if it is incomplete: Provided that Adjudicating Authority shall, before rejecting an application, give a notice to the applicant to rectify the defects in his application within seven days from the date of receipt of such notice from the Adjudicating Authority. (5) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (4) of this section." 20. Under both Section 7 and Section 10, the two factors are common i.e. the debt is due and there is a default. Sub-section (4) of Section 7 is similar to that of sub-section (4) of Section 10. Therefore we, hold that the law laid down by the Hon'ble Supreme Court in "Innoventive Industries Ltd. (supra) is applicable for Section 10 also, wherein the Hon'ble Supreme Court observed as "The moment the adjudicating authority is satisfied that a default has occurred, the a....
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.... months before the date of making of an application under the said Chapter; or that the corporate debtor is one in respect of whom a liquidation order has already been made can be a ground to reject the application under Section 10 on the ground of suppression of fact/not come with clean hand. 24. 1st Respondent -financial creditor has referred to pendency of a Civil Suit between 'Mayank Maheshwari v. Anurag Garg' and another suit between 'Sh. Jagar Nath Mehto v. Vedika Overseas Tradex Ltd.'. Pendency of such suits cannot be a ground to deny admission of an application under Section 10, if all the information in terms of Section 10 of the I & B Code and Form 6 has been supplied by a Corporate Applicant/Corporate Debtor and the application is otherwise complete. Non-mentioning of suit(s) pending between the parties cannot termed to be suppression of facts nor can be a ground to reject the application. In fact, once the application under Section 10 is admitted, all such related proceedings, including suits for recovery of moveable or immovable property of the Corporate Debtor and other proceeding cannot proceed further in any Court or Tribunal or Authority in view of order of 'mor....
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....ion under this Chapter; or (d) a corporate debtor in respect of whom a liquidation order has been made. Explanation. - For the purposes of this section, a corporate debtor includes a corporate applicant in respect of such corporate debtor." 29. In view of the aforesaid provision where a winding up proceeding has already been initiated under the Companies Act, 1956 / 2013 by the Hon'ble High Court such cases have not been transferred to National Company Law Tribunal, pursuant to "Companies (Transfer of Pending Proceedings) Rules, 2016", framed by the Central Government. 30. Clause (d) of Section 11 refers to "liquidation order", against a Corporate Debtor. The word 'winding up' has not been mentioned therein. For the said reason by Section 255 read with Schedule 11 of the I & B Code, in Section 2 of the Companies Act, 2013 for clause (23), the following clause has been substituted : "1. In section 2,- (a) for clause (23), the following clause shall be substituted, namely:- xxx xxx xxx "(....
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....ees, but may extend to one crore rupees. (2) If, any person initiates voluntary liquidation proceedings with the intent to defraud any person, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees but may extend to one crore rupees." 36. Sub-section (11) of Section 5 defines "initiation date" i.e. the date of initiation of corporate insolvency resolution process and reads as follows: "(11) "initiation date" means the date on which a financial creditor, corporate applicant or operational creditor, as the case may be, makes an application to the Adjudicating Authority for initiating corporate insolvency resolution process;" If sub-section (11) of Section 5 is read with Section 65 it is clear that if a 'Financial Creditor', or 'Corporate Applicant' or 'Operational Creditor' makes an application to the Adjudicating authority for initiating Corporate Resolution Process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, the Adjudicating Authority may impose upon such person a penalty which shall not be less ....
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.... any such reasons recorded by the Adjudicating Authority the impugned order cannot be upheld. 41. Further, as the Adjudicating Authority before imposing penalty under Section 65 has not given nor served any notice to the Corporate Applicant recording its prima facie view and intent to punish the Corporate Applicant, the impugned order dated 8th May, 2017 cannot be upheld having been passed in violation of rules of natural justice. 42. For the reasons aforesaid, the impugned order dated 8th May, 2017 passed in C.P. No. IB-39(PB)/2017 is set aside. The case is remitted back to the Adjudicating Authority for admission of the application under Section 10, if the application is otherwise complete. In case it is incomplete, the Adjudicating Authority will grant time to the appellant to remove the defects. 43. At this stage, it is desirable to state that the Central Government in Form 1 or 5 or 6 of the 'Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016', has not provision for the parties to state whether any winding up proceeding has been initiated or liquidation order has been passed against the Corporate Debtor or not. No provision has been made the....