TaxTMI 
TaxTMI 
2021 (7) TMI 60
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....ows: (a) The Appellant had given an unsecured loan of Rs. 3 lakhs to the Respondent / Corporate Debtor for six months carrying interest @ 15% per annum, on 15th February 2019. This was under request for financial assistance by the Respondent / Corporate Debtor. (b) The Appellant is a Financial Creditor of the Respondent viz. Satabadi Investment Consultants Private Limited. As stated above, the Appellant had filed the Section 7 Application against the Respondent on account of default committed by the Respondent / Corporate Debtor in repaying loan amount advanced by the Appellant. (c) The Respondent / Corporate Debtor acknowledged receipt of the unsecured loan amount and also issued a demand promissory note. However, the Respondent Corporate Debtor defaulted to repay the dues. (d) The Appellant had issued a demand notice dated 16th October 2019 recalling the unsecured loan, but the Respondent Corporate Debtor failed to clear the outstanding dues despite the same. (e) The existence of debt and default are admitted. In fact, in the Reply Affidavit filed by the Respondent / Corporate Debtor, there is a definite admission of default. ....
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....the circumstances, under Section 7(5) of IBC, the Adjudicating Authority had no further discretion to exercise in the matter and ought to have admitted the Section 7 Application. However, the Adjudicating Authority, instead of following the mandate of Section 7(5) of IBC, has proceeded with an unjustified and roving enquiry of its own (without even affording any opportunity to the Appellant to make any submissions in such regard) to hold that the Section 7 Application was filed in collusion with the Respondent / Corporate Debtor. 6. There is no basis for the finding in the impugned order that the Section 7 Application is a product of collusion between the parties. The Adjudicating Authority has referred to the master data of the Corporate Debtor and the financial statements for 2018-19 to come to the finding of collusion. However, in doing so, the Adjudicating Authority has grossly exceeded its jurisdiction and authority and/or has acted without authority or jurisdiction. Neither the Master Data nor the financial statements of the Corporate Debtor, as referred to in paragraph 9 of the impugned order, were even part of the records in the Section 7 Application. It is to be noted t....
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....he same categorically provides that the Adjudicating Authority is required to "ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the Financial Creditor under Sub-section (3)". This evidences the scope of an adjudication of the Adjudicating Authority, i.e. adjudication is to be made on the evidence disclosed and on record. The Adjudicating Authority is not empowered to initiate a roving enquiry dehors the records. 15. The only sole reason given in the impugned order to reject the Section 7 Application is based on an erroneous assumption regarding the financial position of the Corporate Debtor, which is arrived based on the Corporate Debtor's financial statement for 2018-2019 (which were anyway not on record before the Adjudicating Authority) and the Corporate Debtor's Master Data available on the MCA portal. 16. It is further submitted that the Corporate Debtor's financial statement for 2018-19 was not part of the records. Still, the Appellant/Financial Creditor also was not given any opportunity to address such issues at all. This amounts to a violation of principles of natural justice si....
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....btor. Even the Adjudicating Authority has not found any relationship or connection. Thus the conclusion drawn by the Adjudicating Authority of collusion existing between Financial Creditor and the Corporate Debtor is unwarranted, unfounded and bereft of any basis. There are no particulars to support the finding of collusion. A finding of collusion cannot be the outcome of guesswork, which is exactly the case in the impugned order and that too, without even giving the Appellant/Financial Creditor opportunity to make any submissions on such issue, and thus, the impugned order of rejection is in violation of natural justice. 21. Without prejudice, Section 65 of the Code also does not and cannot apply to the facts of the case, firstly because there is no connection between the parties. Secondly, the Appellant/Financial Creditor has demonstrated the existence of default recognised by the Adjudicating Authority. Consequently, the scheme of the Code has been ignored by the Adjudicating Authority. 22. The Adjudicating Authority has also totally failed to appreciate that the Appellant/Financial Creditor has no control over the stand taken by the Corporate Debtor to defend the Applicat....
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....Hon'ble Tribunal passed the order, and that is on or about 4th January 2021, the condition of the Company had starkly deteriorated, and the Respondent Company was not in a condition to pay back the same. Additionally, it will be evident from the entries in the balance sheet of the Respondent herein that the Corporate Debtor has made substantial investments in M/S Kohinoor Pulp and Paper Private Limited and M/S Kohinoor Paper and Newsprint Private Limited. M/S Kohinoor Pulp and Paper Private Limited are under liquidation, and M/S Kohinoor Paper and Newsprint Private Limited are under the Corporate Insolvency Resolution Process. In the said matter, an Application has already been filed for initiation of the liquidation process; the Corporate Debtor herein being an unsecured Financial Creditor, there is no chance of getting said money back. As per standard accounting practices, the Respondent herein is bound to show said receivable in its accounts and cannot write it off. 28. Statutory provisions CORPORATE INSOLVENCY RESOLUTION PROCESS 6. Persons who may initiate corporate insolvency resolution process.-Where any corporate debtor commits a default, a financial....
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....ection (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 resolution professional; and (c) any other information as may be specified by the Board. (4) The Adjudicating Authority shall, within fourteen days of the receipt of the Application under sub-section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3): [Provided that if the Adjudicating Authority has not ascertained the existence of default and passed an order under sub-section (5) within such time, it shall record its reasons in writing for the same.] (5) Where the Adjudicating Authority is satisfied that- (a) a default has occurred and the Application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resol....
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....plication to Adjudicating Authority) Rules, 2016. Under Rule 4, the Application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in Part III, particulars of the financial debt in Part IV and documents, records and evidence of default in Part V. Under Rule 4(3), the applicant is to dispatch a copy of the Application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the Application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the "debt", ....
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....lable with any credit information company; (h) Copies of entries in a bankers book in accordance with the Bankers Books Evidence Act, 1891. 54. It is clear from these sections that information in respect of debts incurred by financial debtors is easily available through information utilities which, under the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 (Information Utilities Regulations), are to satisfy themselves that information provided as to the debt is accurate. This is done by giving notice to the corporate debtor who then has an opportunity to correct such information. 58. Rules 11, 34 and 37 of the National Company Law Tribunal Rules, 2016 (NCLT Rules) state as follows: "11. Inherent powers.-Nothing in these Rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal. 21. *** 34. General procedure.-(1) In a situation not provided for in these Rules, the Tribunal may, for reasons to be recorded in writing, determine the procedure in a pa....
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....icious initiation of proceedings.- (1) If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of Insolvency, or liquidation, as the case may be, 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. (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." 60. Also, punishment is prescribed under Section 75 for furnishing false information in an application made by a financial creditor which further deters a financial creditor from wrongly invoking the provisions of Section 7. Section 75 reads as under: "75. Punishment for false information furnished in Application.-Where any person furnishes information in the Application made under Section 7, which is false in material particulars, knowing it to be false or omits any material fact, knowing it to be material, suc....
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.... to admit an Application. However, in the given situation where it appears that Application is filed collusively not with the purpose of Insolvency Resolution but otherwise, then despite fulfilling all the conditions of Section 7(5) of the Code, the Adjudicating Authority can exercise its discretion in rejecting the Application relying on Section 65 of the Code. 35. Hon'ble Supreme Court in Swiss ribbons (P) Ltd v Union of India, (2019) 4 SCC 17 held; Para 55. ***** "A conjoint reading of all these Rules makes it clear that at the stage of the adjudicating authority's satisfaction under Section 7(5) of the Code, the corporate debtor is served with a copy of the Application filed with the adjudicating authority and has the opportunity to file a reply before the said authority and be heard by the said authority before an order is made admitting the said Application. 59. What is also of relevance is that in order to protect the corporate debtor from being dragged into the corporate insolvency resolution process mala fide, the Code prescribes penalties. Thus, Section 65 of the Code reads as follows: "65. Fraudulent or malicious initiation ....
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...., it is clear that the Adjudicating Authority should be very cautious in admitting the Application so that Corporate Debtor cannot be dragged into Corporate Insolvency Resolution Process with mala fide for any purpose other than the resolution of the Insolvency. Therefore, to protect the Corporate Debtor from the mala fide Initiation of CIRP, the law has provided a penalty under sections 65 and 75 of the Code. Before admitting the Application, every precaution is necessary to be exercised so that the insolvency process is not misused for any other purposes other than the resolution of Insolvency. 40. It is pertinent to mention that Hon'ble Supreme Court in Arcelor Mittal India Private Limited (supra) while interpreting the statutory provision of Section 29 A of the Insolvency and Bankruptcy Code 2016, has held that the corporate veil may be lifted when a statute itself contemplates lifting the veil, or improper conduct is intended to be prevented, or a taxing statute or beneficial statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern. 41. The doctrine of "piercing the corporate veil" stands as an ....
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....rements of Section 7 of the Insolvency and Bankruptcy Code, 2016, it is filed collusively, not with the intention of Resolution of Insolvency but otherwise. Therefore, it is not mandatory to admit the Application to save the Corporate Debtor from being dragged into Corporate Insolvency Resolution Process with mala fide. 46. In the instant case, the Adjudicating Authority has observed that "on perusal of the master debt of the Corporate Debtor it is seen that the Corporate Debtor has given a corporate guarantee of Rs. 482,42,00,000. On further enquiry and perusal of the financial statements for the Financial Year 2018-19 of the Corporate Debtor, it has come to light that the networth of the Corporate Debtor is Rs. 15,36,39,015. It is hard to convince oneself that the Company having a net worth of Rs. 15,36,39,015 is not able to make a payment of Rs. 3 lakhs. It appears that the petition at hand has been filed in collusion with the Corporate Debtor." 47. In its reply to the Appeal, the Corporate Debtor stated that by order dated 4th April 2021, necessary clarification/sought regarding the balance-sheet, while it is mentioned that the Company's net worth is Rs. 15,36,39,015 ....