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Judgment
Justice Anant Bijay Singh;
The instant Appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 (for short IBC) preferred by the Appellants being aggrieved and dissatisfied by the order dated 19.02.2021 passed by the Adjudicating Authority (National Company Law Tribunal, Chandigarh Bench, Chandigarh) in IA No. 1/2021 in CP (IB) No. 351/Chd/Pb/2018 whereby IA No. 1/2021 filed by the Appellants herein claiming to be the Financial Creditors of the Corporate Debtor seeking to intervene in the CP (IB) No. 351/Chd/Pb/2018 filed by the Central Bank of India (Respondent No. 2 herein). By which the Adjudicating Authority passed the following orders:
“………..
In the circumstances and for the aforesaid reasons, we do not find any merit in the IA No. 1/2021 and accordingly, the same is dismissed. However, it is made clear that dismissal of this IA, shall not have bearing on the merits, while considering the contentions of the parties, in the C.P.”
The facts giving rise to the instant Appeal are as follows:
i) The Respondent No. 1/Corporate Debtor borrowed a financial debt of Rs. 21,00,000/- from the Appellant No. 2. The ledger of accounts of the Respondent No. 1 as on 01.04.2018 reflects this financial debt being owed to the Appellant No. 2. Further, the Respondent No. 1 borrowed a financial debt of Rs. 3,00,000/-from the Appellant No. 1. This fact is discernible from the ledger of accounts maintained by the Corporate Debtor.
ii) The Respondent No. 2 Bank advanced a financial debt in favour of the Respondent No. 1/Corporate Debtor in respect of an industrial activity and with respect of lands owned by the Respondent No. 1. On the basis of this averment, the Respondent No. 1-Corpoorate Debtor had committed a default in respect of the financial credit. The Respondent No. 2 Bank thus, filed an application under Section 7 of the IBC against the Respondent No. 1 before the Adjudicating Authority.
iii) After an enquiry, the Appellants have found that the land belonging to the Respondent-Corporate Debtor is in reality, agricultural land as per the revenue records. The entire case of the Respondent Bank is based on falsity and false claims, in collusion with the Corporate Debtor, filed only to defeat the claims of the Appellants herein. Based on their, the Appellants filed an application i.e. IA No. 1/2021 in CP(IB) No. 351/Chd/Pb/2018 for intervention. After hearing the parties, the Adjudicating Authority dismissed the said application filed by the Appellants herein. Hence this Appeal.
The Ld. Counsel for the Appellants during the course of argument and in his memo of appeal along with written submissions submitted that the Adjudicating Authority by way of the impugned order, without even issuing notice or considering the issue of fraud, erroneously dismissed the application for intervention filed by the Appellants, on the grounds:
(a) a third party does not find place in an application under Section 7 and Section 9 of the Code;
(b) the financial creditor is a nationalized bank;
(c) the individual officer of the bank has not been impleaded
It is further submitted that the third party under Section 65 can intervene at the stage of Section 7 of the Code. The findings rendered in paragraph 6 of the impugned order are incorrect in law. It is rather well settled that any party may intervene in a petition filed under the Insolvency and Bankruptcy Code to demonstrate that the petition has been filed for a “purpose other than for resolution of insolvency, or liquidation”. In this regard, Section 65 of Code is relied upon, which reads as under:
“65. Fraudulent or malicious 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.”
In this regard, the Appellants relied on the following judgments:
• SREI Infrastructure Finance Ltd. v. Right Tower Pvt. Ltd Company Appeal (AT) (Ins) No. 38 of 2018 (NCLAT).
“4. It is submitted that if any person initiates the Insolvency Resolution Process fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, the Adjudicating Authority may impose such person any penalty as stipulated under Section 65. According to 2nd Respondent (Intervener), any person can bring to the notice of the Adjudicating Authority that the Insolvency Resolution Process has been initiated by the person fraudulently and with malicious intent for the purpose other than resolution of insolvency. For bringing the aforesaid facts to the notice of the Adjudicating Authority it is not necessary that he should be a shareholder or a creditor or a debtor for the Corporate Debtor. It is submitted that the 2nd Respondent (Intervener) intends to bring certain facts to the notice of the Adjudicating Authority, to suggest that it is a case for initiating proceeding and to punish the concern person under Section 65.
We have heard Learned Counsel for the parties. The Corporate Insolvency Resolution Process can be initiated under Section 7 or Section 9 or Section 10 of ‘I&B Code’. Section 55 to 58 of ‘I&B Code’ also relates to initiation of Corporate Insolvency Resolution Process known as ‘Fast Track Corporate Insolvency Resolution Process’. Section 65 of ‘I&B Code’ which relates to penal provision not only covers initiation of Corporate Insolvency Resolution Process under Section 7 or 9 or 10 but will also cover ‘Fast Track Corporate Insolvency Resolution Process’, if initiated under Section 55 to 58 of the ‘I&B Code’.
Such being the position, any person may intervene and may bring the facts to the notice of the Adjudicating Authority. So far as the Respondent (Intervener) is concerned, we leave the question open for Adjudicating Authority to decide the issues as raised and alleged by the 2nd Respondent (Intervener) keeping in mind the question of maintainability of the application as raised by the Appellant.”
• Beacon Trusteeship Ltd v. Earthcon Infracon (P) Ltd, Civil Appeal No. 7641 of 2019 (Hon’ble Supreme Court).
“7. Considering the provision of Section 65 of the IBC, it is necessary for the Adjudicating Authority in case such an allegation is raised to go into the same. In case, such an objection is raised or application is filed before the Adjudicating Authority, obviously, it has to be dealt with in accordance with law. The plea of collusion could not have been raised for the first time in the appeal before the NCLAT or before this Court in this appeal. Thus, we relegate the appellant to the remedy before the Adjudicating Authority.
In case, a proper application is filed, aspect whether the proceedings have been initiated in collusive manner will be looked into, in accordance with law and the appropriate orders have to be passed, considering the facts and circumstances of the case. We have made it clear that we have not commented on the merit of the case. We set aside the impugned order passed by the NCLAT and dispose of the appeal in accordance with the aforesaid direction.”
• Embassy Property Developments Private Limited v. State of Karnataka, 2019 SCC Online SC 1542 (Hon’ble Supreme Court).
“52. Even fraudulent tradings carried on by the Corporate Debtor during the insolvency resolution, can be inquired into by the Adjudicating Authority under Section 66. Section 69 makes an officer of the corporate debtor and the corporate debtor liable for punishment, for carrying on transactions with a view to defraud creditors. Therefore, NCLT is vested with the power to inquire into (i) fraudulent initiation of proceedings as well as (ii) fraudulent transactions. It is significant to note that Section 65(1) deals with a situation where CIRP is initiated fraudulently “for any purpose other than for the resolution of insolvency or liquidation”.
Additionally, the impugned order fails to appreciate that the Appellants are affected by the outcome of the Application under Section 7 filed by the Respondent No.2, as insolvency is an in rem proceeding. The Hon’ble Supreme Court held:
“82. It is clear that once the Code gets triggered by admission of a creditor's petition under Sections 7 to 9, the proceeding that is before the adjudicating authority, being a collective proceeding, is a proceeding in rem. Being a proceeding in rem, it is necessary that the body which is to oversee the resolution process must be consulted before any individual corporate debtor is allowed to settle its claim.”
It is further submitted that the impugned order erred in rendering a finding at paragraph 7 that the financial creditor being a nationalized bank could not have filed an application under Section 7 of the Code for an illegitimate reason. Such a finding is perverse because this is a general and sweeping finding of fact without and basis in law or in fact. The reliance on the corporate structure of the Respondent-Bank is irrelevant to the allegations of fraud levelled by the Appellants against the Respondent-Bank. Additionally, the impugned order fails to appreciate that the Appellant could not have discharged the burden of impleading the relevant office without perusing the documents and the application filed by the Respondent-Bank. After that, the impugned order states that there is no prima facie case made out. Such a finding is against the judgment of “Shri Amit Katyal v. Meera Ahuja (Company Appeal (AT) (Insolvency) No.1380/2019)”:
“49. …..... the Code provides stringent action under Section 65 against the person who initiates proceeding under the Code fraudulently or with malicious intent, for the purpose other than the resolution of Insolvency or liquidation under the Code. To levy a penalty under Section 65 of the Code, a 'prima facie' opinion is required to be arrived at that a person has filed the petition for initiation of proceedings fraudulently or with malicious intent. No penalty can be saddled either under Section 65(1) or (2) of the Code without recording an opinion that a prima facie case is established to suggest that a person „fraudulently‟ or with malicious intent for the purpose other than the resolution of Insolvency or Liquidation or with an intent to defraud any person has filed the Application.”
Further, non- consideration of fraud under Section 65 of the Code 12. The Adjudicating Authority in paragraph 3 of impugned order recorded the submission by the counsel for the Appellant that the Respondent-Bank committed an illegal action by granting loan for industrial activity on agricultural land. However, at paragraph 7, the Adjudicating Authority does not refer to this allegation at all. Therefore, there is a prima facie case of fraud, the Appellants ought to have been impleaded by the Adjudicating Authority. Further, the impugned order does not consider that no prejudice caused to any party if the Appellants herein are permitted to place the true facts before the Adjudicating Authority, especially given that the application filed by the Respondent-Bank is based on fraud and has been instituted in order to defraud the Appellants herein. The Adjudicating Authority did not consider that the application of the Appellants before the Adjudicating Authority contains serious allegations of fraud against the Respondent-Bank. It is settled law that “fraud vitiates everything”. Based on above submissions, the impugned order is fit to be set aside and remands it back to the Adjudicating Authority for reconsideration of the intervention application.
The Ld. Counsel for the Respondent No. 1 during the course of argument and in his Reply Affidavit submitted that the present Appeal must be allowed and the Adjudicating Authority be directed to adjudicate on this issue by calling upon the Bank either by allowing the Appellants to intervene in the Section 7 application pending before the Adjudicating Authority or otherwise. On admission of an application under Section 7 of the Code a resolution professional has no powers of adjudication. An application under Section 7 of the code once admitted is followed by appointment of a resolution professional to manage the affairs of the company. Additionally, the resolution professional admits the claims of the creditors of a Corporate Debtor. However, while admitting such claims a resolution professional is devoid of any adjudicatory powers. Thus, any adjudication as to the status of the creditor i.e., whether a creditor is secured or an unsecured one, does not lie with the resolution professional. Additionally, in case of a petitioning creditor, i.e. a creditor on whose application under Section 7 of the Code the order of initiation of Corporate Insolvency Resolution Process has been passed, the status of such petitioning creditor stands adjudicated by the Adjudicating Authority itself while deciding the application under Section 7 of the Code. Post such adjudication by the adjudicating authority, the resolution professional cannot in any manner take upon himself any adjudicatory powers/appellate powers over and above the Adjudicating Authority.
It is further submitted that the status of a creditor is to be adjudicated by the Adjudicating Authority prior to deciding an application under Section 7 of the Code. In an application filed under Section 7 of the Code, it is incumbent upon a financial creditor to disclose, in part V of Form 1, any particulars of security held by it and its estimated valuation. Such details furnished by the financial creditor ought to be true and correct. However, if the nature/status of such security is incorrect the application under Section 7 of the Code remains defective. Mention of such an entry in Form 1 shows that legislative intent under the code is that while deciding an application under Section 7 of the Code, the Adjudicating Authority is able to decide the status of such petitioning creditor. In the present case, the Adjudicating Authority, instead of adjudicating on the status of the Petitioning Creditor, dismissed the application on an erroneous consideration that the Petitioning Creditor before it is a nationalized Bank. Such a reasoning is irrelevant for the purpose of an application under Section 65 of the Code. Additionally, the Impugned Order ignores the fact that the Bank had conveniently suppressed the status of the security as disclosed in its application filed under Section 7 of the Code. Further, the burden of disclosing the correct status of such security was on the Bank. In the absence of the same, the Bank ought to have been called upon to explain the same. Thus, the finding in the Impugned Order of the allegation being unsubstantiated by the Appellants is incorrect in law. Therefore, the Impugned Order is liable to be set aside and the matter be remanded back to the Adjudicating Authority to ascertain the status of creditor.
It is further submitted that the limited relief of impleadment sought by the Appellants and adjudication on issue of Respondent no. 2 being a financial creditor be done. However, the Respondent No. 1 prayed this Tribunal must reject the contention of the Appellants that there is any collusion between the Respondent No. 1 and the Bank. In any event, the allegation of collusion has been taken by the Appellants for the first time in appeal.
The Ld. Counsel for the Respondent No. 2 during the course of argument and in his Reply Affidavit along with written submissions submitted that the appeal filed by the appellants is a gross abuse of the process of law. From the tenor of the appeal it is apparent that the appellants have been ostensibly setup by the Respondent Company for the purpose derailing the lawful action of the Respondent Bank under section 7 of the Insolvency and Bankruptcy Code, 2016. The contention of the Respondent bank can be corroborated from the play of events in this matter which show that the petition is nothing but a collusive action of the appellant and the first respondent. The gross breach of the timeline of the section 7 petition by the bank before the Tribunal shows how the process of the law has been abused to thwart the lawful action. The appellants claim to be unsecured creditors of the Respondent company on the basis of alleged debit confirmation note signed by the said company. They have not even mentioned as to how the said dues have accrued. No bills for supply of any goods or rendering some services have been produced. The manner in which the debit confirmation note has been issued corroborate collusion.
It is further submitted that the only issue relevant for the purpose of present appeal is about the maintainability of the section 7 petition filed by the Respondent No. 2 bank against the Respondent No. 1 company who has been a very large borrower from the Mid Corporate Finance branch of the Respondent bank in Ludhiana (Punjab). The total outstanding of the bank when the section 7 petition was Rs. 47.36 crores. which presently shall be more than Rs. 72 crores. The said petition has been pending admission before the Chandigarh Bench of the NCLT since then which is more than 3 years and 4 months. The Respondent No. 1 has been able to drag the matter on one or other pretext by raising frivolous and unconcerned claims and has been able to delay simple admission of the section 7 petition. It is a fact that the amount due to the Respondent bank is duly recorded as default and there is no legal defence to the section 7 petition which, as stated by the Hon’ble Supreme Court and Hon’ble Tribunal in a number of judgments, is not an adversarial litigation but is meant for resolution of corporate insolvency and is in the large interest of both the parties.
It is further submitted that as per the scheme of law, upheld by the Hon’ble Supreme Court, the legislature has prescribed a definite time frame for the adjudication of section 7 petition. The petition, if found in order, the adjudicating authority has to ascertain default within 14 days of filing the petition (in this case the same was not required because the bank itself has filed the copy of the record of the utility showing default) and if the adjudicating authority is not able to do so then it shall record the reasons for doing so. The Judgment of Hon’ble Supreme Court in the case of “Innoventive Industries Ltd Vs ICICI Bank reported as (2018) 1 SCC 407” wherein paragraphs 28 and 30 read as follows:-
“28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor - it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made Under Sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application 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”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under Sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be.
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On the other hand, as we have seen, in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is “due” i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise.”
The issues canvassed by the Appellants in the appeal are not of concern to these proceedings. The appellant shall be able to raise his claim in the corporate insolvency resolution process.
After hearing the parties and going through the pleadings made on behalf of the parties, we observe that the application under Section 7 by a Financial Creditor against the Corporate Debtor was pending for consideration and for admission and in the meanwhile, the Appellants are seeking intervention, not on the ground that the Corporate Debtor defaulted in payment of amounts to them, but, on the ground that the Company Petition filed by the Central Bank of India, the Respondent No. 2 herein was not for legitimate reasons but it is a malicious prosecution that falls under Section 65 of the IBC. We have considered the submissions of Respondent No. 2 Bank herein and observe that the Appellants have been ostensibly setup by the Respondent No. 1 Company for the purpose of derailing the lawful action of the Respondent Bank under Section 7 of the IBC. Keeping in view of the aforenoted facts, we do not find any merit in the Appeal to interfere with the order impugned passed by the Adjudicating Authority. The impugned order dated 19.02.2021 passed by the Adjudicating Authority (National Company Law Tribunal, Chandigarh Bench, Chandigarh) in IA No. 1/2021 in CP (IB) No. 351/Chd/Pb/2018 is hereby affirmed. The instant Appeal is hereby dismissed. No order as to costs.
Registry to upload the Judgment on the website of this Appellate Tribunal and send the copy of this Judgment to the Adjudicating Authority (National Company Law Tribunal, Chandigarh Bench, Chandigarh), forthwith.