Apnaghar Builders Pvt. Ltd vs Intense Fitness And Spa Private Limited ...

Intense Fitness & Spa Pvt. Ltd. & Ors. ...Respondents

Present:

For Appellant : Mr. P. Nagesh, Sr. Advocate along with Ms. Devika Mahan, Ms. Geetika Sharma & Mr. Akshay Sharma, Adv.

For Respondents : Mr. Prithu Garg, Mr. Parth Bhatia, Mr. Shivam Singh, Adv. for R-2 & 3.

Mr. Utkarsh Joshi, Adv. for R-5.

JUDGMENT

Per: Justice Rakesh Kumar Jain:

This appeal is directed against the order dated 02.08.2022,

passed by the National Company Law Tribunal, New Delhi (in

short 'Tribunal') in CP (IB) No. 228 / ND / 2022, registered on an

application filed under Section 7 of the Insolvency and

Bankruptcy Code, 2016 (in short 'Code') by which the said

application was admitted and Jagdish Singh Nain was appointed

as the Interim Resolution Professional (IRP).

Comp. App. (AT) (Ins.) No. 1025 of 2022 2

2. In brief, Intense Fitness & Spa Pvt. Ltd. (Corporate

Debtor)/Respondent No. 1 has alleged to have availed loan from

Navayuga Engineering Company Ltd. (Navayuga) which was

assigned by it to CVR Holdings Pvt. Ltd. (Financial

Creditor)/Respondent No. 2 by way of an assignment agreement

dated 10.02.2020 (in short 'Agreement') executed between

Navayuga, Respondent No. 1 and Respondent No. 2 in respect of

an outstanding loan of Rs. 11,08,94,834/-.

3. The Assignee / Respondent No. 2 filed the application under

Section 7 of the Code before the Tribunal bearing CP (IB) No.

228/ND/2022 against the Corporate Debtor / Respondent No. 1

alleging that as per agreement dated 10.02.2020, the CD was to

repay the loan amount by 31.12.2020 without interest with the

condition that it shall pay interest @ 10% w.e.f. 01.01.2021 but

latest by 30.06.2021. In part IV of the application (form 1)

amount of Rs. 11,08,94,834/- was claimed as on 01.03.2022 as

due and payable.

4. The Tribunal has noticed that the Corporate

Debtor/Respondent No. 1, in its reply, admitted the debt and

default, therefore, the IRP named by Respondent No. 2 (Financial

Comp. App. (AT) (Ins.) No. 1025 of 2022 3

Creditor), namely, Jagdish Singh Nain was appointed as such

and moratorium was imposed.

5. It is pertinent to mention here that the suspended director

of the CD/R1 did not challenge the order dated 02.08.2022 by of

way an appeal.

6. However, the impugned order has been challenged by the

present Appellant who was not a party to the application before

the Tribunal.

7. The Appellant is the owner of a property bearing No. C-

2/10, Safdarjung Development Area, New Delhi (property) which

was leased out by the Appellant to Respondent No. 1 by a

registered lease agreement dated 04.01.2016. Respondent No. 1

was to pay a monthly rent in respect of the property, of a sum of

Rs. 17,00,000 p.m (Rupees 18,36,000 after deducting TDS and

adding GST) in advance by the 7th day of each calendar month

w.e.f 01.03.2016 to 28.02.2019 and Rs. 19,55,000/- p.m (Rupees

21,11,400/- after deducting TDS and adding GST) in advance by

the 7th day of each calendar month w.e.f. 01.03.2019.

8. Respondent No.1 defaulted in payment of rent and other

charges w.e.f. 01.11.2018, therefore, the Appellant filed an

application bearing CP No. 1754/ND/2019 for initiation of

Comp. App. (AT) (Ins.) No. 1025 of 2022 4

Corporate Insolvency Resolution Process of Respondent No.1/CD

but the said application was dismissed on 18.03.2020 on the

ground that the lease rent does not come under the definition of

operational debt and that there was a pre-existing dispute

between the parties.

9. Respondent No. 1 filed a civil suit bearing CS (OS)

667/2019 before the High Court of Delhi seeking a decree against

the Appellant for a sum of Rs. 7,63,08,336/- with pendente lite

and future interest @18% which is otherwise not a subject matter

of this appeal.

10. The Appellant filed a suit bearing CS (OS) 164/2020 against

Respondent No. 1 before the Hon'ble High Court of Delhi seeking

a decree of possession of the property and recovery of arrears of

rent and damages and mesne profits of an amount of Rs.

4,78,85,040/-.

11. It is alleged by the Appellant that in order to circumvent the

proceeding initiated by the Appellant in the suit, Respondent

No.2, in collusion with Respondent No. 1, filed the company

petition bearing CP (IB) No. 228/ND/2022 under Section 7 of the

Code for seeking a collusive initiation of CIRP.

Comp. App. (AT) (Ins.) No. 1025 of 2022 5

12. It is further alleged that the suit for possession was decreed

on 19.04.2022 by the Hon'ble High Court of Delhi and

Respondent No. 1 was restrained from removing the

equipment's/belongings currently lying in the said property.

13. It is alleged that Respondent No. 2, immediately after

passing of the decree dated 19.04.2022, in order to delay the

execution of the decree, filed another application bearing I.A. No.

2148 of 2022 seeking early hearing of the said CP filed under

Section 7 of the Code.

14. It is alleged that the Appellant received the possession of the

property on 21.07.2022 which was also recorded in the order

dated 25.07.2022 passed by the High Court of Delhi in execution

petition bearing EX.P. 23/2022.

15. The present appeal has been filed by the Appellant, while

challenging the impugned order by which the application filed

under Section 7 has been admitted, on the ground that both

Respondent No. 1 and Respondent No. 2 are related parties, who

in collusion and connivance with the ex-

management/promotor/director/shareholder of Respondent No.

1 i.e. Respondent No. 3 to 5, for the initiation of CIRP of

Respondent No. 1, filed a collusive petition under Section 7, with

Comp. App. (AT) (Ins.) No. 1025 of 2022 6

malicious intent, for a purpose other than the resolution of the

insolvency, which is hit by Section 65 of the Code.

16. It is also alleged that after the order of admission, when the

Appellant came to know that Respondent No. 1 has gone into

CIRP and IRP has made public announcement for submission

of claim, the Appellant submitted its claim on Form B for an

amount of Rs. 17,41,09,137/- but without prejudice to the filing

of the claim, the Appellant has filed the present appeal seeking

setting aside of the impugned order on the ground that it has

been obtained by Respondent No. 2 in collusion with ex-

management and shareholder of Respondent No. 1 by initiating

the CIRP for a purpose other than the resolution to defraud the

appellant and other creditors.

17. It has also been alleged that the Appellant came to know

about the initiation of CIRP only on publication made by the IRP

and also came to know after making enquires that it is a case of

collusion between Respondent No. 1 and Respondent No. 2,

therefore, there was no option but to file the appeal to set aside

the order dated 02.08.2022 and to prosecute the Respondents

in terms of Section 65 of the Code.

Comp. App. (AT) (Ins.) No. 1025 of 2022 7

18. The Appellant has alleged that the connivance and collusion

of both Respondent No. 1 and Respondent No. 2 is writ large

because debt and default has been admitted by Respondent No.

1 before the Tribunal without contesting the application at all

and no appeal was filed by the suspended directors of the CD.

Besides the above, it is alleged that the alleged financial creditor

/Respondent No. 2 is a related party of Respondent No. 1/CD.

In this regard, it is submitted that the audit report dated

04.12.2020 of Respondent No. 1 shows that the default amount

of Rs. 11,08,94,834/- which has been made the basis for filing

the application under Section 7 of the Code is mentioned

under the heading Note 3 as 'loan and advances from the

related party'. It is also submitted that Respondent No. 2 is also

a related party of Navayuga who has assigned its debt to

Respondent No. 2 which is allegedly evident from the audit

report dated 15.11.2021 of Respondent No. 2 annexed as

Annexure 9. It is further alleged that all three companies i.e. R1,

R2 and Navayuga are the related party and interlinked with each

other through a common person i.e. R3 who is a shareholder in

all three companies and the director in two of these companies,

who is controlling the business of all three companies directly or

indirectly.

Comp. App. (AT) (Ins.) No. 1025 of 2022 8

19. It is alleged that Respondent No. 3 is the common

shareholder in all three companies and has shareholding of

21.77% equity in Navayuga, shareholding of 33.34% in

Respondent No. 1 since 2014 and shareholding of 66.66% in

Respondent No. 2. It is further stated that Respondent No. 3 is

currently serving as the director of Navayuga and Respondent

No. 2.

20. The shareholding of Respondent No. 3 in all the three

companies has been depicted by a chart in the grounds of appeal

which is reproduced as under:-

21. It is alleged that Respondent No. 2 has not demonstrated

that the debt assigned by Navayuga vide agreement dated

10.02.2020 was ever disbursed by Navayuga to Respondent No.

Comp. App. (AT) (Ins.) No. 1025 of 2022 9

1. It is further alleged that the agreement dated 10.02.2020 is

not registered and is under stamped. It is alleged that if the debt

is outstanding for more than three months then the stamp duty

of 0.5% of the amount is to be affixed whereas the agreement

has been executed on a stamp paper of Rs. 100. It is also

alleged that if the outstanding loan of Rs. 11,08,94,834/-

assigned to Respondent No. 2 by agreement dated 10.02.2020

then why Navayuga in its financial statement of the year 2018-

19 and 2019 to 2020 did not reflect the loan amount as the loan

given to Respondent No. 1 under loan and advances.

22. The Respondent No. 2 & 3 have filed their joint reply. It is

alleged that tripartite agreement was executed between

Respondent No. 1, 2 and Navayuga as alleged by the Appellant.

As per clause 1.4 of the agreement, the repayment by Respondent

No. 1 was to be made by way of issuance of Non-convertible

Debentures (NDC), Optionally Convertible Debentures (OCD) or

such other instrument acceptable to Respondent No. 2 within two

months from the date of the agreement but later on, vide letter

04.05.2020 signed by both parties, it was decided that CD shall

repay the principal sum of Rs. 11,08,94,834/- on or before

31.12.2020 and in the event of any delay, Respondent No. 1 shall

Comp. App. (AT) (Ins.) No. 1025 of 2022 10

pay interest on the aforesaid sum at 9% per annum w.e.f.

01.01.2021, shall ensure the entire repayment latest by

30.06.2021 and the requirement of issuance of NCDs, OCDs or

other instrument(s) as mentioned in Clause 1.4 of the agreement

was done away with. It is alleged that Respondent No. 2 issued

various letters and reminders to Respondent No. 1 to clear the

outstanding dues on or before 31.12.2021 but no satisfactory

response was received and thus filed the application under

Section 7 of the Code.

23. It is further alleged that the Appellant itself had filed its

petition under Section 9 of the Code bearing CP No.

1754/ND/2019 which was dismissed by the Tribunal on

18.03.2020 and having failed in its own attempt to initiate CIRP

against the CD, it does not lie in the mouth of the appellant to

contend that the CD is being pushed into insolvency in collusion

and connivance of Respondent No. 1 and R2 because at one

stage the Appellant itself wanted to drive CD into CIRP but now

want to create prejudice in an attempt to extract money from

the CD in supersession of the rights of the other creditors of the

CD. It is also alleged that since the Appellant had already filed

its claim in Form B to the IRP, it has acquiesced to the

Comp. App. (AT) (Ins.) No. 1025 of 2022 11

commencement of the CIRP and is barred from assailing the

same in the present appeal. It is further alleged that the

answering respondents are not the related parties of Respondent

No. 1 as provided under Section 5(24) of the Code and merely,

there is a common shareholder of Respondent No. 1 and

Respondent No. 2 will not make it a case of related party. It is

also submitted that merely because the CD chose to include the

debt owed by Respondent No. 2 under the heading 'Note 3, Loan

and advances from related party' in its audited books will not

attract Section 5(24) of the Code automatically. It is also alleged

that Navayuga had disbursed the loan on different dates between

financial year 2009-10 and 2016-17 which has been mentioned

in its books of accounts

24. Respondent No. 1 has also filed the reply in which he has

alleged that after his appointment as IRP, in terms of Section

15 of the Code, issued public announcement on Form A on

03.08.2022 to invite claims from creditors Form A was

published on 04.08.2022 in Financial Express (English Edition)

and Jansatta (Hindi edition), having circulation in Delhi &

NCR. The public announcement was also uploaded on the

website of IBBI and submitted with IPA of ICAI. It is alleged

Comp. App. (AT) (Ins.) No. 1025 of 2022 12

that pursuant to the public announcement dated 03.08.2022, he

received two claims which were subsequently collated, verified

and provisionally admitted upto 17.08.2022, i.e. the last date for

filing claim as per public announcement and in terms of

Section 21 of the Code the CoC was constituted on 22.08.2022

and report for constitution of CoC was filed with the NCLT on

24.08.2022 which is prior to the order dated 25.08.2022 passed

by this Tribunal.

25. It is pertinent to mention that at the time of preliminary

hearing of this appeal, this Court had passed the following order

dated 25.08.2022 which read as under:-

"Learned counsel for the Appellant submits that the application under Section 7 was filed by the Financial Creditor in collusion with the Corporate Debtor to defeat the rights of the Appellant. It is submitted that a decree in favour of the Appellant has been passed by Hon'ble Delhi High Court on 19.04.2022. He further submits that the Financial Creditor and the Corporate Debtor both are related parties and the Adjudicating Authority Committed error in admitting Section 7 application which was collusively filed. Submission needs scrutiny. Issue notice. Learned counsel appearing for Respondent No. 2 accepts notice. Issue notice on other Respondents. Respondents may file reply within two weeks. Rejoinder be filed within two weeks thereafter. List this Appeal on 28.09.2022. In the meantime, in pursuance of order dated 02.08.2022, the IRP shall ensure that the

Comp. App. (AT) (Ins.) No. 1025 of 2022 13

Corporate Debtor is run as a going concern but shall not constitute the Committee of Creditors till the next date."

26. Counsel for the Appellant has argued that in this case

obtaining the order of CIRP of Respondent No. 1 by Respondent

No. 2 is an act of collusion and for a purpose other than for the

resolution of the insolvency. In this regard, it is argued that

collusion between the parties is evident from the fact that

Respondent No. 3 was controlling all the three companies,

namely, Navayuga, Respondent No. 1 and Respondent No. 2

because in Navayuga he is a director and 21.77% shareholder

and in Respondent No. 1 he was a promotor and director and

33.34% shareholder and in Respondent No. 2 he is a director &

66.66% shareholder, therefore, it is argued that Respondent No.

1 and Respondent No. 2 are the related parties in terms of

Section 5(24)(m)(i)and (iii) of the Code as Respondent No. 3 is

controlling more than 20% of the voting share of these

companies and also the assignor. Counsel for the Appellant has

submitted that in the case of Hindalco Industries Ltd. Vs.

Hirakund Industrial Works Ltd., CA (AT) (Ins) No. 42 of 2022 it

has been held that the common shareholding is required to be

looked into to ascertain the true purpose of the CD and the

Hon'ble Supreme Court in the case of Phoenix ARC (P) Ltd. Vs.

Comp. App. (AT) (Ins.) No. 1025 of 2022 14

Spade Financial Services Ltd, (2021) 3 SCC 475 has held that

amount disbursed to third parties that too by the related party

will not qualify as a financial debt under the Code. He has

further argued that spirit of the Code is to balance the acts of

all the stakeholders in the insolvency resolution of the CD and

any action which goes against the spirit of the Code raises

serious doubt about the CIRP which should be looked into

deeply to examine element of fraud or gaming.

27. Counsel for the Appellant has further argued that the

ledger statement of the CD maintained by Navayuga reflects that

the said amount was not directly disbursed to CD but was

paid towards miscellaneous expenses of the CD to various third

parties over a period 8 years from 03.07.2009 to 12.01.2017.

It is submitted that Respondent No. 5, suspended director of

CD, also filed ledger of Navayuga maintained by CD which

reflects that the said amount which is paid to third parties is

treated as Share Application Money in the ledger books of the

CD from 01.04.2009 to 31.03.2016 but on 31.03.2016 the

amount of Rs. 6.25 Cr. towards the share application money

is transferred to loan account, therefore, it is a collusive

and sham transaction. It is submitted that the amount was

Comp. App. (AT) (Ins.) No. 1025 of 2022 15

disbursed to third party was collusive and no demand was ever

made by Navayuga for repayment of the said amount. The

amount was reflected as share application money in the ledger

book of CD for a period of 7 years from 01.04.2009 to

31.03.2016 and the share application money is not a financial

debt under the Code as held in the case of Parmod Sharma Vs.

Karanaya Heartcare Pvt. Ltd., CA (AT) (Ins) No. 426 of 2022. It

is also submitted that the Financial Creditor shall mean a person

to whom a financial debt is owed and includes a person to

whom such debt has been legally assigned or transferred to

but if the original debt itself is not a financial debt then the

assignee cannot have a better right than the assignor himself.

It is further submitted that the Tribunal has not recorded any

such finding as to how it is a case of financial debt and R2 is

a financial creditor because the debt and default were admitted

by Respondent No. 1 in order to escape from the said

scrutiny/investigation by the Tribunal.

28. It is further argued that it was at the most an interest free

loan which was made payable with interest by creating back

dated document like letter dated 04.05.2020 and that agreement

itself was not registered and cannot be relied upon having been

Comp. App. (AT) (Ins.) No. 1025 of 2022 16

insufficiently stamped etc. Counsel for the Appellant has also

argued that the amount in question has clearly been mentioned

in the audit report of Respondent No. 1 under heading Note 31

that it is a loan from the related parties.

29. On the other hand, Counsel for the contesting Respondent

No. 2 and 3 has vehemently argued that the contention of the

Appellant that Respondent No. 2 is a related party of

Respondent No. 1, on the basis, that there is a common

shareholder is totally erroneous. It is submitted that Respondent

No. 3 had resigned from the board of directors of the CD in

2015 and Respondent No. 2 was not a related party as on the

date of filing of the Section 7 petition. It is submitted that the

related party is defined under Section 5(24) of the Code in Clause

(a) to (m) which prescribes the requirements for considering a

person to be a related party of the CD whereas Respondent

No. 1 and 2 do not fall within that clause. It is also submitted

that total sum of Rs. 11,08,94,834/- were advanced by

Navayuga to Respondent No. 1 and /or to third party on

behalf of CD between July, 2009 and January, 2017. These

sums did not carry any interest and were treated as Inter

Corporate Deposit in Navayuga's books of accounts. The entries

Comp. App. (AT) (Ins.) No. 1025 of 2022 17

in the said books of accounts show that the sums advanced

by Navayuga were treated as loan. It is argued that in the books

of Navayuga there is no mention whatsoever of Share Application

Money nor there is any agreement or contract between the

parties for treating the sums advanced as Share Application

Money as submitted by the Appellant. It is further submitted

that the obligation to pay by way of agreement and letter dated

04.05.2020 that the debt has the commercial effect of borrowing

within the meaning of Section 5(8) of the Code and submitted

that sum advanced by the financial creditor to third party

towards working capital requirements, business expenses, etc. do

constitute financial debt. In this regard, a reference has been

made to a case of this Tribunal in the case of Rajeev Kumar

Jain Vs. Uno Minda Limited, CA (AT) (Ins) No. 947 of 2022. It is

further submitted that Navayuga and Respondent No. 2 do not

exercise any control over the business or affairs of Respondent

No. 1.

30. In the end, it is argued that the appeal itself was not

maintainable in this Court. It is submitted that the Appellant

cannot be permitted to raise allegation of collusion for the first

time before this Tribunal which is required to be agitated before

the Adjudicating Authority under Section 65 of the Code as held

Comp. App. (AT) (Ins.) No. 1025 of 2022 18

by the Hon'ble Supreme Court in the case of Beacon Trusteeship

Limited Vs. Earthcon Infracon Pvt. Ltd. Civil Appeal No. 7641 of

2019.

31. In rebuttal argument, Counsel for the Appellant has

submitted that for the purpose of collusion and malicious

prosecution, the Appellant has to only show that as to whether

Respondent No. 1 and Respondent No. 2 are the related party. It

is submitted that the case is covered by Section 5(24) (m)(i) to

(iii). It is submitted that Respondent No. 3 who is the director

in all three companies, namely, Navayuga, Respondent No. 1

and Respondent No. 2, therefore, he is controlling more than

20% of the voting share of these companies and also the

assignor. It is reiterated that in Note 3 of the audit report it has

clearly been mentioned that the amount of loan is taken from the

related party.

32. As far as the maintainability of the appeal is concerned,

Counsel for the Appellant has also relied upon a decision of the

Hon'ble Supreme Court in the case of Embassy Property

Developments Pvt. Ltd. Vs. State of Karnataka, (2020) 13 SCC

308 in which it has been held that NCLT and NCLAT will have

jurisdiction to decide the issue of collusion under Section 65 of

the Code. It is also submitted that appeal is maintainable

Comp. App. (AT) (Ins.) No. 1025 of 2022 19

because Section 61 of the Code permits any aggrieved party to

file the appeal wherein the Appellant has taken all the objections

under Section 65 of the Code. He has also submitted that in the

case of Hindalco Industries (Supra) and Hytone Merchants Pvt.

Ltd. Vs. Satabadi Investment Consultants Pvt. Ltd., CA (AT) (Ins)

No. 258 of 2021 it has been held that if Section 7 of the Code

ingredients is fulfilled then also if collusion is proved then CIRP

can be set aside.

33. We have heard Counsel for the parties and perused the

record with their able assistance.

34. Admitted facts of the case are that the Appellant had let out

its premise to Respondent No. 1 on a rent of Rs. 17,00,000/- p.m

for a period of three years from 01.03.2016 to 28.02.2019 which

was increased from 01.03.2019 to the tune of Rs. 19,55,000.

35. When Respondent No. 1 defaulted in payment of the rent

and other charges it filed a petition under Section 9 of the Code

for the resolution of an amount of Rs. 1,13,57,341/- outstanding

as on 19.03.2019. The said application was dismissed on

18.03.2020, inter alia, on the ground that outstanding rent does

not fall within the definition of operational debt and that there

was a pre-existing dispute between the parties.

Comp. App. (AT) (Ins.) No. 1025 of 2022 20

36. There is no denial to the fact that the Appellant has

recovered the possession of the premise let out to Respondent No.

1 through a suit filed before the Hon'ble High Court of Delhi.

37. The allegation of the Appellant is that in order to circumvent

the proceedings initiated by the Appellant in the suit, a collusive

application bearing CP (IB) No. 228/ND/2022 under Section 7 of

the Code has been filed in which the impugned order has been

passed to which the Appellant was not a party but as soon as

the Appellant came to know, form public announcement made by

the IRP about the CIRP of the CD, it filed the claim on Form B

for an a mount of Rs. 17,41,09,137/- and without prejudice to

the filing of the claim, the Appellant has also filed the present

appeal because the Appellant is aggrieved against the admission

of the application under Section 7 of the Code which is according

to it an act of collusion to defraud the Appellant and other

creditors.

38. The collusion between Respondent No. 1 and Respondent

No. 2 can be ascertained if it is found that both are related

parties. In this regard, the first evidence which has been referred

to by the Appellant is from the audit report of Respondent No. 1

in which Note 3, pertaining to long term borrowings, recorded as

under:-

Comp. App. (AT) (Ins.) No. 1025 of 2022 21

Which shows that 'loans and advances from related parties' is Rs.

11,08,94,834/- which is the amount in question for which the

application has been filed by Respondent No. 2. This amount has

been assigned by way of an agreement dated 10.02.2020 on the

basis of which the application under Section 7 has been filed,

however, Respondent No. 3 who happened to be a director and

shareholder in all three companies, namely, Navayuga,

Respondent No. 1 and Respondent No. 2. In Navyuga he is

director and 21.77% shareholder, in Respondent No. 1 he was a

Promotor and director till 2015 and 33.34 % shareholder and in

Respondent No. 2 he is a director & 66.66% shareholder which

shows that this case shall come within Section 5(24)(m)(i) and (iii)

of the Code as Respondent No. 3 is controlling more than 20% of

the voting share of these companies and also the assignor. It has

been held by the Hon'ble Supreme Court in the case of Phoenix

Comp. App. (AT) (Ins.) No. 1025 of 2022 22

ARC (P) Ltd. that amount disbursed to third party that too by the

related party will not qualify as a financial debt under the Code.

It has also been held in the case of Hytone Merchants Pvt. Ltd.

(Supra) that even if Section 7 of the Code ingredients are fulfilled

then also if collusion is proved CIRP can be set aside. The

Appellant has specifically averred in para 33 of the appeal paper

book about the presence of Respondent No. 3 in all three

companies as shareholder and director which has not been

denied by Respondent No. 2 and 3 in their reply, firstly, there is

no parawise reply filed and secondly in the reply the emphasis is

more on the issue as to how the provision of Section 5(24) is

attracted about which an inference can be drawn that the

allegation of the Appellant about Respondent No. 3 is correct and

once he was the director/promotor 33.34% shareholder in

Respondent No. 1 and Director in both Navayuga and

Respondent No. 2 with 21.77% and 66.66% shareholder, it

cannot be said that he was not a related party especially when it

is incorporated in the financial statement of the CD much less

Note 3 of the audit report that long term borrowings the amount

in question, is taken from the related parties. The collusion

between Respondent No. 1 and Respondent No. 2 can be

ascertained from such circumstances.

Comp. App. (AT) (Ins.) No. 1025 of 2022 23

39. Moreover, neither the application under Section 7 was

contested by Respondent No. 1 nor any appeal has been filed

against the impugned order which means that it was just an

eyewash.

40. In so far as the maintainability of the appeal and the

application under Section 65 of the Code is concerned, reference

has been made by Respondent to the case of Beacon

Treusteeship Limited (Supra) in which the Hon'ble Supreme

Court by way of two members bench has observed as under:-

"5. Mr. Gopal Jain, learned senior counsel appearing on behalf of the appellant raised manifold submissions that as per agreement it was necessary to give notice to the appellant before initiating the proceedings before the NCLT which was not given. The three invoices on the basis of which the proceedings have been initiated are vague and prima facie proceedings have been initiated in collusive manner by Respondent Nos. 1 and 2. Reliance has been placed on the provisions contained in Section 65 of the IBC and a decision of this Court in Embassy Property Development Pvt. Ltd. v. State of Karnataka and Others, (2019) SCC Online SC 1542 (C.A. No.9170/2019 etc. decided on 03.12.2019), in which this Court has observed as under:-

"52. Even fraudulent tradings carried on by the Corporate Debtor during the insolvency resolution, can be inquired into by the

Comp. App. (AT) (Ins.) No. 1025 of 2022 24

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".

6. We have also heard learned counsel for the IRP and Respondent No.2. It was submitted by the learned counsel appearing for Respondent No.2 that allegation of collusion is unfounded and has no merit. Learned counsel appearing for the IRP has stated that this aspect has to be considered by the IRP, whether the proceedings have been initiated in collusion or not while submitting a report to the Adjudicating Authority. The provisions contained in Section 65 of the IBC are extracted hereunder:-

"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

Comp. App. (AT) (Ins.) No. 1025 of 2022 25

impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees. 3 (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."

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."

41. However, in the case of M/s Embassy Property Development

Pvt. Ltd. (Supra) the Hon'ble Supreme Court by way of three

members bench has specifically framed a question "ii. whether

questions of fraud can be inquired into by the NCLT/NCLAT in

the proceedings initiated under the Insolvency and Bankruptcy

Code, 2016". This question has been answered as under:- "Question No. 2

Comp. App. (AT) (Ins.) No. 1025 of 2022 26

46. The second question that arises for our consideration is as to whether NCLT is competent to enquire into allegations of fraud, especially in the matter of the very initiation of CIRP.

47. This question has arisen, in view of the stand taken by the Government of Karnataka before the High Court that they chose to challenge the order of the NCLT before the High Court, instead of before NCLAT, due to the fraudulent and collusive manner in which the CIRP was initiated by one of the related parties of the Corporate Debtor themselves. In the writ petition filed by the Government of Karnataka before the High Court, it was specifically pleaded (i) that the Managing Director of the Corporate Debtor entered into an agreement on 06.02.2011 with one M/s. D. P. Exports, for carrying out mining operations on behalf of the Corporate Debtor and also for managing its affairs and selling 100% of the extracted iron ore; (ii) that the said M/s. D. P. Exports was a partnership firm of which one Mr. M. Poobalan and his wife were partners; (iii) that another agreement dated 11.12.2012 was entered into between the Corporate Debtor and a proprietary concern by name M/s. P. & D. Enterprises, of which the very same person namely, Mr. M. Poobalan was the sole proprietor; (iv) that the said agreement was for hiring of machinery and equipment: (v) that a finance agreement was also entered into on 12.12.2012 between the Corporate Debtor and a company by name M/s. Udhyaman Investments Pvt. Ltd., represented by its authorized signatory Mr. M. Poobalan; (vi) that there were a few communications sent by the said Mr. Poobalan to various authorities, claiming himself to be the authorized signatory of the Corporate Debtor; (vii) that an MOU was entered into on 16.04.2016 between the Corporate Debtor and M/s. Udhyaman Investments Pvt.

Ltd., represented by the said Mr. Poobalan, whereby the Corporate Debtor agreed to pay Rs. 11.5 crores; (viii)

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that the said agreement was purportedly executed at Florida, but witnessed at Chennai; (ix) that Mr. Poobalan even communicated to the Director. Department of Mines & Geology as well as the Monitoring Committee, taking up the cause of the Corporate Debtor as its authorized signatory: (x) that the CIRP was initiated by M/s. Udhyaman Investments Pvt. Ltd, represented by its authorized signatory. Mr. Poobalan: (xi) that the Resolution Applicant namely, M/. Embassy Property Development Pvt. Ltd. as well as the Financial Creditor who initiated CIRP namely, M/s. Udhyaman Investments Pvt. Ltd. are all related parties and (xii) that Mr. Poobalan had not only acted on behalf of the Corporate Debtor before the statutory authorities, but also happened to be the authorized signatory of the Financial Creditor who initiated the CIRP, eventually for the benefit of the Resolution Applicant which is a related party of the Financial Creditor.

48. In the light of the above averments, the Government of Karnataka thought fit to invoke the jurisdiction of the High Court under Article 226 without taking recourse to the statutory alternative remedy of appeal before the NCLAT. But the contention of the appellants herein is that allegations of fraud and collusion can also be inquired into by NCLT and NCLAT and that therefore the Government could not have bypassed the statutory remedy.

49. The objection of the appellants in this regard is well founded. Section 65 specifically deals with fraudulent or malicious initiation of proceedings. It reads as follows:

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

Comp. App. (AT) (Ins.) No. 1025 of 2022 28

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."

50. 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".

51. Therefore, if, as contended by the Government of Karnataka, the CIRP had been initiated by one and the same person taking different avatars, not for the genuine purpose of resolution of insolvency or liquidation, but for the collateral purpose of cornering the mine and the mining lease, the same would fall squarely within the mischief addressed by Section 65(1). Therefore, it is clear that NCLT has jurisdiction to enquire into allegations of fraud. As a corollary, NCLAT will also have jurisdiction. Hence, fraudulent initiation of CIRP cannot be a ground to bypass the alternative remedy of appeal provided in Section 61.

Conclusion

52. The upshot of the above discussion is that though NCLT and NCLAT would have Jurisdiction to enquire into questions of fraud, they would not have jurisdiction

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to adjudicate upon disputes such as those arising under MMDR Act, 1957 and the rules issued thereunder, especially when the disputes revolve around decisions of statutory or quasi- Judicial authorities, which can be corrected only by way of judicial review of administrative action. Hence, the High Court was justified in entertaining the writ petition and we see no reason to interfere with the decision of the High Court. Therefore, the appeals are dismissed. There will be no order as to costs."

42. In view thereof, we have no doubt in our mind that the

petition filed by Respondent No. 2 against Respondent No. 1 was

collusive and for a purpose other than for the resolution of

insolvency and hence the impugned order by which Respondent

No. 2 has pushed Respondent No. 1 into CIRP is hereby set aside.

Appeal allowed. No costs.

[Justice Rakesh Kumar Jain] Member (Judicial)

[Mr. Naresh Salecha] Member (Technical)

[Mr. Indevar Pandey] Member (Technical)

New Delhi 28th November, 2024 Sheetal

Comp. App. (AT) (Ins.) No. 1025 of 2022