Hytone Merchants Private Limited vs Satabadi Investment Consultants ...

[Arising out of order dated 2nd February 2021, passed by the Adjudicating Authority/National Company Law Tribunal, Kolkata Bench, Kolkata in CP (IB) No. 2192/KB/2019]

IN THE MATTER OF:

Hytone Merchants Private Limited A company within the meaning of the Companies Act, 2013, having its registered Office at: 87, Diamond Harbour Road, Kolkata - 700038, West Bengal Appellant

Versus

Satabadi Investment Consultants Private Limited A company within the meaning of the Companies Act, 2013, having its registered Office at: 235/2Ac AJC Bose Road, Kolkata - 700020, West Bengal Respondent

Present:

For Appellant : Mr Shaunak Mitra and Mr Sarad Singhania, Advocates

For Respondent : Ms Swati Sood, Advocate

[Per; V. P. Singh, Member (T)]

This Appeal emanates from the order dated 2nd February, 2021, passed

by the Adjudicating Authority/National Company Law Tribunal, Kolkata

Bench, Kolkata in CP (IB) No. 2192/KB/2019, whereby the Adjudicating

Company Appeal (AT) (Insolvency) No. 258 of 2021 1 of 31 Authority has rejected the Application filed under Section 7 of the Insolvency

and Bankruptcy Code, 2016 (in short 'I&B Code'). The original status of the

Parties in the Company Petition represents them in this Appeal for the sake

of convenience.

2. The brief facts of the case are as follows:

(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.

Company Appeal (AT) (Insolvency) No. 258 of 2021 2 of 31

(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.

(f) The Section 7 Application was complete in all respects and met

all requirements under IBC and Regulations thereunder. However, in

the impugned order dated 2nd February 2021, despite finding and

ascertaining that there was indeed the existence of default and that the

Section 7 Application was complete in all respects, the Adjudicating

Authority proceeded to dismiss the Section 7 Application.

(g) 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 ₹ 482,42,00,000. On further enquiry and on perusal of the financial statements for the financial year 2018-19 of the corporate debtor, it has come to light that the networks of the corporate debtor is ₹ 15,36,39,015. It is hard to convince oneself that the Company having a network of ₹ 15,36,39,015 is not able to make a payment of ₹ 3 lakhs. It appears that the petition at hand has been filed in collusion with the corporate debtor."

(verbatim copy)

(h) Based on the above finding, the Adjudicating Authority rejected

the Application filed U/S 7 of the Code. Accordingly, being aggrieved by

the said order, this Appeal is filed.

Company Appeal (AT) (Insolvency) No. 258 of 2021 3 of 31 Appellants Submission

3. The learned Counsel for the Appellant submits that by the impugned

order dated 2nd February 2021, the Adjudicating Authority has dismissed the

Appellant/Financial Creditor's Section 7 Application against the Corporate

Debtor despite holding that; the Application was complete in all respects as

required by law, and the Application clearly showed that the Corporate Debtor

was in default of a debt due and payable. The default amount was more than

the minimum threshold stipulated in Section 4 (1) of the Code.

4. The Adjudicating Authority has overreached and exceeded its authority

and jurisdiction in passing the impugned order. Accordingly, the impugned

order is liable to be set aside. Accordingly, the Section 7 Application should

be admitted by commencing the Corporate Insolvency Resolution Process

(CIRP) regarding the Respondent Corporate Debtor.

5. In paragraph 9 of the impugned order, there is a definite finding by the

Adjudicating Authority that the Section 7 Application was complete in all

respects. Consequently, there was existing default, also meeting the minimum

threshold under IBC. In 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

Company Appeal (AT) (Insolvency) No. 258 of 2021 4 of 31 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 that master data appearing on page 11

of the Section 7 Application did not show the corporate guarantee amount as

in paragraph 9 of the impugned order.

7. Anyhow, the Adjudicating Authority cannot embark on a roving enquiry

of its own to adjudicate an Application under Section 7.

8. The Adjudicating Authority has misdirected itself in ignoring the

materials on record, categorically showing the existence of default. Instead,

the Adjudicating Authority has proceeded to refer to and rely on purported

documents that were not on record to arrive at a finding of purported collusion

without giving any opportunity to the Appellant to make submissions in this

regard.

Company Appeal (AT) (Insolvency) No. 258 of 2021 5 of 31

9. The impugned order has been passed in contravention of law, the

provisions of IBC and Regulations thereunder. The Adjudicating Authority has

acted in excess and/or without jurisdiction in passing the impugned order

without appreciating the facts and records of the case.

10. The impugned order has been passed without Application of mind and

without taking into consideration the aforesaid facts and the materials on

record, and without appreciating the submissions made on behalf of the

Appellant.

11. Under Section 7 (5), it is submitted that there is no discretion vested to

the Adjudicating Authority to reject a Section 7 Application if the default has

occurred and the Application is complete.

12. The Appellant further contends that Hon'ble Supreme Court in

Innoventive Industries Limited vs ICICI Bank held that "the moment the

Adjudicating Authority is satisfied that the default has occurred, the

Application must be admitted unless it is complete." Relying on the

observations of the Hon'ble Supreme Court, which leaves no room for doubt

that there is no discretion to reject if there is default and the Application is

complete.

13. However, in passing the impugned order, the Adjudicating Authority

has acted in derogation of the settled principles of law. Therefore, Ex-facie,

the impugned order deserves to be set aside on this ground alone, especially

after the Adjudicating Authority has arrived at the factual finding that debt

Company Appeal (AT) (Insolvency) No. 258 of 2021 6 of 31 was due, default by the Corporate Debtor, and the Application was complete

in all respects. Furthermore, there were no facts on record to warrant the

exercise of discretion to reject the Application.

14. Section 7 (4) of the Code is also relevant since the 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 since the Adjudicating

Authority has arrived at an erroneous inference based on the irrelevant

Company Appeal (AT) (Insolvency) No. 258 of 2021 7 of 31 records, and that too, without allowing the Appellant/Financial Creditor to

make submissions regarding the same.

17. Furthermore, the financial statements of the Corporate Debtor for the

year ending 31st March 2019 are not at all relevant because; the Section 7

Application was filed in December 2019, i.e. more than eight months after 31st

March 2019; the impugned order rejecting the Section 7 Application was

passed on 2nd February 2021, almost two years after the 31st March 2019;

the Adjudicating Authority has ignored the possibility that the financial

position reflected on 31st March 2019 may have undergone a sea change in

the intervening two years.

18. Significantly, the Corporate Debtor's submission that it was unable to

make payment to Appellant/Financial Creditor due to "economic recession

and losses in its business" and due to Corporate Debtor "being a victim of

circumstances" and "by reason of the duration of the business", though

recorded in para 7 of the impugned order, the Adjudicating Authority has

failed to appreciate the meaning of the same.

19. Now the Corporate Debtor has disclosed its financial statement for

2018-19 in this Appeal in their reply affidavit, and the Corporate Debtor has

categorically stated on oath (at paragraph 7, page 3 of reply affidavit) that the

financial condition of Corporate Debtor has starkly deteriorated after 31st

March 2019. Because the major portion of its investment into companies,

namely, Kohinoor Newsprint and Papers Private Limited & Kohinoor Pulp

Company Appeal (AT) (Insolvency) No. 258 of 2021 8 of 31 and Paper Private Limited, are sunk investments, where the Corporate

Debtor has no chance of getting its money back, and the amounts are

reflected in the accounts as per the accounting standard since the same

cannot be immediately written off. The Corporate Debtor has disclosed

that the said two companies are under CIRP and in liquidation,

respectively, under the provisions of the Code. The Appellant/Financial

Creditor has also enquired ascertained that even in respect of Kohinoor

Newsprint, Application for liquidation is already filed. In short, the net

worth of the Corporate Debtor stands substantially eroded after 31st

March 2019.

20. Further, it is pertinent to mention that the Appellant/Financial Creditor

has no relation or connection with the Corporate Debtor. 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

Company Appeal (AT) (Insolvency) No. 258 of 2021 9 of 31 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 Application. Therefore, merely because the

Corporate Debtor has admitted the default due to its hopeless financial

condition and the Corporate Debtor has refused to pay, it is not and cannot

be a ground to reject the Section 7 Application on an unsubstantiated guess,

as has been done in the instant case.

23. The net effect of the impugned order is that the Appellant/Financial

Creditor, which has a genuine and established claim against Corporate

Debtor, has been made to suffer for the Corporate Debtor's failure to make

payment of the defaulted amount.

24. The reference by the Adjudicating Authority to the corporate

guarantee mentioned in the Corporate Debtor's master data (page 40 of

the Appeal) is also totally irrelevant. Assuming that any such guarantee

exists, the same is a liability of the Corporate Debtor. Therefore, it is not

even mentioned in the impugned order as to the relevance of the same.

Respondent/Corporate Debtor's submission

25. The Corporate Debtor submits that an unsecured loan of ₹ three lakhs

was sought from the Appellant/Financial Creditor for six months carrying

Company Appeal (AT) (Insolvency) No. 258 of 2021 10 of 31 interest at the rate of 15% per annum on 15th February 2019. But due to

business losses and economic recession, the Company was not able to recover

and thus was unable to pay back such loan.

26. The impugned order alleges of existing collusion, mentioned in the

impugned order, is vehemently disagreed disputed as there has been proper

disbursement of a sum of ₹ three lakhs. It was taken as a loan, and by a

demand notice dated 16th October 2019, the Appellant had recalled the

unsecured loan, which is explained herein. However, due to staggering

economic and business exigencies, the same could not be fulfilled, and the

amount was not returned timely. Moreover, the Corporate Debtor Company

had made several other commitments and investments, and it was in no

current position to pay back the recalled amount.

27. As per the order dated 4th April 2021, necessary clarifications were

sought regarding the balance-sheet with regards to its mention in the Order

of National Company Law Tribunal, dated 4th January 2021, where it is

mentioned that the net worth of the Company's ₹ 15,36,39,015 as per the

financial statements of 2018-2019. The Respondent contends that the

Application was filed during the said period 2019-2020. But at the present

situation, when the 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

Company Appeal (AT) (Insolvency) No. 258 of 2021 11 of 31 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

creditor, an operational creditor or the corporate debtor itself may

initiate corporate insolvency resolution process in respect of such

corporate debtor in the manner as provided under this Chapter.

7. Initiation of Corporate Insolvency Resolution Process by

Financial Creditor.--(1) A financial creditor either by itself or jointly

with [other Financial Creditors, or any other person on behalf of the

financial creditor, as may be notified by the Central Government] may

file an application for initiating corporate insolvency resolution process

Company Appeal (AT) (Insolvency) No. 258 of 2021 12 of 31 against a corporate debtor before the Adjudicating Authority when a

default has occurred.

[Provided that for the financial creditors, referred to in clauses (a) and

(b) of sub-section (6-A) of Section 21, an application for initiating

corporate insolvency resolution process against the corporate debtor

shall be filed jointly by not less than one hundred of such creditors in

the same class or not less than ten per cent. of the total number of such

creditors in the same class, whichever is less:

Provided further that for financial creditors who are allottees under a

real estate project, an application for initiating corporate insolvency

resolution process against the corporate debtor shall be filed jointly by

not less than one hundred of such allottees under the same real estate

project or not less than ten per cent. of the total number of such

allottees under the same real estate project, whichever is less:

Provided also that where an application for initiating the corporate

insolvency resolution process against a corporate debtor has been filed

by a financial creditor referred to in the first and second provisos and

has not been admitted by the Adjudicating Authority before the

commencement of the Insolvency and Bankruptcy Code (Amendment)

Act, 2020, such Application shall be modified to comply with the

requirements of the first or second proviso within thirty days of the

Company Appeal (AT) (Insolvency) No. 258 of 2021 13 of 31 commencement of the said Act, failing which the Application shall be

deemed to be withdrawn before its admission.]

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 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):

Company Appeal (AT) (Insolvency) No. 258 of 2021 14 of 31 [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 resolution professional, it may, by

order, admit such Application; or

(b) default has not occurred or the Application under sub-

section (2) is incomplete or any disciplinary proceeding is pending

against the proposed resolution professional, it may, by order,

reject such Application:

Provided that the Adjudicating Authority shall, before rejecting the

Application under clause (b) of sub-section (5), give a notice to the

applicant to rectify the defect in his Application within seven days of

receipt of such notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shall commence

from the date of admission of the Application under sub-section (5).

(7) The Adjudicating Authority shall communicate--

(a) the order under clause (a) of sub-section (5) to the financial

creditor and the corporate debtor;

Company Appeal (AT) (Insolvency) No. 258 of 2021 15 of 31

(b) the order under clause (b) of sub-section (5) to the financial

creditor, within seven days of admission or rejection of such

Application, as the case may be.

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.

Judgements Referred

29. Hon'ble Supreme Court in case of Innoventive Industries Ltd. v. ICICI

Bank, (2018) 1 SCC 407 : 2017 SCC OnLine SC 1025 : (2018) 1 SCC (Civ)

356 at page 438 held:

"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

Company Appeal (AT) (Insolvency) No. 258 of 2021 16 of 31 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

Company Appeal (AT) (Insolvency) No. 258 of 2021 17 of 31 within 7 days of admission or rejection of such Application, as the case may be.

****

30. 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."

30. Hon'ble Supreme Court in Swiss Ribbons (P) Ltd. v. Union of India,

(2019) 4 SCC 17 : 2019 SCC OnLine SC 73 at page 71has held:

"55. Apart from the record maintained by such utility, Form I appended to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, makes it clear that the following are other sources which evidence a financial debt:

(a) Particulars of security held, if any, the date of its creation, its estimated value as per the creditor;

(b) Certificate of registration of charge issued by the Registrar of Companies (if the corporate debtor is a company);

(c) Order of a court, Tribunal or arbitral panel adjudicating on the default;

Company Appeal (AT) (Insolvency) No. 258 of 2021 18 of 31 (d) Record of default with the information utility;

(e) Details of succession certificate, or probate of a

will, or letter of administration, or court decree (as may be applicable), under the Indian Succession Act, 1925;

(f) The latest and complete copy of the financial contract reflecting all amendments and waivers to date;

(g) A record of default as available 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.

Company Appeal (AT) (Insolvency) No. 258 of 2021 19 of 31

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 particular case in accordance with the principles of natural justice.

(2) The general heading in all proceedings before the Tribunal, in all advertisements and notices shall be in Form No. NCLT 4.

(3) Every petition or Application or reference shall be filed in form as provided in Form No. NCLT 1 with attachments thereto accompanied by Form No. NCLT 2 and in case of an interlocutory application, the same shall be filed in Form No. NCLT 1 accompanied by such attachments thereto along with Form No. NCLT 3.

(4) Every petition or Application including interlocutory Application shall be verified by an affidavit in Form No. NCLT 6. Notice to be issued by the Tribunal to the opposite party shall be in Form NCLT 5.

37. Notice to Opposite Party.--(1) The Tribunal shall issue notice to the Respondent to show cause against the Application or petition on a date of hearing to be specified in the notice. Such notice in Form No. NCLT 5 shall be accompanied by a copy of the Application with supporting documents.

(2) If the Respondent does not appear on the date specified in the notice in Form No. NCLT 5, the Tribunal, after according reasonable opportunity to the

Company Appeal (AT) (Insolvency) No. 258 of 2021 20 of 31 Respondent, shall forthwith proceed ex parte to dispose of the Application.

(3) If the respondent contests to the notice received under sub-rule (1), it may, either in person or through an authorised representative, file a reply accompanied with an affidavit and along with copies of such documents on which it relies, with an advance service to the petitioner or applicant, to the Registry before the date of hearing and such reply and copies of documents shall form part of the record."

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 of proceedings.--

(1) If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any

Company Appeal (AT) (Insolvency) No. 258 of 2021 21 of 31

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, such person shall be punishable with fine which shall not be less than one lakh rupees, but may extend to one crore rupees."

56. Rule 4(3) of the aforesaid Rules states as follows:

"4. Application by financial creditor.--(1)- (2) * * * (3) The applicant shall dispatch forthwith, a copy of the Application filed with the adjudicating

Company Appeal (AT) (Insolvency) No. 258 of 2021 22 of 31 authority, by registered post or speed post to the registered office of the corporate debtor."

Discussion and findings

31. We have heard argument of the Learned Counsel for the parties and

perused the record. Based on the pleadings of the parties, the question that

arises for our consideration is as under;

Whether the petition complying with all requirements of Section

7(5) of the Insolvency and Bankruptcy Code, 2016, but if it appears

that the Application is filed collusively, not with the intention of

Resolution of Insolvency, and so with malicious intent, or

malafides, then whether the Application can be rejected relying on

Section 65 of the Code?

32. Undisputedly the petition filed under Section 7 of the Code meets all

the requirements under the Insolvency and Bankruptcy Code, 2016. The

Adjudicating Authority has also observed that "the Application is complete in

all respects as required by law and the Application clearly showed that the

Corporate Debtor is in default of a debt due and payable and that the default

amount is more than the minimum threshold stipulated in Section 4 (1) of the

Code".

33. Based on the above findings, the Learned Counsel for the Appellant

submits that the Adjudicating Authority had no discretion except to admit the

Application filed under Section 7 of the Code. It is emphasised that Section 7

Company Appeal (AT) (Insolvency) No. 258 of 2021 23 of 31 (5) of the Code leaves no discretion to the Court where other ingredients of

Section 7 are fulfilled. Section 7 (5) of the Code provides that "where the

Adjudicating Authority is satisfied that in default has occurred and the

Application under Sub-section (2) is complete, and there is no disciplinary

proceedings pending against the proposed Resolution Professional, it may, by

order, admit such Application."

34. The use of the phrase 'it may' under Sub-section (5) of section 7 itself

leaves the scope of discretion exercised by the Adjudicating Authority in

admitting or rejecting the Application. Section 7 (5) (a) lays down parameters

about general conditions 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.

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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 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, such person shall be punishable with

Company Appeal (AT) (Insolvency) No. 258 of 2021 25 of 31 fine which shall not be less than one lakh rupees, but may extend to one crore rupees."

36. In the above mentioned case Hon'ble Supreme Court in Para 59 has

very clearly observed that "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."

37. Based on the law laid down by Hon'ble Supreme Court in the above-

mentioned case, it is clear that even if the Application filed under Section 7

meets all the requirements, then also the Adjudicating Authority has exercise

discretion carefully to prevent and protect the Corporate Debtor from being

dragged into the Corporate Insolvency Resolution Process mala fide.

38. Therefore, the Code prescribes penalties under Section 65 and 75.

Furthermore, Section 65 explicitly says that if any person initiates the

insolvency resolution process or liquidation proceedings fraudulently or with

malicious intent for any purpose other than for resolution of Insolvency

or liquidation, as the case may, the Adjudicating Authority may impose a

penalty.

39. Thus, 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

Company Appeal (AT) (Insolvency) No. 258 of 2021 26 of 31 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 exception to

the principle that the Company is a legal entity separate and distinct from a

shareholder with its own legal rights and obligations. It seems to disregard

the separate personality of Company and attribute the acts of the Company

to those who are allegedly in direct control of its operation.

42. The concept of the corporate entity was evolved to encourage and

promote trade and commerce but not to commit illegalities or to defraud

people. Where, therefore, the corporate character is employed for the

purpose of committing illegality or for defrauding others, the Court

would ignore the corporate character and will look at the reality behind

Company Appeal (AT) (Insolvency) No. 258 of 2021 27 of 31 the corporate veil so as to enable it to pass appropriate orders to do

justice between the parties concerned.

43. The expression "acting jointly" in the opening sentence of Section 29-A

cannot be confused with "joint venture agreements". All that is to be seen by

the expression "acting jointly" is whether certain persons have got together

and are acting "jointly" in the sense of acting together. If this is made out on

the facts, no superadded element of "joint venture" as is understood in law is

to be seen. The other important phrase is "in concert". Section 3 (37) of the

Code, words and expressions used but not defined in the Code but defined,

inter alia, by the SEBI Act, 1992, and the Companies Act 2013, shall have the

meanings respectively assigned to them under those Acts.

44. Thus it is clear 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 recognised the

principle of lifting the corporate veil in matters relating to Insolvency under

the Code. Section 65 of the Insolvency and Bankruptcy Code, 2016 provides

for punishment or fraudulent or malicious initiation of proceedings. It does

not mean that Section 65 will not be applicable to prevent such fraudulent or

malicious initiation of proceedings. When a statute makes a provision for

punishment for any wrong, it also contains deemed power to prevent it.

Therefore it cannot be said that section 65 will be applicable only after

initiation of the Corporate Insolvency Resolution Process fraudulently or with

malicious intent.

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45. Based on the above discussion, we believe that even if the petition

complies with all requirements 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 ₹ 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 ₹ 15,36,39,015. It is hard to convince oneself that the Company having a net

worth of ₹ 15,36,39,015 is not able to make a payment of ₹ 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 ₹ 15,36,39,015

as per the financial statement of 2018 -19. The Corporate Debtor/Respondent

contends that the Application was filed during the year 2019-20. Still, in the

present situation when the order was passed, the Company's position is

starkly deteriorated and is not able to pay back the loan amount.

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48. The Corporate Debtor further admitted that it had made a substantial

investment in M/s' Kohinoor Pulp and Paper Private Limited' and 'Kohinoor

Paper and Newsprint Private Limited'. Kohinoor Pulp and Paper Private

Limited are under liquidation, and Kohinoor Paper and Newsprint Private

Limited is under this Corporate Insolvency Resolution Process wherein an

Application has already been filed to initiate the liquidation process. Master

data of the Corporate Debtor further reflects that the Corporate Debtor had

extended the corporate guarantee of ₹ 482,42,00,000, and the Company's net

worth is ₹ 15,36,39,015.

49. In the circumstances, the Adjudicating Authority decided that the

petition is filed in collusion with the Corporate Debtor and thereby rejected

the Petition filed U/S 7 of the Code. There is a plausible contention to form

such an opinion of collusion with the Financial Creditor that a company with

a net worth of ₹ 15,36,39,015 has already given a corporate guarantee worth

₹ 4,82,42,000,00 is unable to repay a loan of ₹ 3 lakhs only. The Corporate

Debtor, in its reply, has not disputed that it has extended the corporate

guarantee worth ₹ 482,42,00,000. Since the master data of the Corporate

Debtor reflects that the Corporate Debtor is also a Corporate Guarantor and

has extended the Corporate Guarantee of a considerable amount worth

₹482,42,00,000, therefore, such plausible contention cannot be ruled out that

the Corporate Debtor colluded with the Financial Creditor to escape its

liability as a corporate guarantor.

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50. In the circumstances stated above, we believe that the Appeals sans

merit and deserve to be dismissed.

ORDER

The Appeal is dismissed- no order as to costs.

[Justice A.I.S. Cheema] The Officiating Chairperson

[V. P. Singh] Member (Technical) NEW DELHI 30TH JUNE, 2021

pks

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