Rakesh Arora & Anr vs Acute Daily Media Private Limited & Ors

[Arising out of Order dated 12.06.2024 passed by the Adjudicating Authority (National Company Law Tribunal), New Delhi Bench (Court-II) in IA No.3602 of 2022 in CP (IB) No.50(PB)/2021]

IN THE MATTER OF:

Rakesh Arora & Anr. ...Appellants

Versus

Acute Daily Media Pvt. Ltd. & Ors. ...Respondents

Present: For Appellants: Mr. Rohit Gandhi, Ms. Akshita Nigam, Advocates.

For Respondents:

Company Appeal (AT) (Insolvency) No. 1608 of 2024 & I.A. No. 5865 of 2024

[Arising out of Order dated 12.06.2024 passed by the Adjudicating Authority (National Company Law Tribunal), New Delhi Bench (Court-II) in IA No.3602 of 2022 in CP (IB) No.50(PB)/2021]

IN THE MATTER OF:

Rockman Advertising & Marketing (India) Ltd. ...Appellant

Versus

Acute Daily Media Pvt. Ltd. & Ors. ...Respondents

Present: For Appellant: Mr. Sakal Bhushan, Ms. Vasu Bhushan, Mr. Nipun Bhushan, Advocates. For Respondents: Ms. Eshna Kumar, Mr. Harpreet Singh Malhotra, Advocates for R-8 to 15. 2

JUDGMENT

(07th March, 2025)

Ashok Bhushan, J.

These two Appeals have been filed challenging the same order dated

12.06.2024 passed by the Adjudicating Authority (National Company Law

Tribunal), New Delhi Bench, Court-II in Company Petition (IB) No.50 (PB)

2021. By the impugned order, the Adjudicating Authority allowed the IA

No.3602 of 2022 filed under Section 65 of the IBC and has also recalled the

order dated 17.05.2022 admitting Section 7 application filed by the financial

creditor. Vide impugned order, Show Cause Notice was issued on the

financial creditors- M/s. Acute Daily Media Pvt. Ltd. & Ors. as to why

penalty as stipulated under Section 65(1) should not be imposed. Company

Appeal (AT) (Ins.) No.1608 of 2024 has been filed by Rockman Advertising

and Marketing (India) Ltd., a shareholder of M/s. Sharp Eye Advertising Pvt.

Ltd.- the corporate debtor. Company Appeal (AT) (Ins.) No.1606 of 2024 has

been filed by two Appellants who had filed the application for intervention in

IA No.3602 of 2022. Prayers made in both the appeals are to the limited

extent which we shall notice hereinafter. It shall be sufficient to refer the

pleadings and facts in Company Appeal (AT) (Insolvency) No.1608 of 2024

for deciding both the appeals.

2. Brief facts of the case giving rise to these appeals are as follows:-

2.1. An application under Section 7 was filed by Respondent Nos.1 to 6

claiming to be financial creditors of corporate debtor- M/s. Sharp Eye

Advertising Pvt. Ltd. Section 7 application alleged debt and default on the

Company Appeal (AT) (Insolvency) Nos. 1606 of 2024 & 1608 of 2024 3

corporate debtor. The Adjudicating Authority vide order dated 17.05.2022

admitted Section 7 application and initiated CIRP process against M/s.

Sharp Eye Advertising Pvt. Ltd. After Section 7 application was admitted, an

IA No.3602 of 2022 was filed by Appellant- Rockman Advertising and

Marketing (India) Ltd. claiming to be majority shareholder of the corporate

debtor. In the application IA No.3602 of 2022, following prayers were made:-

"a) "Call for record of CP (IB) No. 50(PB)/2021 decided on 17.05.2022 by this Hon'ble Tribunal;

b) Pass an interim Order staying the CIRP proceedings- till the final disposal of this Application disclosing prima facie fraud: played upon the Hon'ble Tribunal, in order to avoid multiplicity of proceedings;

c) Impose a penalty of Rs. One Crore on each of the Respondents in exercise of the powers vested in it under Section 65 IBC for initiating the CIRP of Corporate Debtor fraudulently, with malicious intent and for a purpose other than insolvency resolution of the Corporate Debtor;

d) Recall the Order dated 17.05.2022 (Annexure-1) obtained fraudulently by the Respondents from this Hon'ble Tribunal in CP (IB) No. 50(PB)/2021 as explained above;

e) Award exemplary and compensatory costs in favour of the Applicant whose decade long efforts since 2013 in the oppression and mismanagement petition were sought to be defeated by the Respondents by initiating the CIRP fraudulently;

Company Appeal (AT) (Insolvency) Nos. 1606 of 2024 & 1608 of 2024 4

f) Pass such other/ further orders, as this Hon'ble Tribunal may deem fit and proper in the facts and circumstances of the instant case."

2.2. The Appellants claimed in the application that Section 7 application

was filed fraudulently with malicious intent by financial creditors in

collusion with the corporate debtor and its directors. It was pleaded that the

corporate debtor and its promoters were previously subject to an oppression

and mismanagement petition filed by the shareholders in 2013 where

grievance was raised regarding decrease of the shareholding from 62.57% to

17.86%. It was pleaded by the appellants that appellant claim to know

about the initiation of the CIRP on 26.05.2022 and thereafter filed the

application. We need not notice various other allegations in the application

since the issue raised in the appeals are limited as we shall notice

hereinafter.

2.3. An intervention petition being IA No.36 of 2022 was filed by Rakesh

Arora and Ors. in IA No.3602 of 2022. Adjudicating Authority heard the

parties on IA No. 3602 of 2022 as well as intervention petition and by order

dated 10.09.2024, allowed the application and recalled the order dated

17.05.2022 held that the CIRP was initiated fraudulently. It is useful to

notice paragraphs 16, 17 and 18 of the impugned order:-

"16. To sum up, we are of the considered view that the aforementioned insolvency proceedings in C.P.(IB)-50(PB)/2021 resulting in our order dated 17.05.2022 were initiated fraudulently and with

Company Appeal (AT) (Insolvency) Nos. 1606 of 2024 & 1608 of 2024 5

malicious intent for a purpose other than the resolution of the insolvency of the Corporate Debtor.

17. As a sequel, we recall the order dated 17.05.2022 initiating CIRP of the Corporate Debtor, obtained fraudulently from the Tribunal in C.P.(IB)- 50(PB)/2021. The RP is directed to hand over the control and custody of the corporate debtor and its assets to the erstwhile management. The Financial creditors/Applicants in the C.P. (IB)-50(PB)/2021 are directed to pay the CIRP costs incurred so far within 7 days of this order.

18. Regarding action under Section 65(1) of IBC 2016, we deem it appropriate to issue a Show Cause Notice, under Rule 59 of the National Company Law Tribunal Rules, 2016 to the Financial Creditors M/s. Acute Daily Media and Ors. through its Directors as to why penalty as stipulated under Section 65(1) of IBC, 2016 should not be imposed on it. The notice is made returnable on 09.09.2024. Learned Registrar NCLT would serve Show Cause Notice under Section 65(1) of IBC, 2016 read with Rule 59 of the National Company Law Tribunal Rules, 2016 upon M/s Acute Daily Media and other financial creditors calling upon them to explain and submit in writing as to why the penalty as stipulated under Section 65(1) of IBC, 2016 should not be imposed on them."

2.4. Company Appeal (AT) (Insolvency) No.1608 of 2024 has been filed on

12.08.2024 praying for following reliefs:-

Company Appeal (AT) (Insolvency) Nos. 1606 of 2024 & 1608 of 2024 6

"i. Modify the impugned order dated 12.06.2024 to the extent that it does not impose any penalty under S. 65, IBC on the R. Nos. 1-6 (alleged FCs) and R. Nos. 8-15 (promoters of CD) despite agreeing to and accepting all the allegations levelled by the Appellant and reaching the conclusion that "insolvency proceedings in C.P.(IB)-50(PB)/2021 resulting in our order dated 17.05.2022 were initiated fraudulently and with malicious intent for a purpose other than the resolution of the insolvency of the Corporate Debtor":

ii. Impose a penalty of Rs. One Crore on each of the R. Nos. 1-6 (alleged FCs) and R. Nos. 8-15 (promoters of CD) under S. 65, IBC since it already stands that the Respondents initiated CIRP of the CD fraudulently, with malicious intent and for a purpose other than resolution of insolvency of the CD;

iii. Award exemplary and compensatory costs in favour of the Appellant whose decade long efforts since 2013 in its oppression and mismanagement petition were sought to be defeated by the Respondents by initiating the CIRP fraudulently; and/or

iv. Pass any such other or further orders as this Hon'ble Appellate Tribunal may deem fit and proper in the facts and circumstances of the instant case."

2.5. In Company Appeal (AT) (Insolvency) No.1606 of 2024, similar

prayers have been made to the following effect:-

Company Appeal (AT) (Insolvency) Nos. 1606 of 2024 & 1608 of 2024 7

"(i) Modify the impugned order dated 12.06.2024 to the extent that it does not impose any penalty under S. 65, IBC on the Respondent Nos. 1 to 6 (alleged Financial Creditors) and Respondent Nos.8 to 15 (promoters of Corporate Debtor)

(ii) Impose a penalty of Rs. One Crore on each of the Respondent Nos. 1 to 6 (alleged Financial Creditors) and Respondent Nos. 8 to 15 (promoters of Corporate Debtor) under Section 65, IBC;

(iii) Award exemplary and compensatory costs in favour of the Appellant; and/or

(iv) Pass any such other/ further orders, as this Hon'ble Appellate Tribunal may deem fit and proper in the facts and circumstances of the instant case."

2.6. Notices were issued in these appeals and both the parties were heard.

2.7. It is relevant to notice that against order dated 12.06.2024 passed by

the Adjudicating Authority in IA No.3602 of 2022, Company Appeal (AT)

(Insolvency) No. 1480 of 2024 has been filed by financial creditors

Respondent Nos.1 to 6 to this appeal which appeal was heard and dismissed

by judgment and order of this Tribunal on 16.01.2025.

3. Counsel for the Appellants challenging the impugned order has

contended that the Adjudicating Authority after having found that Section 7

application was initiated fraudulently, Adjudicating Authority ought to have

imposed the penalty on the financial creditors as well as on the promoters of

the corporate debtor to the extent of Rs.1 Crore each and the Adjudicating

Company Appeal (AT) (Insolvency) Nos. 1606 of 2024 & 1608 of 2024 8

Authority instead of imposing penalty has directed for issuance of notice to

the financial creditors only. It is contented that the financial creditor having

initiated the proceedings in collusion with the promoters of the corporate

debtor, penalty was liable to be imposed both on financial creditors as well

as promoters of the corporate debtor. It is further contended that Rule 59 of

the NCLT Rules, 2016 which is relied for issuance of notice is not applicable.

It is further submitted that the findings of the Adjudicating Authority that

the CIRP has been initiated by the financial creditor fraudulently having

been affirmed by this Tribunal vide its judgment dated 16.01.2025, both

financial creditors and the promoters are liable to be penalised. The

expression "initiates" employed in Section 65 of the IBC is not confined only

to the alleged creditors who file an application under Section 7 or 9 but the

same is broad enough to include within its sweep all other persons like

promoters etc. who collude/conspire with the alleged creditors in formally

filling the application. There is no legislative intent in Section 65 to issue

any further notice to a wrongdoer after finding him guilty have been arrived

at in Section 65. Counsel submits that in the facts of the present case, this

Tribunal may allow the appeal and impose the penalty on the financial

creditors Respondent Nos.1 to 6 as well as Respondent Nos. 7 to 15

promoters of the corporate debtor which may serve as a deterrent to others

as well and preserve the sanctity of the machinery established under the

IBC.

4. Counsel for the promoters has opposed the above submissions and

submits that penalty under Section 65 can be imposed only on financial

Company Appeal (AT) (Insolvency) Nos. 1606 of 2024 & 1608 of 2024 9

creditors who has initiated the proceedings. Section 65 does not indicate

that on the promoters' penalty can also be imposed. It is further submitted

that the Adjudicating Authority in the impugned order dated 12.06.2024

has not returned any finding regarding collusion of the promoters.

Allegations made against the promoters are denied. Adjudicating Authority

itself having not found sufficient material to issue notice against the

promoters, Appellants' contention that promoters be also penalised is

without any basis. Scope of Section 65 does not include collusion. There is

no direct evidence to establish that answering respondent conspired and

colluded with Respondent Nos.1 to 6 in initiation of the CIRP.

5. We have considered the submissions of the counsel for the parties and

perused the record.

6. The submission which has been advanced by the counsel for the

parties is with regard to interpretation of Section 65 of the IBC. Section 65

of the IBC provides 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,

Company Appeal (AT) (Insolvency) Nos. 1606 of 2024 & 1608 of 2024 10

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.

[(3) If any person initiates the pre-packaged insolvency resolution process--

(a) fraudulently or with malicious intent for any purpose other than for the resolution of insolvency; or (b) 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. The expression "initiation date" has been defined in Section 5(11)

which is to the following effect:-

"5. Definitions. - (11) "initiation date" means the date on which a financial creditor, corporate applicant or operational creditor, as the case may be, makes an application to the Adjudicating Authority for initiating corporate insolvency resolution process [or pre-packaged insolvency resolution process, as the case may be]"

8. "Initiation date" has been defined in Section 5(11). From the definition

of "initiation date", it is clear that initiation is by a financial creditor,

corporate applicant or operational creditor only. In Section 65 of the IBC

when we examine the expression "if any person initiates the insolvency

resolution process fraudulently or with malicious intent for any purpose other

than for resolution of insolvency", the focus is on the person who initiates the

Company Appeal (AT) (Insolvency) Nos. 1606 of 2024 & 1608 of 2024 11

insolvency resolution process. We, in the present case, are concerned with

initiation of insolvency resolution process under Section 7. Insolvency

resolution process can be initiated under Section 7, 9 and 10 which is also

clear from definition of "initiation date" under Section 5(11) and the scheme

of the IBC as captured by Sections 7, 9 and 10. No other person is entitled

to initiate insolvency resolution process except financial creditor, operational

creditor or corporate applicant. The heading of Section 65 also provides

"fraudulent or malicious initiation of proceedings". The use of expression

"impose upon such person a penalty" in sub-section (1) of Section 65

obviously relates to the person who has initiated the insolvency resolution

process. The submission of the appellant is that the promoter should also be

treated in whose collusion the proceedings initiated by financial creditors

needs consideration. Counsel appearing for the promoters has refuted the

contention that any collusion was found with the promoters. It is not

necessary for us to enter into issue as to whether there is any finding of

collusion in the order of the Tribunal or this Tribunal dismissing the

appeals. We need to examine the statutory scheme under Section 65, unless

the promoters can also be covered under the statuary scheme, the prayer of

the appellants to impose penalty on the promoters cannot be accepted.

Section 65 is a penal provision. Hon'ble Supreme Court in AIR 1954 SC 496-

"Tolaram Relumal and Anr. vs. State of Bombay" laid down:-

"........if two possible and reasonable constructions can be put upon a penal provision, the Court must lean towards that construction which exempts the subject

Company Appeal (AT) (Insolvency) Nos. 1606 of 2024 & 1608 of 2024 12

from penalty rather than the one which imposes penalty."

9. It is not competent to the court to stretch the meaning of expression

used by the legislature in order to carry out the intention of legislature. Even

the literal construction of Section 65 does not contemplates that penalty can

be imposed on any person other than one who has fraudulently or

maliciously initiated the proceedings. It is well settled that penal statute are

to be strictly construed. We may refer to the judgment of the Hon'ble

Supreme Court in "(2013) 8 SCC 71- Aparna A. Shah vs. Sheth

Developers Pvt. Ltd. & Anr." where in reference to Section 138 of the NIA

Act, the Hon'ble Supreme Court has occasion to consider the construction of

penal provision. In paragraphs 15 & 16, following was laid down:-

"15. In S.K. Alagh v. State of U.P. [(2008) 5 SCC 662 :

(2008) 2 SCC (Cri) 686] this Court held: (SCC p. 667, para 19) "19. ... If and when a statute contemplates creation of such a legal fiction, it provides specifically therefor. In absence of any provision laid down under the statute, a Director of a company or an employee cannot be held to be vicariously liable for any offence committed by the company itself. (See Sabitha Ramamurthy v. R.B.S. Channabasavaradhya [(2006)

10 SCC 581 : (2007) 1 SCC (Cri) 621] .)"

16. In Sham Sunder v. State of Haryana [(1989) 4 SCC 630 : 1989 SCC (Cri) 783] , this Court held as under: (SCC p. 632, para 9)

Company Appeal (AT) (Insolvency) Nos. 1606 of 2024 & 1608 of 2024 13

"9. ... The penal provision must be strictly construed in the first place. Secondly, there is no vicarious liability in criminal law unless the statute takes that also within its fold. Section 10 does not provide for such liability. It does not make all the partners liable for the offence whether they do business or not."

10. Section 65 of the IBC being a penal statute, it is required to be strictly

construed and as observed above even a literal reading of Section 65 which

is a golden rule of construction of statutory statute, no interpretation can be

put on the provisions of Section 65 that penalty can be imposed on any

other person except those who have initiated insolvency resolution process

fraudulently or maliciously. We, thus, do not accept the submission of the

appellant that in exercise of jurisdiction under Section 65, promoters are

also need to be penalised.

11. The next submission which has been pressed by the Appellant is that

the Adjudicating Authority by the impugned order has issued notice to the

financial creditors which is clear from direction under paragraph 18 as

extracted above. It is submitted that the Adjudicating Authority has referred

to Rule 59 of the NCLT Rules, 2016 for issuance of notice which Rule is not

applicable. Rule 59 of the NCLT Rules deals with procedure for imposition of

penalty under the Act. Rule 59 is as follows:-

"59. Procedure for imposition of penalty under the Act.- (1) Notwithstanding anything to the contrary contained in any rules or regulations

Company Appeal (AT) (Insolvency) Nos. 1606 of 2024 & 1608 of 2024 14

framed under the Act, no order or direction imposing a penalty under the Act shall be made unless the person or the company or a party to the proceeding, during proceedings of the Bench, has been given a show cause notice and reasonable opportunity to represent his or her or its case before the Bench or any officer authorised in this behalf. (2) In case the Bench decides to issue show cause notice to any person or company or a party to the proceedings, as the case may be, under sub-rule (1), the Registrar shall issue a show cause notice giving not less than fifteen days asking for submission of the explanation in writing within the period stipulated in the notice.

(3) The Bench shall, on receipt of the explanation, and after oral hearing if granted, proceed to decide the matter of imposition of penalty on the facts and circumstances of the case."

12. Counsel for the Appellant is right in his submission that the

expression "Act" used in Rule 59 has to take colour from the definition as

given in Rule 2. Rule 2(1) defines the "Act" in following manner:-

"2. Definitions.- (1) "Act" means the Companies Act,

2013 (18 of 2013);

13. When we read Rule 59 read with definition under Rule 2(1) of the

NCLT Rules, 2016, it is clear that Rule 59 is procedure for imposition of

penalty under the Companies Act, 2013. Under the Companies Act 2013,

there are various provisions like Sections 229, 237, 446B and 455A under

Company Appeal (AT) (Insolvency) Nos. 1606 of 2024 & 1608 of 2024 15

which penalty can be imposed. Rule 59, thus, strictly is to confine only with

procedure while imposing penalty under the Companies Act, 2013.

14. Admittedly, show cause notice was issued to the financial creditors in

pursuance to the order dated 12.06.2024. The financial creditors to whom

the notice has been issued are not aggrieved by the issuance of notice and it

is the appellant who has challenged the issuance of notice by the

Adjudicating Authority in paragraph 18 of the order.

15. As observed above, although Rule 59 is not applicable while issuing

notice of penalty under Section 59 and it was open for the Adjudicating

Authority to impose penalty under Section 65 without issuing any notice to

the financial creditors on the basis of materials on record. However, fact

remains that by the impugned order penalty was not imposed. Adjudicating

Authority having returned finding that the CIRP was initiated fraudulently,

it is for the Adjudicating Authority to impose penalty under Section 65. We

are not persuaded to accept the submission of the Appellant that this

Tribunal in exercise of jurisdiction in this appeal may impose the penalty on

the financial creditors. Issuance of notice being not precluded by any

statutory provisions, in event the Adjudicating Authority has called the

financial creditors to show cause, no exception can be taken to the said

procedure adopted by the Adjudicating Authority. We, however, are of the

view that it is the Adjudicating Authority who has to take a decision on the

penalty in reference to the order dated 12.06.2024 passed by the

Adjudicating Authority. We, thus, are of the view that the prayers of the

appellant that this Tribunal may in this appeal modify the order dated

Company Appeal (AT) (Insolvency) Nos. 1606 of 2024 & 1608 of 2024 16

12.06.2024 and impose the penalty cannot be accepted. We, however,

observe that the Adjudicating Authority may proceed to pass an appropriate

order with regard to penalty on the financial creditors in continuation of the

order dated 12.06.2024 and in accordance with law.

16. With these observations and directions, we dispose off both the

appeals.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical)

[Arun Baroka] Member (Technical) New Delhi Anjali

Company Appeal (AT) (Insolvency) Nos. 1606 of 2024 & 1608 of 2024