The court affirmed that the Adjudicating Authority can investigate allegations of fraud in CIRP initiation, allowing termination when evidence shows collusion and misrepresentation.

Headnote:(A) Insolvency and Bankruptcy Code, 2016 - Section 61 and Section 65 - Appeal against termination of Corporate Insolvency Resolution Proceedings (CIRP) - Appellants alleged fraud in filing Section 7 application, which the Adjudicating Authority found to be collusive and malicious - Evidence of financial transactions misrepresented as loans - Appeal dismissed. (Paras 1-41)

(B) Corporate Debtor - Financial transactions and loan agreements - Allegations of fabricated loan documents and failure to comply with statutory requirements under Companies Act - The Adjudicating Authority noted discrepancies in records leading to conclusion of fraudulent intent. (Paras 10, 12, 40)

Facts of the case:
The appeal arose from the termination of CIRP against Sharp Eye Advertising Pvt. Ltd., initiated based on loan defaults claimed by the Appellants. The Respondent alleged the loans were fabricated to initiate insolvency proceedings fraudulently.

Findings of Court:
The Adjudicating Authority found that the initiation of CIRP was based on collusive actions and misrepresented financial transactions, warranting termination under Section 65.

Issues: Whether the Section 7 application was filed fraudulently and with malicious intent, and whether the Adjudicating Authority had the jurisdiction to recall the CIRP admission order.

Ratio Decidendi: The court ruled that the Adjudicating Authority has jurisdiction to investigate allegations of fraudulent initiation of CIRP even after the application is admitted, emphasizing the need to prevent misuse of the IBC provisions.

Result: Appeal dismissed.

J U D G M E N T

(Hybrid Mode) Per: Barun Mitra, Member (Technical)

The present appeal filed under Section 61 of Insolvency and Bankruptcy Code 2016 (‘ IBC ’ in short) by the Appellants arises out of the Order dated 12.06.2024 (hereinafter referred to as ‘ Impugned Order ’) passed by the Adjudicating Authority (National Company Law Tribunal, New Delhi Bench-II) in I.A. No. 3602/2022 in C.P. No. 50(PB) of 2021 . By the impugned order, the Adjudicating Authority has allowed I.A. No. 3602 of 2022 under Section 65 of IBC terminating the Corporate Insolvency Resolution Proceedings ( ‘CIRP’ in short) initiated against the Corporate Debtor aggrieved by which order, the Appellants have come up in appeal.

2. Coming to the brief factual background of the present case, basis the Section 7 proceedings filed by Acute Daily Media Pvt. Ltd. and other financial creditors, CIRP was initiated on 17.05.2022 against Corporate Debtor-Sharp Eye Advertising Pvt. Ltd. The Appellants had purportedly advanced loans to the Corporate Debtor, repayment of which had been defaulted by the Corporate Debtor. After the above CIRP proceedings had concluded and resolution plan approval application was filed before the Adjudicating Authority, the Respondent No.1-Rockman Advertising moved an application vide I.A. No. 3602 of 2022 under Section 65 of the IBC seeking termination of the CIRP and for action against the Appellants for having filed the Section 7 application collusively and fraudulently with the promoters of the Corporate Debtor with a malicious intent other than insolvency of the Corporate Debtor. Respondent No.1 had also filed an Oppression and Mismanagement Petition ( ‘OMP’ in short) against the Corporate Debtor and the promoters which was allowed on 20.07.2022 and the act of reduction of the shareholding of Respondent No.1-Rockman Advertising in the Corporate Debtor was declared null and void. The Section 65 application filed by the Rockman Advertising was allowed by the Adjudicating Authority terminating the CIRP of the Corporate Debtor and show cause notice issued to the Appellants for imposition of penalty. Aggrieved by this impugned order, the Appellants have preferred this appeal.

3. Making submissions on behalf of the Appellants, Shri Krishnendu Datta, Ld. Senior Counsel for the Appellant challenging the impugned order stated that the Adjudicating Authority by admitting the Section 65 application indirectly recalled the CIRP admission order dated 17.05.2022 which is not permissible in the eyes of law. It was contended that the CIRP admission order of 17.05.2022 not having been challenged by the Appellant, the same had already attained finality. Since appeal against this order stood time barred, with a view to indirectly challenge the CIRP initiation order, the Respondent took recourse to file Section 65 application vide IA No. 3602 of 2022. Recall of the CIRP order of 17.05.2022 was violative of the settled principles of law under IBC.

4. It was emphatically asserted that the Adjudicating Authority in allowing the IA No. 3602 of 2022 had failed to appreciate that the records of the Corporate Debtor clearly reveal that loan was taken by the Corporate Debtor from the Appellants. There is clear evidence of disbursal of financial debt by the Appellants-Financial Creditors to the Corporate Debtor. There is ample proof that the Corporate Debtor had been given several notices for having defaulted in making repayment of the financial debt before finally filing the section 7 application. It was also contended that debt and default having been unequivocally established and the same having been adjudicated upon by the Adjudicating Authority, this order cannot be indirectly challenged by the Respondent after the period of limitation had expired.

5. It was also emphasized that at the time of passing the admission of Section 7 order there was no order passed by the Adjudicating Authority in respect of the OMP filed by the Respondent. It was pointed out that the A

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2025 Supreme(Online)(NCLAT) 16

The court affirmed that the Adjudicating Authority can investigate allegations of fraud in CIRP initiation, allowing termination when evidence shows collusion and misrepresentation.

Cases Referred (1)