The National Company Law Appellate Tribunal (NCLAT) has passed an order on 30th June stating that it is empowered to refuse insolvency applications if there are signs of collusion and mala fide intent. The matter relates to an insolvency application which was filed by Hytone Merchants Pvt Ltd against Satabadi Investment Consultants Pvt Ltd.
Quoting Tina Abraham, partner at Trilegal, the report from BloombergQuint
says,“The judgement is a step in ensuring that the resolution process under the Insolvency and Bankruptcy Code (IBC) is not abused by persons coming with unclean hands before the tribunal to avoid their obligations and enjoy the benefits of moratorium granted during the process.”
Moneylife spoke to an insolvency professional, who on condition of anonymity says “When we talk of insolvency resolution, we mean that over long term the corporate debtor’s assets are falling short of liabilities. A short-term cash flow mismatch doesn't indicate insolvency. In this case, the Rs3 lakh default was a joke looking at the size of the company.”
He cited another example of a case of such 'gaming the system' where default of less than Rs40 lakh for a company with Rs45.30 crore paid-up equity, turnover of over Rs100 crore till recently and debt of Rs153 crore from banks allowed itself to be taken to corporate insolvency resolution process (CIRP). Not just that, the company managed to get itself classified as medium-scale enterprise (MSME) and even got its own resolution plan cleared by committee of creditors (CoC)! It is now waiting for a nod from NCLT.
Hytone Merchants is an unsecured creditor and had given a Rs3 lakh loan (at 15% per annum interest for six months) in February 2019 on which Satabadi Investment Consultants defaulted.
The Kolkata bench of the National Company Law Tribunal (NCLT) had rejected the application filed by Hytone under Section 7 of the IBC while pointing to Satabadi Investments Consultants’ net worth of more than Rs15 crore.
"…on perusal of the master debt of the corporate debtor it is seen that the corporate debtor has given a corporate guarantee of Rs 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 net worth of the corporate debtor is Rs15,36,39,015. It is hard to convince oneself that the Company having a network of Rs15,36,39,015 is not able to make a payment of Rs 3 lakhs. It appears that the petition at hand has been filed in collusion with the corporate debtor." the NCLT noted.
This NCLT order from February 2021 was subsequently challenged before the NCLAT.
In its appeal to appellate tribunal, Hytone contended that the NCLT dismissed the application under Section 7 against Satabadi Investment Consultants (corporate debtor) despite holding that the application was complete in all respects as required by law, and the application clearly showed that the Satabadi Investment Consultants 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, it added.
Satabadi Investment Consultants submitted that it was unable to make payment to appellant or 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'.
Satabadi also submitted that its financial condition has starkly deteriorated after 31 March 2019. “Because the major portion of its investment into companies, namely, Kohinoor Newsprint and Papers Pvt Ltd & Kohinoor Pulp and Paper Pvt Ltd, 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 appeal said.
The appeal also reiterated that the financial creditor (Hytone) and corporate debtor (Satabadi) have no relation or connection and said “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”. The appeal also stressed on the statutory provisions by listing them point wise and arguing that the petition fulfils all said conditions.
Hytone also argued that NCLT does not have the powers to proceed with an unjustified and roving enquiry into mala fides on its own.
The NCLAT disagreed with this contention and held that the NCLT has to exercise careful discretion so as to prevent and protect the corporate debtor from being dragged into the insolvency resolution process with mala fides.
The NCLAT relied on Sections 7(5) of the insolvency law to arrive at this conclusion which says if there is an admitted debt and default, the tribunal ‘may’ admit the application. The NCLAT relied on the word 'may' and held that the law itself gives it a discretion to admit or reject an application.
“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 Rs482,42,00,000 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,” NCLAT said in its order while dismissing the appeal.
According to Section 65 of the IBC, if any person initiates the insolvency resolution process fraudulently or with malicious intent, a penalty may be imposed.
The NCLAT pointed out that 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.
"...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," the order said.
While instances of mala fide have been pressed upon earlier by the parties to the insolvency proceedings, this is the first time, the tribunal as well as the appellate tribunal suo motu initiated an enquiry and found elements of mala fide and collusion, observed Ms Abraham.