In Shobhnath v. Prism Industrial Complex Ltd., the NCLT Allahabad (in an order dated 5 July 2018) discussed a very pertinent question: whether an insolvency petition can be entertained in a case where financial fraud exists?

Normally the AA can admit the case on the following grounds: (These are the only requirements specified under code for admitting the case under IB code 2016)

An application filed by financial creditors is complete and in conformity with section 7 of the CodeThere was existence of a debt duly acknowledged by the corporate debtor, and subsistence of default duly fulfilling the conditions laid down under sections 3(11) and 3(12) andNo disciplinary proceeding is pending against the proposed IRP to be appointed for CD

If AA is satisfy with the above requirements then AA shall admit a case under IBC.

In present case , it is important to note that the requirements enumerated under the provision of the IB Code have been complied by the FC.

Existing provision under IBC section 65:

The NCLT regarded that while section 65 only stipulates punishment for fraudulent and malicious initiation of insolvency proceedings, the intent is very clear that if such petition is filed under the Code fraudulently with malicious initiation of insolvency proceedings, then in that case, the petition should not be admitted.

This is only the case where AA has rejected the application filed under section 7 on a ground that petition is filed under the Code fraudulently with malicious initiation of insolvency proceedings.

Key take away:

There may be several instances where the application is filed at the behest of the corporate debtor itself, or the applicant is a mere puppet in the hands of the corporate debtor. The adjudicating authority in such cases should place the matter under strict scrutiny and declare that the parties are acting hand-in-glove. Thus AA has power to reject such application/petition filed under IB code.

Analysis by CA Viral Doshi


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