Operational Creditor (OC) filed an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) for initiation of Corporate Insolvency Resolution Process (CIRP) against Corporate Debtor (CD). The Adjudic

CS Professional · Insolvency - Law and Practice · PYQS · June 2022
Operational Creditor (OC) filed an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) for initiation of Corporate Insolvency Resolution Process (CIRP) against Corporate Debtor (CD). The Adjudicating Authority (AA) admitted the application. The CD challenged the order on the ground that the application under Section 9 of IBC was filed fraudulently with malicious intent for the purpose, other than for the resolution of insolvency or liquidation and attracts penal amount in terms of Section 65(1) of the IBC. The OC is claiming the amount, on the basis of two Memorandum of Understanding(s), (MOUs), first one is for claim against invoices raised and the second one is for reimbursement of custom duty, paid to the relevant authorities. As per CD, he offered 100% of the amount actually payable in terms of the first MOU on account of the invoices raised by the OC, but the OC declined to settle the amount and asked for more. Further, the OC also demands for customs duty paid to the relevant authorities. However, no such arrangement has been made as per the MOU terms. CD appealed to, the National Company Law Appellate Tribunal (NCLAT). During the proceedings, NCLAT, on request of CD, allowed CD to pay entire amount as mentioned in 1st MOU, and also to pay certain additional amount. However, the OC refused to accept the same and asked for more interest. Discuss, whether the appeal filed by the CD at NCLAT, will be maintainable?

Answer & Explanation:

The facts of the above are similar to the case of IRK Raju vs. Immaneni Eswara Rao & Ors. (1058 of 2019) decided on 30th January, 2020. Section 5(20) defines 'Operational Creditor (OC)' whereas, section 5(21) of IBC defines 'Operational Debt which includes goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority. The statutory dues are payable under law to the Central Government for which the Central Government can claim to be the OC. The OC in present case, does not come within the meaning of 'Operational Creditor for the purpose of Custom Duty. The NCLAT held that it is a glaring example that the OC moved an application under Section 9 fraudulently with malicious intent for extracting more amount, not for the liquidation or resolution as covered by Section 65 and as such calls for penal action. The Adjudicating Authority has failed to notice the aforesaid fact. Fraudulent or malicious initiation of proceedings Section 65 of the Insolvency and Bankruptcy Code, 2016 provides that 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, AA may impose upon a such person a penalty which shall not be less than One Lakh Rupees, but may extend to One Crore Rupees. Whereas, if any person initiates voluntary liquidation proceedings with the intent to defraud any person, AA may impose upon such person a penalty which shall not be less than One Lakh Rupees, but may extend to One Crore Rupees. The Appellate Authority opined to release CD from all the rigours of CIRP and was allowed to function through its Board of Directors with immediate effect. The 'Interim Resolution Professional (IRP) will hand over the assets and records to the Board of Directors. Hence, the appeal is allowed with aforesaid observations and directions.

Topics: Corporate Insolvency Resolution Process (CIRP)

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