NCLAT Affirms Strict Compliance with Insolvency & Bankruptcy Code: Non-Disclosure of Extraneous Facts Not Grounds for Dismissal

Introduction

The case of M/s. Unigreen Global Pvt. Ltd. v. Punjab National Bank adjudicated by the National Company Law Appellate Tribunal (NCLAT) on December 1, 2017, serves as a pivotal reference in the realm of corporate insolvency and bankruptcy in India. This case delves into the procedural intricacies of initiating a Corporate Insolvency Resolution Process (CIRP) under the Insolvency & Bankruptcy Code (I&B Code), 2016, specifically addressing the grounds on which an application can be dismissed and the imposition of penalties for alleged malpractices.

Summary of the Judgment

Unigreen Global Private Limited, acting as the Corporate Debtor, filed an application under Section 10 of the I&B Code in Form 6 to initiate CIRP against itself due to defaults in payments to financial and other creditors. Punjab National Bank (PNB), a financial creditor, objected to this application, alleging that Unigreen had suppressed material facts by not fully disclosing ongoing legal proceedings related to its assets. Consequently, the Adjudicating Authority (National Company Law Tribunal, NCL) rejected the application and imposed a penalty of ₹10 lakhs on Unigreen under Section 65 of the I&B Code.

Unigreen Global appealed this decision to the NCLAT, challenging both the rejection of its application and the imposition of the penalty. The primary questions before the tribunal were:

• Whether non-disclosure of facts beyond statutory requirements can be ground for dismissing an application under Section 10 of the I&B Code.
• Whether the penalty imposed under Section 65 of the I&B Code was legally justified.

After a detailed examination, the NCLAT set aside the Adjudicating Authority's order, ruling that the rejection of the application was unwarranted as the non-disclosed facts were extraneous to the statutory requirements. Furthermore, the penalty under Section 65 was deemed illegal due to procedural lapses, including the absence of a prima facie case and violation of natural justice principles.

Analysis

Precedents Cited

The judgment extensively referenced the Innoventive Industries Ltd. vs. ICICI Bank & Anr. case (Supreme Court, 2017 SCC Online SC 1025), wherein the Supreme Court elucidated the procedural framework and interpretation of Sections 7 and 10 of the I&B Code. The Supreme Court emphasized that the initiation of CIRP should strictly adhere to the forms and procedures outlined in the Code, and any deviation or suppression of facts outside the statutory requirements cannot be grounds for rejecting an application.

Additionally, Section 238 of the I&B Code was pivotal in this case, reinforcing the supremacy of the Code over other conflicting laws, including the SARFAESI Act, 2002, and the Debt Recovery Tribunal (DRT) Act, 1993.

Legal Reasoning

The NCLAT meticulously dissected the Adjudicating Authority's rationale for rejection and penalty imposition. The tribunal underscored that:

• Strict Compliance with Statutory Requirements: The application under Section 10 must adhere strictly to the provisions of the I&B Code and the prescribed forms. Any non-disclosure beyond these requirements, especially pertaining to unrelated legal proceedings, should not influence the decision to admit or reject the application.
• Non-Disclosure of Extraneous Facts: Unigreen's failure to disclose ongoing litigation relating to its properties, which were not directly tied to the insolvency resolution process, was deemed irrelevant. The Adjudicating Authority overstepped by considering these unrelated facts as grounds for dismissal.
• Penalty Under Section 65: For a penalty to be imposed under Section 65, there must be clear evidence of fraudulent intent or malicious purposes behind initiating the CIRP. In this case, the Adjudicating Authority failed to establish such prima facie evidence and did not follow due process, thereby rendering the penalty unlawful.
• Natural Justice: The absence of a fair hearing or notice before the imposition of the penalty violated the principles of natural justice, a fundamental aspect of legal proceedings.

Moreover, the tribunal noted the absence of any provision in the prescribed forms (Form 6) that mandates the disclosure of certain extraneous legal proceedings, thereby reinforcing that non-disclosure in such contexts should not be construed as suppression of facts.

Impact

This judgment has significant implications for future CIRP applications:

• Clarification of Disclosure Requirements: It delineates the boundaries of required disclosures in insolvency applications, ensuring that applicants are not penalized for non-disclosures unrelated to the resolution process.
• Protection Against Arbitrary Penalties: Strengthens the procedural safeguards against arbitrary or unjust penalties, emphasizing the necessity of substantial evidence before imposing penalties under the I&B Code.
• Judicial Oversight: Enhances the role of appellate tribunals like NCLAT in reviewing the grounds for application rejections and penalties, ensuring adherence to legal principles and procedural fairness.
• Encouragement for Transparency: While ensuring that only relevant disclosures are mandated, it promotes transparency within the confines of the law, preventing misuse of the insolvency framework.

Consequently, stakeholders, including creditors and corporate debtors, can approach the insolvency resolution process with greater confidence, knowing that procedural lapses or overreaches by Adjudicating Authorities will be subject to rigorous appellate scrutiny.

Complex Concepts Simplified

Corporate Insolvency Resolution Process (CIRP)

CIRP is a structured process under the I&B Code aimed at resolving the insolvency of a corporate debtor, allowing for the reorganization of the company and repayment to creditors within a stipulated time frame.

Section 10 vs. Section 7 of the I&B Code

- Section 10: Allows the corporate debtor to initiate CIRP against itself.
- Section 7: Enables financial creditors to initiate CIRP against a debtor in case of default.

Section 65 Penalty

This section empowers the Adjudicating Authority to impose penalties ranging from ₹1 lakh to ₹1 crore on individuals who initiate insolvency proceedings fraudulently or with malicious intent.

Prima Facie

A basic level of evidence required to establish a fact unless disproved by further evidence. In this context, the Adjudicating Authority needed to establish a prima facie case of fraud or malintent to impose penalties.

Section 238 of the I&B Code

It declares that the provisions of the I&B Code override any inconsistent provisions in other laws, ensuring a unified framework for insolvency and bankruptcy in India.

Conclusion