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Neeraj Jain v. Yes Bank Ltd. And Another
Summary of Opinion — Company Appeal (AT) (Insolvency) No. 323 of 2019
Factual and Procedural Background
This appeal was preferred by Mr. Neeraj Jain, a shareholder of M/s. Namo Alloys Pvt. Ltd. (the Corporate Debtor), against the order dated 25 March 2018 of the Adjudicating Authority (National Company Law Tribunal), Principal Bench, New Delhi, which initiated the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor pursuant to an application under Section 7 of the Insolvency and Bankruptcy Code, 2016.
The Appellant's counsel stated that bank officials had fraudulently withdrawn amounts from the Corporate Debtor's accounts and that FIR No. 222/2018 was lodged at Palwal Police Station alleging the Applicant Bank's involvement; a charge sheet has been filed in that criminal matter. It was asserted that the Section 7 application was filed after embezzlement of funds from the Corporate Debtor's bank accounts. The Appellant also stated that of five financial creditors (banks), four had not joined the respondent bank and were co-operating with the Corporate Debtor to recover funds allegedly withdrawn fraudulently. The Appellant referred to an amount of Rs. 23 Crores having been fraudulently withdrawn. In reply it was informed that the Chief Financial Officer of the Corporate Debtor had signed forged cheques and withdrawn funds.
Legal Issues Presented
- Whether the pendency of a criminal investigation or trial relating to alleged misappropriation of funds by employees (including the Corporate Debtor's Chief Financial Officer) prevents initiation or continuation of a CIRP under Section 7 of the Insolvency and Bankruptcy Code, 2016.
- Whether alleged fraudulent withdrawals from the Corporate Debtor's bank accounts and related criminal proceedings are a valid ground to refuse or stall an application under Section 7 when the application is otherwise complete and there exists debt and default.
Arguments of the Parties
Appellant's Arguments
- Bank officials fraudulently withdrew amounts from the Corporate Debtor's accounts; FIR No. 222/2018 was lodged and a charge sheet has been filed against the Applicant Bank in respect of this alleged fraud.
- The Section 7 application was filed after embezzlement of funds from the Corporate Debtor's bank accounts.
- Of five financial creditors, four have not joined the respondent bank and are co-operating with the Corporate Debtor to recover the fraudulently withdrawn amounts.
- An amount of Rs. 23 Crores was alleged to have been fraudulently withdrawn; had these funds remained, the Corporate Debtor would not have failed to pay the creditors.
- It was unclear why fraudulent withdrawals occurred across multiple banks if there was no link between those banks.
Respondent / Other Parties' Position (as reported)
- It was informed in reply that the Chief Financial Officer of the Corporate Debtor was involved and had signed forged cheques to withdraw funds.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
After hearing counsel for the Appellant and the Interim Resolution Professional, the Court stated the following reasoning:
- An application under Section 7 is an independent proceeding and is not related to the pendency of criminal proceedings concerning alleged misappropriation by the Corporate Debtor's CFO or bank employees.
- The bank, as the Financial Creditor, is a distinct legal entity separate from the Chief Financial Officer of the Corporate Debtor or any individual bank employees who may be implicated in criminal wrongdoing.
- The pendency of investigation or trial in a criminal matter cannot, by itself, constitute a ground to refuse an application under Section 7, provided the Section 7 application is complete and there exists debt and default.
- The Insolvency and Bankruptcy Code is characterized in the opinion as a complete code that will prevail over other Acts; accordingly, parties cannot use the existence of parallel criminal proceedings to stall insolvency and bankruptcy proceedings initiated under Section 7.
Holding and Implications
Pendency of criminal proceedings is not a ground to refuse an application under Section 7 of the Insolvency and Bankruptcy Code, 2016.
Implications:
- The direct effect on the parties is that alleged criminal investigations or trials concerning misappropriation of the Corporate Debtor's funds do not, by themselves, entitle a court to decline or stay a Section 7 insolvency proceeding if the application is complete and debt and default are established.
- The opinion emphasizes that the I&B Code will prevail over other statutes insofar as a party might attempt to delay or frustrate insolvency proceedings by pointing to parallel criminal processes.
This summary is restricted to the content expressly contained in the provided opinion and does not infer outcomes or facts beyond that text.
10.04.2019 This appeal has been preferred by Mr. Neeraj Jain, Shareholder of M/s. Namo Alloys Pvt. Ltd.- (Corporate Debtor) against the order dated 25th March, 2018 passed by the Adjudicating Authority (National Company Law Tribunal), Principal Bench, New Delhi, initiating the Corporate Insolvency Resolution Process against the Corporate Debtor pursuant to an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code for short).
2. Learned counsel appearing on behalf of the Appellant submits that the Bank officials fraudulently withdrew the amount from the account of the Corporate Debtor for which FIR No. 222/2018 has been lodged in Contd/- Palwal Police Station alleging Applicant Banks involvement in defrauding the Corporate Debtor. Pursuant to the said FIR, charge sheet has already been filed.
3. In view of such development, it is submitted that the application under Section 7 has been filed after embezzling the amount from the Bank Accounts of the Corporate Debtor.
4. It is further submitted by the learned Senior Counsel for the Appellant that there are five Financial Creditors (Banks) but four of them have not joined with the Respondent Bank and are co-operating with the Corporate Debtor for recovery of amount fraudulently withdrawn from the account of the Corporate Debtor.
5. It is further submitted by learned counsel for the Appellant that if the amount of Rs.23 Crores which has been fraudulently withdrawn from the Corporate Debtor would have remained in the account of the Corporate Debtor, the Corporate Debtor would not have failed to pay the dues of the Financial Creditors. When we asked, it was informed that in all other Banks also the amount has been withdrawn fraudulently from the account of the Corporate Debtor. However, it is not made clear as to why in all Bank accounts of the Corporate Debtor fraudulent Company Appeal (AT) (Insolvency) No. 323 of 2019 withdrawals have been made if there is no link of one Bank and other Bank.
6. In reply, it is informed that actually the Chief Financial Officer of the Corporate Debtor was involved who duly signed forged cheques and had withdrawn from the account.
7. Having heard Mr. Darpan Wadhawa, learned Senior Counsel for the Appellant and Mr. Anant A. Pavgi, learned counsel for the Interim Resolution Professional, we are of the view that an application under Section 7 being an independent proceeding has nothing to do with the pendency of the Criminal Case relating to misappropriation of the funds by the Chief Financial Officer of the Corporate Debtor and the employees of the Banks. The Bank which is the Financial Creditor is a separate entity from the Chief Financial Officer of the Corporate Debtor or the individual employees of the Bank(s), if any, involved. The pendency of the investigation or trial cannot be a ground to refuse an application under Section 7 if the application is complete and there is a debt and default. The I&B Code being a complete Code will prevail over the other Acts and no person can take advantage of the pendency of the case to stall Insolvency and Bankruptcy proceeding filed under Section 7. Company Appeal (AT) (Insolvency) No. 323 of 2019
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