Citation Codes

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Case Number

946/2020

Attorney(S)

Mr. Raghvendra Bajaj, Mr. Garvit Khandelwal and Mr. Jaitegan Singh Khurana, Advocate

Judges

Bansi Lal Bhat
Acting Chairperson
Jarat Kumar Jain, Member (Judicial)
Kanthi Narahari, Member (Technical)

Acts

SECTION 10 INSOLVENCY AND BANKRUPTCY CODE 2016
SECTION 164 COMPANIES ACT 2013
provisions of SARFAESI Act, 2002 and RDDB Act, 1993.
RDDB Act, 1993 and SARFAESSI Act, 2002
Rule 92(1) of the NCLAT Rules, 2016
sub Sections 3 a, b & c of Section
Section 10(3)(c)

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Smart Summary

Summary of Opinion: Company Appeal (AT)(Insolvency) No. 946 of 2020 (NCLAT, 23 December 2020)

Factual and Procedural Background

This appeal challenges the Adjudicating Authority's (National Company Law Tribunal, Ahmedabad Bench) order dated 17 September 2020 rejecting an application under Section 10 of the Insolvency and Bankruptcy Code, 2016 (IBC) filed by the appellant company (the "Appellant").

The Section 10 application (Form-6 under Rule 7) had been filed by one of the promoters, Mr. Sanjay Gupta, seeking initiation of the Corporate Insolvency Resolution Process (CIRP) on the ground that the company was unable to meet day-to-day financial requirements and pay its financial and operational creditors due to adverse market conditions. The Appellant stated that the Board of Directors had no effective members because directors were disqualified under Section 164 of the Companies Act, 2013, and therefore promoters had filed the application. The Appellant represented that Mr. Sanjay Gupta held 97.09% of the paid-up share capital and Mrs. Neelu Gupta held 2.22% (as stated by the Appellant).

The Adjudicating Authority rejected the Section 10 application. The appellant appealed to this Tribunal (NCLAT). The NCLAT heard the matter and delivered the impugned opinion dated 23 December 2020, dismissing the appeal and affirming the Adjudicating Authority's rejection.

Legal Issues Presented

Whether a company may validly initiate a Section 10 IBC application (CIRP) through its promoters where the company's directors are disqualified under Section 164 and there is no effective board.
Whether the Section 10 application complied with the statutory conditions in Section 10(3), particularly the requirement of a special resolution of shareholders (Section 10(3)(c)).
Whether alleged discrepancies in shareholding documentation and other record-keeping (including an apparent inconsistency in share figures in the Special Power of Attorney versus the promoters' list) warrant rejection of the application as containing fabricated documents.
Whether the Section 10 application was filed with bona fide intention or mala fide for the purpose of stalling ongoing recovery proceedings by financial creditors (e.g., proceedings under the SARFAESI Act, 2002 and the RDDB Act, 1993).

Arguments of the Parties

Appellant's Arguments

The Appellant is a registered company that was unable to meet financial obligations due to unfavourable market conditions and competitive pressures, making it debt-strapped and unable to pay financial and operational creditors.
All directors on the Board were disqualified under Section 164 of the Companies Act, 2013; consequently, there was no effective board to authorize a Section 10 application, and promoters therefore initiated the CIRP application.
One promoter, Mr. Sanjay Gupta, was authorized by another promoter, Mrs. Neelu Gupta, by a Special Power of Attorney to file the application; the Appellant relied on that SPA to show authority to file.
The Appellant contended the Adjudicating Authority dismissed the application on frivolous grounds and relied on precedent (M/s Unigreen Global Private Limited v. Punjab National Bank & Others — Company Appeal No. 81 of 2017) to challenge the rejection; it argued rejection would adversely impact stakeholders including employees.

Respondents' / Financial Creditors' Position (as recorded)

Financial Creditors (Small Industries Development Bank of India — SIDBI, and Indian Overseas Bank — IOB) filed counter affidavits opposing admission of the Section 10 application.
They had initiated proceedings under SARFAESI Act, 2002 and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB Act), with pending recovery processes, and contended that the Section 10 application was filed to obtain moratorium and stall these proceedings.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
M/s Unigreen Global Private Limited v. Punjab National Bank & Others — Company Appeal (AT) (Insolvency) No. 81 of 2017	Held that non-disclosure of facts beyond statutory requirements under IBC and forms can be a ground for dismissal of an application for initiation of CIRP.	The Appellant relied on this judgment; the Tribunal held the facts of Unigreen were different and that the Adjudicating Authority in the present case did not confine itself to non-disclosure alone but dealt with broader aspects, so Unigreen could not be relied upon to overturn the rejection.
Gaja Trustee Company Private Limited & Ors. v. Haldia Coke and Chemicals Private Limited — Company Appeal (AT) (Insolvency) No. 137 of 2017	Held that an application under Section 10 cannot be filed by the Board of Directors without prior approval of shareholders in an Extraordinary General Meeting or Annual General Meeting (i.e., emphasizing shareholder approval requirement).	The Tribunal referred to this authority to support the principle that shareholder approval / special resolution is required before filing Section 10 applications where applicable; it reinforced the Adjudicating Authority's view on the need for appropriate shareholder authorization.

Court's Reasoning and Analysis

The Tribunal's analysis tracks the Adjudicating Authority's findings and the documentary record. The court's step-by-step reasoning, as reflected in the opinion, is as follows:

Document review: The Tribunal examined the appeal papers and the record considered by the Adjudicating Authority, including Form-6, the list of promoters, the Special Power of Attorney (SPA), balance sheets, and annexures listing creditors.
Authority to file: The Adjudicating Authority noted that the Company had no directors on the board due to disqualification under Section 164, and the application had been filed by promoters. The SPA executed by Ms. Neelu Gupta appointed Mr. Sanjay Gupta as her attorney, but the promoters' list and SPA contained inconsistent shareholding figures (Annexure/I vs SPA), which led the Adjudicating Authority to characterize the application as filed on fabricated documents.
Non-compliance with Section 10(3)(c): The Adjudicating Authority found violation of Section 10(3)(c) because no special resolution of the shareholders (or requisite partners' resolution) approving the filing of the Section 10 application was placed on record. The Tribunal emphasized that Section 10 applications must satisfy the conditions set out in sub-sections 3(a), 3(b) and 3(c) of Section 10.
Non-disclosure and creditor information: The Adjudicating Authority observed that while Annexure-4 listed as many as 241 operational creditors (various classes of sundry creditors), the records did not disclose the outstanding amounts, creating an absence of clarity about operational debt quantum.
Commercial and recovery context: The record showed the company's account was declared NPA on 30.04.2014, financial creditors initiated proceedings under SARFAESI and RDDB Acts, the mortgaged property was sold with a sale certificate issued on 27.10.2017 (consideration noted), and a recovery application (OA No. 53 of 2015) was pending before the DRT. The Tribunal noted these facts and found that the Section 10 application appeared to have been filed to obtain moratorium and stall these bank-initiated proceedings.
Bonafides of the applicant: Taking the above together — documentary inconsistency, lack of shareholder special resolution, non-disclosure of operational debt amounts, NPA status and pending recovery proceedings — the Adjudicating Authority concluded the applicant had not approached the Tribunal with bona fide intention. The Tribunal affirmed this conclusion, agreeing the application was filed with mala fide intent to evade liabilities.
Precedent considerations: The Tribunal considered the Appellant's reliance on Unigreen but held that the present facts differed and that the Adjudicating Authority's findings went beyond mere non-disclosure. The Tribunal also referenced Gaja Trustee to underscore the requirement of shareholder approval for filing Section 10 applications where applicable.

Holding and Implications

Holding: The Tribunal affirmed the Adjudicating Authority's order rejecting the Section 10 application and accordingly dismissed the appeal. The Tribunal held that the applicant had not acted with bona fide intention and that mandatory conditions under Section 10 (including Section 10(3)(c)) were not fulfilled.

Implications and immediate consequences:

The Adjudicating Authority's rejection of the Appellant's Section 10 IBC application stands affirmed; the CIRP initiation was not ordered.
Ongoing recovery and enforcement proceedings by financial creditors (including actions under SARFAESI and RDDB Acts and pending recovery applications) remain un-stayed and may continue, subject to the creditors' own actions and any other orders of competent authorities.
No order as to costs was directed by the Tribunal (explicitly noted in the opinion).
The Tribunal did not purport to lay down a new general precedent beyond applying existing principles (it expressly found the cited Unigreen authority factually distinguishable and applied the Gaja Trustee principle on shareholder approval). If the opinion discusses no broader implications, this summary notes only the direct effects above.

Pronounced by two Members of the Bench in terms of Rule 92(1) of the NCLAT Rules, 2016. No costs were ordered. (Acting Chairperson: Justice Bansi Lal Bhat; Member (Judicial): Justice Jarat Kumar Jain; Member (Technical): Kanthi Narahari.)

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Neesa Infrastructure Limited Corporate Debtor/ v. State Bank Of India And Others Financial Creditors/

(23rd December, 2020) KANTHI NARAHARI, MEMBER (TECHNICAL) The present appeal preferred aggrieved by the order passed by the learned Adjudicating Authority (National Company Law Tribunal, Ahmedabad Bench, Ahmedabad), in CP No. (IB) 61/10/NCLT/AHM/2018 dated 17th September, 2020 whereby the Adjudicating Authority rejected the Application of the Appellant filed under Section 10 of Insolvency and Bankruptcy Code, 2016 (in short IBC). BRIEF FACTS:

2. The Appellant is a registered Company under the Companies Act and registered at Office of Registrar of Companies, Ahmedabad. It is stated that one of the Promotors of the Appellant, namely Mr. Sanjay Gupta, filed the Application before the Adjudicating Authority in Form -6 under Rule-7 of the IBC- Application to Adjudicating Rules, 2016 seeking initiation of Corporate Insolvency Resolution Process (in short CIRP) in respect of Appellant Company under Section 10 for the reason that the Appellant Company was unable to meet its day to day financial Company Appeal (AT)(Insolvency) No. 946 of 2020 Page 3 of 10 requirements and unable to pay its Financial Creditors for the reason that the condition of marketing is not favourable and also competing marking scenario leads to become debt strapped company. In view of situation, the Appellant Company being unable to pay the debt due to Financial Creditors as well as Operational Creditor.

3. Learned Counsel for the Appellant contended that the Appellant Company filed Section 10 Application through its Promotors since all the Directors on Board of Directors of the Appellant Company disqualified under Section 164 of the Companies Act, 2013, thereby while preferring Section 10 Application, there was no effective Board of Directors. Therefore, the Promotors of the Company preferred Section 10 Application to initiate CIRP on their own. It is submitted that one of the Promotors, i.e. Mr. Sanjay Gupta holding 97.09 % paid- up share capital of the Company and another Promotor i.e., Mrs. Neelu Gupta holding 2.22 % paid-up share capital of the Appellant Company. It is submitted that Mr. Neelu Gupta, through Special Power of Attorney, authorised Mr. Sanjay Gupta to file Company Application before the Adjudicating Authority.

4. Learned Counsel for the Appellant further submitted that the Application was dismissed on frivolous grounds. He submitted that the Adjudicating Authority ought to have considered the legal Principles laid down by this Honble Appellant Tribunal in the matter of M/s Unigreen Global Private Limited Vs. Punjab National Bank and Others- Company Appeal(AT)(Insolvency) No. 81 of 2017. He Company Appeal (AT)(Insolvency) No. 946 of 2020 Page 4 of 10 submitted that in view of rejecting the Application of the Appellant, would adversely impact on all the stakeholders including the employees of the Company. FINDINGS:

5. We have gone through the records submitted by the Appellant along with Appeal Paper Book.

6. Learned Adjudicating Authority considered the Application filed by the Appellant and rejected the Application by passing the following Order:

18. Admittedly, as also matter or record that, the applicant is not a corporate applicant as per form 6, Clause 3, the applicant is not a director and is disqualified under Section 164, wherein the name and address of the Director is shown as presently, there is no Director on the Board of the Company due to disqualification under Section 164 of the Companies Act 2013. However, clause 3 of form 6 further discloses that the list of promoters along with their address attached.

19. As per the list of promoters (page 7), Ms. Neelu Gupta holds 3,30,000 shares whereas as per the Special Power of Attorney (page 8) dated 5th December, 2017, Ms. Neelu Gupta, wife of Mr. Sanjay Gupta shown to be holding 4,50,000 shares and the said SPA is executed on oath. Thus, it is amply clear that the instant application is filed on Company Appeal (AT)(Insolvency) No. 946 of 2020 Page 5 of 10 fabricated documents. Further, the applicant has not filed/disclosed the details of the unsecured financial creditors. However, as per Annexure 4 (Page No. 11 to 15), there are as many as 241 operational debtors, which includes sundry creditors for capital goods, sundry creditors for casting project, sundry creditors (Export), sundry creditors for employee, sundry creditors for contractor, sundry creditors for rolling mill, sundry creditors for trade creditors, sundry creditors for valves, sundry creditors for others, sundry creditors for consultancy, sundry creditors for goods, sundry creditors for operation etc. However, while going through the records it is found that there is no whisper about the outstanding amount. It is also pertinent to note that if the company is really insolvent why it has not opted for winding up application. Further, affairs of the company is managed by the Directors and not by the promoters. Since the promoters are already disqualified, the applicant has no authority to file the instant application.

20. On perusal of the record it is found that there is violation of Section 10(3)(c). In the instant matter as there is no special resolution passed for filing the application. For the sake of convenience Section 10(3)(c) is reproduced herein below: - Section 10(3)(c) The special resolution passed by shareholders of the corporate debtor or the resolution passed by at least three-fourth of the total number of partners of Company Appeal (AT)(Insolvency) No. 946 of 2020 Page 6 of 10 the corporate debtor, as the case may be, approving filing of the application.

21. On perusal of the record i.e., balance sheet as on 31.03.2016 (page 254) it is found that under the head deferred tax liability an amount of Rs. 10,34,37,089/- has been shown thereby meaning that no returns have been filed by the company. It is also a matter of record that objector banks have already initiated proceedings under RDDB Act, 1993 and SARFAESSI Act, 2002 and to install the said proceedings, the applicant has filed the instant application so as to initiate moratorium and to get stayed the proceedings initiated by the banks. Under such circumstances, the instant application has no merits and, therefore, requires to be dismissed.

7. For filing an Application under Section 10 of IBC, the Corporate Debtor shall fulfil conditions as enumerated under sub Sections 3 a, b & c of Section 10.

8. We have perused the Application filed by the Appellant before the Adjudicating Authority and found that there is no Special Resolution passed by the shareholders of the Corporate Debtor or the Resolution passed by at least 3/4th of the total number of partners of the Corporate Debtor, as the case may be, approving filing of the Application. Apart from the above, we have also noticed that the Special Power of Attorney, (at page 47, Annexure-II) issued by Ms. Neelu Gupta, wife of Mr. Sanjay Gupta holding 4,50,000 Equity Shares Company Appeal (AT)(Insolvency) No. 946 of 2020 Page 7 of 10 of Rs. 10 each by appointing Mr. Sanjay Gupta, one of the Promotors to act as her lawful attorney for initiation of CIRP before Court of law. However, from the list of Promotors at Annexure-I (page-46), it is seen that Ms. Neelu Gupta holds only 3,30,000 Equity Shares. There are other Promotors but no Power of Attorney was issued except Ms. Neelu Gupta. Further, in the Application it is clearly mentioned in Form-6, part-1, coloumn-8 that there is no director on the Board of the company due to dis-qualification under Section 164 of the Companies Act, 2013. It is also stated in the said column that the Promotors of the Company being involved in the management of Company, initiated CIRP on their own. However, as per the requirements under law, there is no Resolution passed by the Shareholders of the Corporate Debtor, though, admittedly the Applicant Company shows that there are other Promotors and the List of Promotors (copy) annexed at Annexure-I (page 46). Apart from the above, Financial Creditors, namely Small Industries Development Bank of India (SIDBI) and Indian Overseas Bank (IOB) initiated various proceeding against the Appellant- Company under the provisions of SARFAESI Act, 2002 and RDDB Act, 1993. Learned Adjudicating Authority made note of all the proceedings initiated by the Financial Creditors and the proceedings are pending. It appears that Appellant-Company with an intention to stall the proceedings filed Application before the Adjudicating Authority with a malafide intention and not for the interest of Financial or Operational Creditors and stakeholders. It is also recorded in the Impugned Order that the account of the Appellant Company was declared as NPA on Company Appeal (AT)(Insolvency) No. 946 of 2020 Page 8 of 10 30.04.2014 and thereafter the proceedings were initiated by the Bank under SARFAESI Act wherein the mortgaged property was sold by the Bank for a consideration of Rs. 13,68,58,600/- and the Sale Certificate was issued to the Auction Purchaser on 27.10.2017. Further it is also recorded in the Impugned Order that the Bank had also filed a Recovery Application before the Debts Recovery Tribunal at Ahmedabad being OA No. 53 of 2015 for recovery of its dues which is pending for adjudication. Despite all the efforts taken by the Financial Creditors, the Appellant Company failed and neglected to repay the loan as per the terms and conditions of the Bank. Application u/s 10 IBC in the backdrop of this factual scenario, can safely be held to have been filed only to wriggle out of liability to pay, as determined. CONCLUSION:

9. We are of the view that the Applicant has not approached the Adjudicating Authority with a bonafide intention and we affirm that the Adjudicating Authority rightly rejected the Application of the Appellant.

10. Learned Counsel for the Appellant relied upon the judgment of this Tribunal in the matter of M/s Unigreen Global Private Limited Vs. Punjab National Bank and Others- Company Appeal(AT)(Insolvency) No. 81 of 2017. The facts of that case are different from the facts of this case. In M/s Unigreen Global Private Limited Vs. Punjab National Bank and Others the issue arises for Company Appeal (AT)(Insolvency) No. 946 of 2020 Page 9 of 10 consideration where non-disclosure of facts beyond the statutory requirements under the IBC read with relevant forms prescribed under IBC can be a ground for dismissal of Application for initiation of CIRP.

11. In the present case, the Adjudicating Authority dealt with all aspects including the Special Power of Attorney given by one of the Promotors Ms. Neelu Gupta, and did not confine to only non-disclosure of facts beyond the statutory requirements. Therefore, the learned Counsel for the Appellant cannot rely upon the Judgment of this Tribunal passed in M/s Unigreen Global Private Limited Vs. Punjab National Bank and Others- Company Appeal(AT)(Insolvency) No.

81 of 2017. Further, this Tribunal in the matter of Gaja Trustee Company Private Limited & Ors. Vs. Haldia Coke and Chemicals Private Limited- Company Appeal (AT) (Insolvency) No. 137 of 2017 held that the Application under Section 10 of IBC cannot be filed by the Board of Directors of a Company without prior approval of the shareholders in its Extraordinary General Meeting or Annual General Meeting.

12. Further, it is on record that the SIDBI and IOB, the Financial Creditors have strenuously opposed the admission of Section 10 Application by filing their Counter Affidavits. We add and express that the intention of Promotors is only to get admission and followed by imposition of Moratorium to stall all further proceedings. The IBC being a special legislation cannot be used as a tool to ones advantage and others disadvantage. Company Appeal (AT)(Insolvency) No. 946 of 2020 Page 10 of 10

13. For the aforesaid reasons, we are of the view that the Adjudicating Authority rightly rejected the Application. Accordingly, the Appeal is dismissed. No orders as to cost. [Justice Bansi Lal Bhat] Acting Chairperson [Justice Jarat Kumar Jain] Member(Judicial) (Kanthi Narahari) Member(Technical) Pronounced by two Members of the Bench in terms of Rule 92(1) of the NCLAT Rules, 2016 [Justice Bansi Lal Bhat] Acting Chairperson (Kanthi Narahari) Member(Technical) New Delhi

Neesa Infrastructure... v. State Bank Of India ...