NCLAT: Application Under Section 65 Of IBC Can Be Considered Prior To Admission Of Insolvency Petition
NCLAT: Application Under Section 65 of IBC Can Be Considered Prior to Admission of Insolvency Petition
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, comprising Justice Rakesh Kumar Jain (Judicial Member), Naresh Salecha (Technical Member), and Indevar Pandey (Technical Member), has held that an application under Section 65 of the Insolvency and Bankruptcy Code (IBC) can be considered even before the formal admission of Corporate Insolvency Resolution Process (CIRP) petitions.
This appeal arises from two orders passed by the National Company Law Tribunal (NCLT) on August 29, 2023, which dismissed a petition under Section 7 and an application under Sections 60(5), 65, and 75 of the IBC. The appellant, Bajaj Electricals Limited, filed a petition under Section 7 of the IBC to initiate the CIRP against Aravali Cylinders Pvt. Ltd. (the corporate debtor) for a debt amounting to ₹2,31,00,000, which was dismissed. Additionally, shareholders Leelawati Mahipal and Sanjay Mahipal filed an application under Sections 60(5), 65, and 75, arguing that such applications could not be admitted before the petition under Section 7 was admitted.
The appellant contended that the NCLT dismissed the petition under Section 7 without providing an opportunity to be heard, thus violating the principle of natural justice. The appellant argued that the petition should be restored and remanded back to the NCLT for fresh consideration. Regarding the dismissal of the application under Sections 60(5), 65, and 75, the appellant claimed that the tribunal misinterpreted the IBC provisions, asserting that it is not a prerequisite for an application under these sections to be admitted only after a petition under Section 7 is granted. The appellant cited the Supreme Court judgment in Beacon- Trusteeship Limited v. Earthcon Infracon Pvt. Ltd. & Anr. (2019), which emphasized that allegations of fraud under Section 65 must be addressed by the adjudicating authority. Furthermore, the appellant contended that the tribunal is obligated to investigate allegations of fraudulent or malicious intent under Section 65, regardless of whether a petition for CIRP has been admitted.
Conversely, the respondents conceded that the appellant was not given an opportunity to be heard but maintained that the Section 7 petition was meritless and should have been dismissed. They argued that the tribunal was correct in rejecting the application under Section 65, as no allegations of fraud could be investigated prior to the formal admission of the Section 7 petition.
The NCLAT agreed with the appellant’s contentions and concluded that the NCLT’s rejection of the application under Section 65 was legally incorrect. The Tribunal noted that Section 65 of the IBC serves the essential purpose of preventing the admission of fraudulent or malicious CIRP petitions. The NCLAT referenced its prior judgment in Shree Ambica Rice Mill v. Kaneri Agro Industries Ltd. (2021), stating that the adjudicating authority must investigate the nature of the transaction cautiously to protect the rights of legitimate creditors and prevent malafide CIRP petitions.
The NCLAT reiterated the importance of the Supreme Court judgment in Beacon Trusteeship Limited v. Earthcon Infracon Pvt. Ltd. & Anr. (2019), which stated that the plea of collusion should not be raised for the first time in an appeal. Delaying the examination of allegations would undermine the objective of the IBC.
The NCLAT observed that the principles of natural justice were violated by the NCLT by failing to provide an opportunity to the appellant while dismissing the Section 7 petition. As a result, the Tribunal held that the matter must be remanded to the NCLT for a fresh hearing, stating:
“The application bearing 1120 of 2022 dismissed by the impugned order is restored, and the matter is remanded back to the Tribunal to decide the aforesaid application in accordance with law.”
The NCLAT concluded that an application under Section 65 could indeed be maintained even before the admission of the petition under Section 7 of the IBC. Furthermore, it found that the NCLT erred in not providing the appellant with an opportunity to be heard when dismissing their Section 7 petition. Consequently, the present appeal was allowed, and the impugned order was set aside.
