Deliberate Concealment Of Creditor's Decree Justifies Recall Of CIRP: NCLAT New Delhi

The National Company Law Appellate Tribunal (NCLAT), New Delhi, on 30 October held that deliberate concealment of a decree-holder's claim in an application under Section 10 of the Insolvency and Bankruptcy Code (IBC), 2016, constitutes material suppression warranting recall of the Corporate Insolvency Resolution Process (CIRP).

A Bench of Judicial Member Justice Mohd Faiz Alam Khan and Technical Member Arun Baroka dismissed appeals filed by Intarvo Technologies Private Limited and successful resolution applicant Sonoma Management Partners Pvt. Ltd., upholding the National Company Law Tribunal's (NCLT) decision to recall the CIRP admission order. It observed:

“The decree was a direct liability of the Corporate Applicant and was required to be disclosed; its omission is therefore not the non-disclosure of a fact lying outside the Code or the prescribed form.”

Intarvo had filed an application under Section 10 of the IBC claiming default of Rs. 2.29 crore. The NCLT admitted the application on 16 October 2023, commencing CIRP. During the resolution process, Sonoma emerged as the successful resolution applicant, with its resolution plan receiving 71.32% approval from the Committee of Creditors (CoC).

Before the NCLT approved the resolution plan, Vivek Jairath, proprietor of Jairath Constructions, filed an application under Section 65 alleging that Intarvo had deliberately concealed a decree for Rs. 47.09 lakh obtained by him and initiated insolvency proceedings to defeat his claim.

Accepting the allegations, the NCLT recalled the CIRP admission order, restored Intarvo to its pre-CIRP status, discharged the Resolution Professional and imposed a penalty of Rs. 5 lakh on the corporate applicant. Intarvo and Sonoma challenged the decision before the NCLAT.

Intarvo contended that it was unaware of the decree and that the requirements of debt and default under the Code were satisfied. It also argued that Jairath had filed his Section 65 application belatedly instead of seeking condonation of delay for admission of his claim. At the same time, he had filed an application under Section 60(5) seeking admission of the claim.

Moreover, the company submitted that including the decree amount would only have increased the debt threshold for initiating proceedings under Section 10. It also argued that the alleged defects in board authorisation were procedural and that the write-off of Rs. 7.05 crore in related-party receivables was a bona fide accounting decision taken on the advice of statutory auditors.

Sonoma contended that it had not been impleaded or heard in the Section 65 proceedings despite being the successful resolution applicant and having invested substantial effort in the resolution process. It argued that its resolution plan had already received CoC approval.

Rejecting Intarvo's contentions, the NCLAT noted that the decree was passed on 5 November 2022, shortly before the board resolution and filing of the Section 10 application.

It held that the decree represented a material liability that Intarvo was required to disclose. The proximity of these events supported the inference that the company knew about the decree and deliberately omitted it from its insolvency application.

Further, the Bench observed that satisfying the statutory debt threshold was not the sole requirement for filing an application under Section 10. A corporate debtor was also required to make a complete and truthful disclosure of its liabilities.

It also agreed with the NCLT that the authorisation to initiate CIRP was doubtful. It noted that the directors who purportedly authorised the filing of the Section 10 application were not validly authorised and that Intarvo had failed to establish the legality of the board approvals relied upon.

The Tribunal also took note of the write-off of Rs. 7.05 crore in related-party receivables and the inflated operational debt figure of Rs. 1.61 crore. These circumstances, taken together, supported the conclusion that the insolvency process had not been initiated for a bona fide resolution of insolvency.

Rejecting Sonoma's challenge, it held that a successful resolution applicant does not acquire a vested right merely because its resolution plan has been approved by the CoC. Since the plan had not yet received approval from the NCLT, its fate remained dependent on the validity of the CIRP itself.

It observed that once CIRP was found to have been initiated fraudulently and the admission order was recalled, all subsequent steps, including CoC approval of the resolution plan, necessarily fell. It further observed:

“The Adjudicating Authority was entitled to recall an admission order obtained by fraud and to terminate CIRP. The rights of a resolution applicant, however substantial, cannot be preserved at the cost of allowing a fraudulently initiated CIRP to continue.”

Accordingly, the NCLAT upheld the penalty imposed under Section 65(1) of the IBC and dismissed both appeals.