Mere Allegations Of Fraud Cannot Become A Vehicle To Reopen Every Concluded CIRP: NCLT Bengaluru

The National Company Law Tribunal at Bengaluru has reiterated that mere allegations of fraud cannot be permitted to become a vehicle for reopening every concluded Corporate Insolvency Resolution Process, especially when such allegations are founded on materials that were already available during the insolvency proceedings.

A coram of Judicial Member Sunil Kumar Aggarwal and Technical Member Radhakrishna Sreepada dismissed an application seeking to reopen CIRP and recall an already approved resolution plan.

“We are conscious of the settled principle that fraud vitiates all judicial proceedings. However, allegations of fraud cannot be permitted to become a vehicle for reopening every concluded CIRP. “ it held

The case arose from an application filed by Shree Ratna Farm Products, an operational creditor of Mylari Agro Products Ltd, seeking recall of the resolution plan approved by the Tribunal and reopening of the CIRP.

Shree Ratna had originally initiated insolvency proceedings against the corporate debtor, which was admitted to CIRP in March 2021. A resolution plan was subsequently approved by the Tribunal on February 15, 2023.

Shree Ratna alleged meagre treatment accorded to operational creditors under the approved plan. It further alleged serious financial irregularities, including diversion of funds, suppression of transaction value and fraudulent conduct by the corporate debtor, and sought a fresh forensic audit and investigation.

Relying on a transaction audit report that flagged preferential, undervalued and fraudulent transactions, Shree Ratna contended that the actual extent of fund siphoning might be much higher.

The erstwhile resolution professional opposed the plea, arguing that the application was an attempt to reopen a concluded CIRP, especially when the allegations were based on materials already available during the insolvency process.

The Tribunal noted that the primary issue was whether, after approval and implementation of a resolution plan, insolvency proceedings could be reopened based on allegations substantially founded on pre-existing records.

“ A careful perusal of the Application reveals that no specific subsequently discovered material has been brought on record which was unavailable during the CIRP or incapable of being placed before the Committee of Creditors or this Authority at the relevant point of time.” it observed

The tribunal observed that the objective of the Insolvency and Bankruptcy Code is to ensure certainty, finality, and timely resolution. Emphasising the “clean slate” principle, the Tribunal observed,

“The rationale underlying the 'Clean Slate' Principle is to provide commercial certainty and confidence to Resolution Applicants. Any attempt at permitting the concluded CIRP proceedings to be reopened on the basis of allegations founded on pre-existing materials would defeat the very object of the Code and render implementation of approved Resolution Plans uncertain.”

It held that a party alleging fraud must produce specific and cogent material demonstrating discovery of fraud that could not reasonably have been unearthed during CIRP.

The Tribunal found that the applicant had failed to identify any subsequently discovered evidence and had instead relied on the transaction audit report and other materials that were already part of the CIRP record.

“The Applicant has not been able to demonstrate any exceptional circumstance or subsequently discovered fraud warranting interference and the approval and implementation of Resolution Plan having attained finality, we find the present Application to be a desperate exercise in frustration on not being able to achieve a meaningful pie out of dues against the Corporate Debtor.” it said

It further held that Section 420(2) of the Companies Act permits only rectification of mistakes apparent on the face of the record and cannot be invoked for a substantive review or reappreciation of evidence in a concluded insolvency proceeding.

Accordingly, the Tribunal dismissed the application.

For Applicant: Dr. Vijayakumar A.B, General Attorney

For Respondent: Shivani P Murthy