Familial Disputes Alone Can't Establish Fraudulent Insolvency Proceedings Under IBC: NCLT Chandigarh

The National Company Law Tribunal (NCLT), at Chandigarh on 10 September held that a family relationship or strained relations between parties, by themselves, cannot establish that insolvency proceedings were initiated fraudulently or maliciously under Section 65(1) of the Insolvency and Bankruptcy Code, 2016 (IBC).

A Bench of Judicial Member Khetrabasi Biswal and Technical Member Shishir Agarwal dismissed an application filed by Monica Agarwal, a director and shareholder of Narayanam Organics Private Limited, alleging that Section 7 proceedings against the company were initiated for personal and familial reasons rather than to resolve insolvency. It observed:

“the existence of a family relationship or strained relations between the parties cannot, in itself, lead to a finding that the insolvency proceedings were initiated fraudulently or maliciously. The Applicant was required to place material before us demonstrating that the Respondents invoked the jurisdiction of this Tribunal for a purpose wholly alien to the insolvency resolution process. The allegations of personal vendetta, coercion and ulterior motive, without supporting material demonstrating such purpose, cannot by themselves satisfy the requirements of Section 65(1) of the Code.”

Sushil Kumar Agarwal and Lata Agarwal, Monica Agarwal's father-in-law and mother-in-law, had initiated Section 7 proceedings against Narayanam Organics based on alleged unsecured loans.

Monica Agarwal contended that the Corporate Debtor was solvent and operational and that no financial insolvency warranted initiation of the corporate insolvency resolution process (CIRP). She alleged that the Respondents invoked the insolvency jurisdiction because of personal and familial disputes and sought to exert pressure on her.

She relied on the NCLAT's ruling in Wave Megacity Centre Pvt. Ltd. v. Rakesh Taneja & Ors., contending that where insolvency proceedings are initiated fraudulently or maliciously for a purpose other than insolvency resolution, the Adjudicating Authority need not admit the application merely because debt and default are otherwise established.

The Respondents opposed the application, arguing that Monica Agarwal had filed it without authorisation from the Corporate Debtor. They submitted that the Corporate Debtor was a separate legal entity and that she could not represent it merely because she was its director or shareholder.

They further submitted that they had never been shareholders, directors or key managerial personnel of the Corporate Debtor and had never controlled it. Therefore, they argued that their familial relationship with the Applicant did not prevent them from maintaining proceedings under Section 7 of the IBC.

The Tribunal held that the proposition in Wave Megacity was not in dispute. However, it said that exercise of power under Section 65(1) requires a finding, based on the facts and material in the particular case, that the insolvency proceedings were initiated fraudulently or maliciously for a purpose other than resolution of insolvency.

It found that the Applicant had not placed material establishing such a purpose. It also observed that the “material on record does not demonstrate that the Respondents initiated the proceedings on the basis of a claim which was ex facie fictitious or wholly unsupported.”

Further, the Bench said that the Applicant's contention that no financial debt existed had to be examined in the main Section 7 proceedings.

Accordingly, the NCLT dismissed the application, finding that the Applicant had failed to establish the foundational requirement for invoking Section 65(1) of the IBC.