NCLT Hyderabad Finds GPT Pharmaceuticals–Punarnava Rasayan CIRP Collusive, Finds No Financial Trail

The Hyderabad Bench of the National Company Law Tribunal (NCLT) has held that parties cannot invoke the insolvency framework under the Insolvency and Bankruptcy Code, 2016 (IBC) in a collusive or malicious manner and that such misuse attracts proceedings and penalty under Section 65 of the Code.

Judicial Member Rajeev Bhardwaj and Technical Member Sanjay Puri initiated proceedings under Section 65 of the IBC and imposed a penalty of Rs. 25 lakh each on GPT Pharmaceuticals Private Limited and Punarnava Rasayan Private Limited for fraudulent initiation of the Corporate Insolvency Resolution Process (CIRP), finding that the proceedings constituted an abuse of the insolvency mechanism. The Bench held:

“Applying the aforesaid principles to the facts of the present case, the absence of disbursement, anomalies in documentation, lack of financial disclosure, and the close relationship between the parties, it is an inescapable conclusion that the proceedings were initiated for purposes other than insolvency resolution or liquidation of the corporate debtor.”

The NCLT proceeded under Section 65 of the IBC in continuation of its earlier order dated 13 February 2024, in which it had issued notice to both companies directing them to explain why action should not be taken for allegedly fraudulent initiation of CIRP.

Despite multiple opportunities, neither GPT Pharmaceuticals Private Limited nor Punarnava Rasayan Private Limited filed any reply to the show-cause notice. The Bench therefore proceeded to examine whether GPT Pharmaceuticals had initiated insolvency proceedings with fraudulent or malicious intent and for purposes other than insolvency resolution.

GPT Pharmaceuticals claimed to be a financial creditor and relied on a loan agreement dated 30 May 2020, alleging that it had extended financial assistance to Punarnava Rasayan Private Limited. It asserted that Rs. 4.79 crore, along with interest at 12% per annum, remained outstanding, aggregating to approximately Rs. 6.88 crore.

The Tribunal, however, found serious inconsistencies in the alleged transaction. It noted that the loan agreement did not disclose any mode of disbursement, bank account details, cheque particulars, or any identifiable financial trail. It also found that the parties failed to produce any bank statements or supporting financial records to establish actual transfer of funds.

The Bench further noted that the stamp paper used for executing the loan agreement had been purchased in 2017, whereas the agreement was executed in 2020. It also observed that the balance sheet for the financial year ending 31 March 2021 did not reflect the alleged loan transaction.

The NCLT additionally recorded that both companies operated from a common registered office and shared a common director, Mr. Ashok Adityan, indicating lack of independence and reinforcing the inference of collusive conduct.

Relying on the Supreme Court decisions in Swiss Ribbons Pvt. Ltd. v. Union of India and Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd., the Tribunal reiterated that the IBC cannot be used as a substitute for recovery proceedings or invoked for collateral purposes under the guise of financial debt.

Accordingly, the NCLT concluded that the CIRP had been initiated in a collusive manner to abuse the insolvency framework and held that the conduct squarely attracted Section 65 of the IBC, imposing penalties of Rs. 25 lakh each on both entities, payable within 30 days.

On its own motion.

None appeared for the Respondents