Hytone-Satabadi Case: NCLAT Smells Collusion, Sets Aside Insolvency Application

In a first-of-its-kind decision, the National Company Law Appellate Tribunal has ruled that it is empowered to refuse insolvency applications if there are signs of collusion and mala fide intent.

The judgment is a step in ensuring that the resolution process under the Insolvency and Bankruptcy Code is not abused by persons coming with unclean hands before the tribunal to avoid their obligations and enjoy the benefits of moratorium granted during the process, Tine Abraham, partner at Trilegal, said.

The insolvency application was filed by Hytone Merchants Pvt. against Satabadi Investment Consultants Pvt. An unsecured creditor, Hytone, had given a Rs 3 lakh loan on which Satabadi defaulted.

The tribunal refused to admit the petition pointing to Satabadi Investment's net worth of more than Rs 15 crore.

"It is hard to convince oneself that the company having a net worth of Rs 15,36,39,015 is not able to make a payment of Rs 3 lakh. It appears that the petition at hand has been filed in collusion with the corporate debtor," the NCLT observed.

This order was challenged before the appellate tribunal. Hytone argued that the tribunal doesn't have the powers to proceed with an unjustified and roving enquiry into mala fides on its own.

The NCLAT, however, did not agree.

It held that the tribunal has to exercise discretion carefully to prevent and protect the corporate debtor from being dragged into the insolvency resolution process with mala fides.

In arriving at this conclusion, the NCLAT relied on Sections 7(5) of the insolvency law.

The provision says if there is an admitted debt and default, the tribunal ‘may' admit the application. Relying on the word 'may', the NCLAT held that the law itself gives it a discretion to admit or reject an application.

"...where it appears that application is filed collusively not with the purpose of insolvency resolution but otherwise, then despite fulfilling all the conditions of Section 7(5) of the code, the adjudicating authority can exercise its discretion in rejecting the application relying on Section 65 of the code."

Section 65 says that if any person initiates the insolvency resolution process fraudulently or with malicious intent, a penalty may be imposed.

Before admitting the application, every precaution is necessary to be exercised so that the insolvency process is not misused for any other purposes other than the resolution of insolvency, the NCLAT held.

The judgment explains the scope of Section 65 of IBC, Nakul Sacheva, partner at L&L Partners, said.

Typically instances of mala fide have, in the past, been pressed upon by the parties to the insolvency proceedings, Abraham said. But in this case, according to her, the tribunal as well as the appellate tribunal suo motu initiated an enquiry and found elements of mala fide and collusion.