India: False Information Furnished In An Application Under Section 7 Of The Insolvency And Bankruptcy Code, 2016

Introduction

The Insolvency and Bankruptcy Code 2016 (hereinafter referred to as 'Code') attempts to consolidate the laws for insolvency resolution of corporate persons in a time bound manner. Under Part II of the Code, process for insolvency resolution and liquidation process for corporate persons is described wherein financial creditors, operational creditors or corporate applicants can approach the Adjudicating Authority for initiation of corporate insolvency resolution process.

A financial creditor may file an application before the National Company Law Tribunal (which is the Adjudicating Authority under Part II) for initiating the corporate insolvency resolution process against a corporate debtor along with the record of default, name of the suggested interim resolution professional and any other relevant information as may be specified by the Insolvency Board.26 The forms and contents of the application under this Section are specified in Form 1 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. In the event of a false application being filed by a financial creditor, two remedies are provided under the Code. One remedy is under Section 75 while the other remedy is under Section 65.

Recourse under Section 75

Section 75 provides for punishment for false information furnished in an application under Section 7. When material particulars of the application are false or omitted and the applicant has knowledge of such error or omission, such an applicant may be punishable with fine which can range from one lakh rupees to one crore rupees. Application under Section 75 is deemed to be false in material particulars, if the non-omission or correctness of the fact would have been sufficient to prove default.27

Such recourse may be beneficial for a corporate debtor against whom a false application has been filed. However, according to the Code, such a right cannot be exercised by the corporate debtor. Section 75 is under Chapter VII of Part II which provides for Offences and Penalties. Section 236 states that all offences under the Code have to be tried by the Special Court set up under the Companies Act, 2013. Sub-Section (2) states that no court can take cognizance of any offence except when a complaint is made by the Board or the Central Government or any other person authorised by the Central Government. Since such a complaint can only be made by the abovementioned, the corporate debtor has been excluded from filing a complaint under Section 75. There is no provision for a corporate debtor making an application to the Board to initiate proceedings under Section 75 of the Code. The party against whom false information has been furnished cannot approach the Courts for any remedy.

Apart from the issue of locus standi, Section 75 is silent on the aspect of limitation. If the Board or Central Government decide to file a complaint against a financial creditor, within how many days should the complaint be made? If the complaint is made after the application under Section 7 has been accepted or the resolution plan has been accepted or when the liquidation has commenced, the purpose of filing the complaint is defeated as the punishment prescribed is in the nature of fine and does not mention what impact it will have on the insolvency process. If the foundation of the process is based on false documents, the remedy should not be merely imposition of fine.

Recourse under Section 65

The recourse against initiation of false proceedings may lie in Section 65 which states that when any person initiates the insolvency resolution process fraudulently or with malicious intent for any purpose other than the resolution of insolvency, the Adjudicating Authority shall impose such penalty which can range from one lakh rupees to one crore rupees.

Even though the corporate debtor has the locus standi to approach the Adjudicating Authority under this Section, the relief that the Adjudicating Authority will provide is in the nature of fine. However, it is a wellfounded principle of law that fraud vitiates all underlying transactions. Therefore, after the application under Section 7 has been accepted, an action under this Section 65 will render the entire insolvency resolution process void. It is to be noted that this provision doesn't provide for the nature of fact finding that the Adjudicating Authority will engage in for determining the presence of fraud or male fide intent. Proving such male fide intention on part of the financial creditors through evidence is a difficult task if it has to be proved beyond reasonable doubt. The nature of inquiry to be undertaken can be interpreted in consonance with paragraph 6.7 of the report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design which states that:

"An individual is not guilty of the offence if he proves that, at the time of the conduct constituting the offence, he had no intent to defraud."

A remedy against fraudulent proceedings under Section 65 is not brought under Offences and Penalties28 and can be tried by the Adjudicating Authority but false information under Section 75 is an offence to be tried by the Special Courts. The rationale behind such a distinction has not been elaborated on by the drafters of the Code.

Conclusion

When the application under Section 7 is based on false documents filed by the financial creditor, the recourse available to the corporate debtor is insufficient. Under Section 75, it is not the corporate debtor but the Board or Central Government which has the locus to raise a claim. If the recourse under Section 65 is taken up, the relief provided is in the nature of a fine. However, fraud once proved will vitiate the entire insolvency process. Therefore, the recourse for a corporate debtor in the event of false application being filed by the financial creditor lies in Section 65.

Footnotes

26 Section 7, Insolvency and Bankruptcy Code, 2016.

27 Explanation, Section 77, Insolvency and Bankruptcy Code, 2016.

28 Part II, Chapter VII, Insolvency and Bankruptcy Code, 2016.

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