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Allegations of fraudulent initiation of proceedings under IBC to be decided by adjudicating authority, Supreme Court

Shruti Mahajan

The Supreme Court, in its recent order, held that allegations pertaining to collusion and fraudulent initiation of proceedings under the Insolvency and Bankruptcy Code (IBC) have to be decided by the Adjudicating Authority. (Beacon Trusteeship Ltd. vs Earthcon Infracon Pvt. Ltd.)

The Bench of Justice Arun Mishra and Indira Banerjee, while disposing of an appeal against the NCLAT order, remitted a case to the Adjudicating authority to look into the allegations of collusion and fraud under Section 65 of the IBC raised.

Considering the provision of Section 65 of the IBC, it is necessary for the Adjudicating Authority in case such an allegation is raised to go into the same. In case, such an objection is raised or application is filed before the Adjudicating Authority, obviously, it has to be dealt with in accordance with law.
Supreme Court

The Court said that when such allegations are made, the Adjudicating authority must necessarily look into them in accordance with the law. Such grounds cannot be raised in an appeal before the National Company Law Appellate Tribunal (NCLAT) or before the Supreme Court.

The plea of collusion could not have been raised for the first time in the appeal before the NCLAT or before this Court in this appeal.
Supreme Court

The Court added that if a proper application is filed before the Adjudicating authority, then the allegations of collusion will have to be dealt with and looked into keeping in mind the facts and circumstances as well as the in accordance with the law.

Section 65 of the IBC deals with Fraudulent or malicious initiation of proceedings. In the instant case, an application under Section 7 of the IBC against the Appellant was admitted by the NCLT. This was challenged before the Appellate Tribunal which dismissed the appeal which brought the appellant before the Supreme Court.

In the appeal in the Apex Court, it was submitted by the Appellant that a notice ought to have been given to him before proceedings under the IBC were initiated. Further, it was argued that the material, that is the invoices, based on which the proceedings have been sought to be initiated against the appellant are "prima face" vague. Collussion on part of Respondents 1 and 2 has also been alleged by the appellant.

It is on this allegation, that the Court noted that if such allegations of collusion and fraudulent initiation of proceedings are made, the same needs to be looked into by the adjudicating authoprity mandatorily.

The Court thus relegated the Appellant to exercise the available legal remedy before the adjudicating authority without making any observations on the merits of the case. The appellant was represented by Senior Counsel Gopal Jain along with AOR Ankur Kashyap.

[Read the order]

Beacon Trusteeship Ltd. vs Earthcon Infracon Pvt. Ltd..pdf
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