No IBC provision for recovery of money raised fraudulently by company undergoing CIRP: Delhi HC issues notice in plea by 94 Financial Creditors

The Delhi High Court has issued notice on a plea filed by ninety-four Financial Creditors who have raised grievance over lacunae in the Insolvency and Bankruptcy Code, 2016 (IBC) since it does not allow recovery of money for financial creditors defrauded by a company undergoing the corporate insolvency resolution process (CIRP). [Sushmita Dey & Ors. v Union of India]

The petition alleged fraudulent trading by C&C Towers Limited in connivance with M/s C&C Constructions Ltd, M/s Edelweiss Asset Reconstruction Company, M/s Karvy Realty Ltd. and M/s Karvy Stock Broking Ltd. through their promoters.

As per the plea, in 2019, insolvency proceedings were initiated against C&C Construction Ltd (by NCLT, Delhi) and M/s C&C Towers Ltd. (by NCLT, Chandigarh).

It is the case of the petitioners/creditors that the IBC does not provide a remedy for situations where the Corporate Debtor has raised money through fraudulent investment schemes.

In this case, the petitioners, who were clients of M/s Karvy Stock Broking Ltd., were stated to have been lured to invest in a ponzi scheme by C&C Towers Private Ltd. and Karvy Realty Ltd. This was allegedly done without disclosing that C&C Towers had already declared a Non-Performing Asset (NPA).

As per the petitioners, not only did C&C Towers default on monies owed to the petitioners, the funds were also diverted to M/s C&C Constructions.

While so, it is submitted that the IBC does not provide the remedy of restitution for defraudment of creditors by way of ponzi / illegal investment scheme. Section 66 of the IBC, when read with Sections 43 and 45 of IBC, reflects this lacunae, it was stated.

In this backdrop, it was submitted that the petitioners have been left remideless, between the bar on initiating civil suits once a moratorium is declared under Section 14 and the lack of jurisdiction on the part of the NCLT to grant the relief of restitution under Section 66.

"This lacunae in the IBC coupled with Moratorium imposed under Section 14 of the IBC and the corresponding Clean Slate theory as envisaged under Section 31 of the IBC, restricts the Petitioners herein from availing any appropriate legal remedy for recovery/restitution," the petition said.

Therefore, the petitioners have now approached the High Court for relief, contending that "the extraordinary jurisdiction of this Hon’ble High Court under Article 226 vests vast powers to intervene and do complete justice in cases of the present nature."

A resolution professional had also sought the approval of a resolution plan before the NCLT Chandigarh, which has been objected to by the petitioners.

The petitioners termed this resolution plan an eyewash "whereby the petitioners along with other such similar financial creditors had been offered a haircut of 87% on their admitted claim amount."

The petitioners further pointed out that if the resolution plan is approved, they would be bound by it under clean slate doctrine "whereby once a resolution plan is approved by the NCLT, all creditors are bound by the same, irrespective of whether or not they participated in the corporate insolvency resolution proceedings."

The petitioners submitted that despite there being overwhelming documentary evidence against the respondent-companies, the petitioners are being "forced to see the perpetrators go scot-free, while the legal machinery is being abused to legitimize the fraud as committed by Private Respondents herein."

They have, therefore, urged the High Court to intervene and protect their fundamental rights under Article 21, also considering that many of the petitioners are senior citizens who have been "subjected to defraudment, and swindled of their hard-earned life savings."

The petitioners have made the following prayers before the Delhi High Court:

1. Declare that the scheme of Insolvency and Bankruptcy Code, 2016 does not contemplate a Ponzi scheme floated by the Corporate Debtor, and consequently does not provide any redressal to defrauded creditors, like the petitioners herein;

2. Declare that the absence of a provision in the Insolvency and Bankruptcy Code 2016 to redress the grievances of individual retail investors who have been fraudulently induced by the corporate debtor to invest in a Ponzi Scheme (like the petitioners), to be violative of Articles 14 and 21 of the Constitution of India.

3. Lift the corporate veil and direct the respondents to return an unjustly enriched and admitted amount of ₹ 23,14,12,369 (₹ 23.14 crores) to the petitioners raised by way of the Ponzi scheme.

The matter is listed to be taken up next on October 26, 2021.

The petitioners were represented by Senior Advocate Krishnendu Datta, along with advocates Srijan Sinha, Himanshu Chaubey and Parul Dhurvey. The Union of India (respondent 1) was represented by central government standing counsel, Asheesh Jain and advocate Adarsh Kr. Gupta.

[Read Order]