The Delhi High Court has issued notice on a petition filed by ninety-four financial creditors who claim that the Insolvency and Bankruptcy Code, 2016 (IBC) contains flaws that prevent financial creditors from recovering money defrauded by a company in the midst of a corporate insolvency resolution process (CIRP). [Sushmita Dey & Ors. v Union of India]
The petition claimed that C&C Towers Limited, through its promoters, engaged in fraudulent trading in collusion 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.
According to the complaint, insolvency procedures against C&C Construction Ltd (by NCLT, Delhi) and M/s C&C Towers Ltd were started in 2019. (by NCLT, Chandigarh).
The petitioners/creditors argue that the IBC does not afford a remedy in cases where the Corporate Debtor has obtained funds through deceptive investment schemes.
C&C Towers Private Ltd. and Karvy Realty Ltd. were accused of luring the petitioners, who were clients of M/s Karvy Stock Broking Ltd., to participate in a Ponzi scheme. This is said to have been done without disclosing the fact that C&C Towers had already declared a non-performing asset (NPA).
According to the petitioners, C&C Towers not only defaulted on payments owed to them but the funds were also moved to M/s C&C Constructions. While this is true, it is argued that the IBC does not provide a restitution remedy for defrauding creditors through an illegal investment scheme. It was asserted that Section 66 of the IBC reflects these lacunae when read with Sections 43 and 45 of the IBC.
In this backdrop, it was submitted that the petitioners have been left remediless, 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."
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 legitimise 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 de fraudulent, and swindled of their hard-earned life savings.”
The matter is listed to be taken up next on 26 October 2021.