Pranav B Prem

The National Company Law Tribunal (NCLT), Jaipur Bench, has imposed a cost of ₹5 lakh on M.D. Suitings Pvt. Ltd. after holding that the company had abused the insolvency framework by filing a voluntary insolvency petition with the sole intention of stalling recovery proceedings initiated by the State Bank of India (SBI). The Tribunal dismissed the petition filed by the company under Section 10 of the Insolvency and Bankruptcy Code, 2016, concluding that it was fraudulent and malicious in nature and attracted the penal consequences contemplated under Section 65 of the Code .

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The order was passed by a Bench comprising Judicial Member Reeta Kohli and Technical Member Kavita Bhatnagar. Accepting SBI’s objections, the Tribunal held that the corporate debtor had approached the insolvency forum not for genuine resolution of insolvency, but to trigger the statutory moratorium and derail recovery actions being pursued by the bank under the SARFAESI Act.

The Tribunal observed, “We therefore find substance in the contention of the Applicant that the CD had filed Section 10 Petition to derail the recovery process of the Bank since moratorium would have been imposed if Section 10 Petition had been admitted which would have had the effect of prohibiting institution or continuation of pending suits or proceedings before any Court or Tribunal including DRT.”

M.D. Suitings had moved the NCLT seeking initiation of insolvency proceedings against itself, claiming inability to service its debts. SBI strongly opposed the plea, submitting that it had extended multiple credit facilities to the company, secured by mortgage and hypothecation over movable and immovable assets, including land, building, plant and machinery. As on March 8, 2023, the outstanding dues stood at approximately ₹15.34 crore.

The bank further pointed out that during a physical inspection conducted in February 2022, it was discovered that the company had shut down production and had sold its plant and machinery without the bank’s consent, despite those assets being hypothecated. The sale proceeds, SBI alleged, were not utilised to repay bank dues but were diverted elsewhere. The bank had already issued a demand notice under the SARFAESI Act and lodged an FIR alleging criminal breach of trust and misappropriation.

Relying on a forensic audit, SBI highlighted serious financial irregularities, including diversion of funds to personal accounts of directors, repayment of unsecured loans in preference to secured bank dues, routing of funds through multiple accounts, transactions with sister concerns, sale of machinery without a no-objection certificate, and discrepancies in stock statements. The bank also pointed out that the corporate debtor had been declared a wilful defaulter.

The Tribunal found that the corporate debtor had not approached the adjudicating authority with clean hands. It noted that the sale of hypothecated assets without prior permission, coupled with diversion of proceeds and suppression of material facts, clearly demonstrated mala fide intent. The NCLT held that the Section 10 petition was filed only after SBI had intensified recovery actions and that the timing of the insolvency plea made it evident that the company was attempting to misuse the moratorium provisions.

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Holding that the case squarely fell within the mischief of Section 65 of the Insolvency and Bankruptcy Code, the Tribunal concluded that the insolvency petition had been filed “with malicious and fraudulent intent for a purpose other than resolution of insolvency.” Accordingly, the NCLT dismissed the Section 10 petition and directed M.D. Suitings Pvt. Ltd. to deposit a cost of ₹5 lakh with the Prime Minister’s Relief Fund. The order serves as a cautionary reminder that the insolvency process cannot be invoked as a shield to frustrate legitimate recovery proceedings and that misuse of the Code will invite strict consequences.

Appearance

For Applicant: Advocates Shivangshu Naval and Jaya Sharma

For Respondent: Advocate Abhishek Naik

Cause Title: M.D Suitings Pvt Ltd v. State Bank of India and Ors

Case Number: IA No. 251/JPR/2023 in CP No. (IB)- 11/10/JPR/2023

Coram: Judicial Member Reeta Kohli and Technical Member Kavita Bhatnagar