Penalty for faulty application: Concerning M/s. Starlog Enterprises Limited v. ICICI Bank

Introduction

In India silence is a confusing element when it comes to law. An accused remaining silent even after being charged with an offence allows the prosecution to strengthen its viewpoint. Sometimes this silence acts against the accused and can get him a proven convict. But, if the law remains silent on a provision that is necessarily such that it allows the authority to do as per its will?

Such a thing will not only be chaotic but also will render the entire regulation devoid of trust and belief. The very reason Indians believe in the Court is just that the principle of natural justice is present and therefore, justice must be delivered after all the aspects of the case are covered within the boundary of the law.

However, the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as Code) remains silent on the provision of natural justice and this has led to the harassment of various companies who have suffered the erroneous decisions of the adjudicating authority because of such silence.

The provision of natural justice is missing in the Code but again is inserted through Section 424 of the Companies Act, 2013 which again works as a binding authority upon the Tribunals to ensure the process of hearing under the process of natural justice. It is to be noted that the Code of Civil Procedure, 1908 fails to give a binding on the Code concerning the trials being conducted within the ambit of the natural justice principles.

The case of M/s. Starlog Enterprises Limited v. ICICI Bank, 2017 in the NCLAT opened newer doors for the aggrieved party whenever it comes to misleading applications, forceful ex-parte decisions and of course, the ignorance to Audi alterem partem and certain restrictions to it. The case exhibits the fact that sometimes the law may be misused by a party to gain benefit over the aggrieved party and the misleading application by the financial creditor, in this case, is enough example for understanding such a process.

Facts of M/s. Starlog Enterprises Limited v. ICICI Bank

The aggrieved and appellant party to the aforementioned case M/s. Starlog Enterprises filed a petition with the National Company Law Appellate Tribunal (NCLAT) under Section 61 of the Code.

This section allows any person or party aggrieved by the decision of the adjudicating authority can appeal to the appellant authority that is, NCLAT within thirty days of the decree passed by the adjudicating authority and in case of serious nature such that the party aggrieved may have enough reasons to satisfy the appellant authority may get another fifteen days to file for the appeal against the decision of the adjudicating authority.

The aggrieved party who is the financial debtor in this case is slashed a debt amount of around Rs. 30 crores instead of the aforesaid default amount of Rs. 10 crores. Moreover, the financial debtor was not even allowed to place his written statement as the financial creditor haphazardly moved the petition in NCLT, Mumbai thereby gaining an ex-parte decree against the financial debtor.

This resulted in the resignation of some of the key employees of M/s. Starlog Enterprises cited ‘stress at workplace’ as the reason for resignation. Apart from this, the company suffered a loss of an important client with whom the company had a valuable relationship and business. The decree of the NCLT allowed for the appointment of two Interim Resolution Professionals (IRPs) under Section 5(27) of the Code for undertaking the Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Code.

Moreover, the company was a participant in the Joint Lenders’ Forum (JLF) where the lenders thought of an exit option and also, for individual norms of recovery of the debt amount.

In this case, the bank moved a haphazard petition and provided misinformation to the NCLT to get their petition accepted without even informing the JLF or the company moved to achieve an order without allowing the company to file a written statement and express their point of view thereby allowing the company to not only lose their status of operation but subsequently lose their reputation, reliable and valuable employees, important clients and above all suffer huge losses.

The NCLT ordered the moratorium, and freezing of the company’s accounts and restricted it from functioning independently through its Board of Directors.

This order by NCLT was challenged in the NCLAT through an appeal under Section 61 of the Code. The NCLAT observed that the actions of the bank were dubious and they forced the NCLT to undertake the petition through false facts and an inflated debt amount.

Apart from this, the appellate authority observed the flaw in the order of the adjudicating authority concerning the order passed by the latter. The appellate authority admitted the fact that the appointment of IRPs for the process of CIRP under Section 5(27) and Section 9 of the Code respectively was unnecessary and the petition was liable to be rejected in the first instance itself. It expressed confusion as to how the petition was accepted.

The appellate authority pointed out the heavy losses incurred by the company in terms of revenue, human resource and clients due to this faulty petition and therefore, ordered the dismissal of the order passed by the adjudicating authority by citing the need of the principal of natural justice and the way the case was moved in the NCLT.

Therefore, such a loss cannot be tolerated and coupled with the fraudulent motives of the bank, the NCLAT ordered the independent functioning of the appellant company through its Board of Directors with immediate effect and thereby, removing it from all sorts of legal bindings of the order as it is to be closed by the NCLT. Moreover, for such harassment to the appellant company, the appellant authority charged the bank with a fine of Rs. 50,000/-.

Issues in M/s. Starlog Enterprises Limited v. ICICI Bank

This case is very important as it discusses three important problems

• Whether the order passed by the NCLT was faulty in nature and the reason for it?
• Whether the principles of natural justice are mandatory in hearing the adjudicating authority?
• The consequence of a dubious petition.

When the initial debt amount was around Rs. 10 crores as per the information brought forward by the client. But, the bank slashed a whooping debt of an amount approximating Rs. 30 crores and filed a petition with the NCLT to initiate the Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Code.

The dubious nature of the petition consisted of the inflated debt amount and also, haphazardly moved the petition to get the decree in favour of the bank. This resulted in not only the petition getting accepted by the NCLT but also, the order of the adjudicating authority consisting of the moratorium for the company, freezing all its accounts and the restriction of the company functioning independently through its Board of Directors.

Moreover, the order allowed for the appointment of IRPs under Section 5(27) of the Code. These IRPs were found to work more than their jurisdiction by the NCLAT, who again found their actions to be ultra vires as the actions undertaken by them were beyond the scope of the Code.

Apart from this, the NCLAT observed that such a petition found the order to affect the business of the company and the subsequent resignation of key personnel who were working with the company for a long period citing ‘stress at the workplace’ and the breaking of contract by a renowned client with the company resulted in severe loss of the company.

Such incidents have led to the loss of business and reputation of the company due to the order passed by the NCLT. Therefore, it is clear that the intentions of the bank were mala fide which is clear through the fact that even the debtor being a part of the JLF was not even informed of the process and the debt amount was inflated to make the case strong and get a faster judgement from the tribunal.

The notice period was not served and hence, the opportunity for the company for fair representation was lost. This again was noted by the NCLAT but it regarded that for every case the principle of natural justice may not be adhered to. However, in cases of serious nature where the process of limited insolvency or moratorium is involved, an appropriate time must be given to the financial debtor for representation under Section 424 of the Companies Act, 2013 because nothing can go beyond the principles of natural justice.

Hence, after finding the order of the NCLT to be flawed and the intentions of the bank or the financial creditor to be dubious, the NCLAT decided to close the process undertaken by the NCLT and fined the bank with a penalty of Rs. 50,000/-  as a part of the damages caused to the reputation of the company. The appellant authority allowed the company to function through its Board of Directors with an immediate effect.

Inferences

Through this case, we infer the fact that any mala fide intention is to be considered with caution and will be noticed by the appropriate authority. The process of getting justice may involve time and labour but the Code itself coupled with certain other regulations is strong enough to identify the flaws and get it right.

The excess debt amount raised the eyebrows of the NCLAT and this led to the opinion of dubious and mala fide intention in the process of getting an order from the NCLT bank. Again, in such a serious issue, the bank did not allow the company to file a written statement to the effect of the notice and get itself represented therefore, this resulted in the company approaching the appellate tribunal under Section 61 of the Code.

Hence, the process of the trial was flawed and this opened up the intentions of the bank only to be penalized for such an action in the order by the NCLAT. This case explains the fact that principles of natural justice can never be ignored and you’re liable for your wrongdoings.

References

• M/S. Starlog Enterprises Ltd. v. ICICI Bank Ltd. (2017)
• The Insolvency and Bankruptcy Code, 2016
• The Constitution of India, 1950
• The Companies Act, 2013

This article has been authored by Soham Banerjee, a student at J.B. Law College, Guwahati.