The Logix Case – NCLAT Ruling On Fraudulent Misuse Of Insolvency Law

Background 

The Insolvency and Bankruptcy Code, 2016, was to provide a time-bound mechanism for the resolution of insolvent companies, focusing on reviving viable businesses instead of opting for liquidation. However, over the years, concerns have arisen about its misuse, with parties filing collusive or fraudulent petitions to have an unfair advantage. 

In a recent judgement by NCLAT in case of Logix Group the Principal bench held that insolvency proceedings cannot be used as an instrument of fraud between parties.

Facts of the Case

Logix Infrastructure Pvt. Ltd. launched the residential project “Blossom County” in Noida (17 towers, 2384 units), scheduled for 2013 but remained incomplete. On 20th October 2020, Logix executed an agreement with Experts Realty Professionals Pvt. Ltd. (Appellant/ Creditor) for a buy-back of 1,37,918 sq. ft. built area. The Appellant infused Rs. 15 Crore between October 2020 – February 2021, with Rs. 12.88 Crore recorded as payable in minutes dated 15th December 2021. Upon non- payment, Appellant under Section 7 of IBC filed a petition before NCLT (CB (IB) No. 237/2023). NCLT admitted the petition on 14th July 2023 and appointed Mr. Pawan Kumar Goel as IPR. Application under Section 65 of IBC were filed by homebuyers and Respondents No. 2&3 alleging fraudulent and collusive initiation of CIPR, claiming appellant and corporate debtor as “related parties” under section 5(24).

Issues 

1. Whether the Appellant and Respondent No. 1 (Logix) were “related parties” under Section 5(24) IBC.
2. Whether the Section 7 petition was filed fraudulently and collusively, attracting Section 65 IBC.
3. Whether the NCLT’s admission order dated 14.07.2023 was liable to be recalled.

Decision

1. NCALT held that the Appellant and Logix were related parties under Section 5 (24) IBC.
2. The initiation of CIRP was found to be fraudulent and collusive, falling within the mischief of Section 65 IBC.
3. Accordingly, the admission order of NCLT dated 14.07.2023 was recalled, the CIRP was set aside, and the moratorium was withdrawn.
4. A penalty of ₹55 lakhs was imposed on the Appellant/Financial Creditor, though its recovery was stayed pending further proceedings.

Key Principle 

1. Related-party financial creditors cannot use Section 7 IBC proceedings as a device to initiate insolvency against the corporate debtor.
2. Filing a petition with a fraudulent or malicious intent other than a genuine resolution attracts Section 65 IBC, warranting dismissal of proceedings and imposition of costs/penalty.

Read Order