NCLT (Allahabad Bench) : In Shobhnath vs. Prism Industrial Complex Ltd.

Whether insolvency application can be entertained in a case where financial fraud exists? It was held that the benevolent scheme of IBC for a resolution of a company under distress is not meant for a case of financial fraud or irregularity.

There were two reasons why such an application for declaration of insolvency and moratorium cannot be granted.

(i) Where it seems to be financial fraud, it can be no one’s case that in such a murky scenario of fraud, section 7, which is intended for a holistic collective healing process, could be rightly deployed.

(ii) Section 3(7) excludes a financial service provider from the ambit of IBC and if such a company is put into a situation of moratorium, and the payments made by such entity are halted, the financial system could get into a tail spin. The consequential impact of the commencement of CIRP will be moratorium and with this, the orders made by SEBI or NCLT for immediate refund of the money raised from the retail investor will not be implemented during the moratorium period.

Link : https://nclt.gov.in/sites/default/files/Interim-order-pdf/SHOBHNATH%20VS%20PRISM%20INDUSTRIAL%20CP%20NO%20168%20ALD%202017.pdf