Arvind Garg vs Jagdish Khattar & Ors.

“While reviewing details of Bad Debts written off and written back the following points has been observed:-

1.

Partywise details of Bad Debts written off amounting to Rs.1139.02 Lacs and bad debts written back amounting to Rs 720.30 lacs were not identifiable.

2.

The Total Bad Debts has been written off amount of Rs.2638.36 Lacs and Rs.892.17 Lacs has been written back. Hence the net balance bad debts written off is Rs.1746.19 Lacs.

3.

The total amount of Bad Debts written is Rs.2638.36 Lacs out which Rs.992.41 Lacs approx. has been written off in case of Insurance companies.

4.

Bad Debts amount of Rs.457.59 Lacs is pertaining to Related Parties.”

xi.

That the corporate debtor, has written off inventory amounting to ₹604.17 lacs during the period January 2008 to September 2017. In their forensic audit report the forensic auditor has observed;

"The term loan sanction letter states that the loan is secured by hypothecation of plant and machinery, spares, stores, consumables, furniture and fixtures, leasehold improvements, loosetools, inventory of cars (old and new), other movable assets at the service centres/sales offices, book debts, insurance claim receivables etc.

xii.

That regarding transactions with Calabasas Ventures Pvt. Ltd., a related party, forensic auditor has observed;

“The company has availed services from Calabasas Ventures Pvt. Ltd. related to preparation of I&M, documentation charges with respect to seeking investment amounting to Rs 1,50,000 p.m. plus applicable taxes. Calabasas Ventures Pvt. Ltd. is a private company incorporated in 2015 and registered at 3/16, Shanti Niketan, 2nd Floor, New Delhi-110021. Mr. KunalKhattar& his wife Ms. SonalikaKhattar are the directors of the company. Calabasas Ventures Pvt. Ltd. Is a related party and details of services actually provided by it have not been furnished. As on 25.09.2017, the company has received services invoices of Rs17,22,750/-from Calabasas Ventures Pvt. Ltd and payment for the same has also been made. Also agreement for the same has not been made available.” Payment made to Calabasas Ventures Pvt. Ltd. falls within the purview of section 43 and 66 of IBC.

xiii.

That forensic auditor has observed regarding transactions with related parties;

“During the preceding two years, the company has incurred expenses on behalf of its group companies and also transferred funds to them. Later on, provision has been created in the books against these balances. Carnation Realty Private Limited 1,600,000 Lewis Trading Private Limited 2,800,000 Carnation Insurance Broking Company Private Limited 18,351 4,418,351"

xiv.

That incurring expenses on behalf of its group companies, transferring funds to them and later on creating provision in the books falls within the purview of section 66 of IBC.

xv.

That the corporate debtor opened a large number of accounts with other banks, in violation to loan sanction agreement, thereby depriving secured financial creditor an opportunity to recover balance amount of loan. The forensic auditor has observed;

"Transactions routed through non-TRAaccounts The term sheet with PNB states that,all the cash flows by way of proceeds from all businessestoberoutedthroughTRAaccountmaintainedwithPNB. However,therehavebeentransactionsthroughNonTRAaccounts as well."

xvi.

That the forensic auditor further observed;

"Summary of Bank accounts operated during the period January 2008 to September 2017 Summary of bank accounts

S.N.	Bank Name	No. of Accounts (CC / CA/ TRA)
1	City Corporation	1
2	HDFC Bank	50
3	ICICI Bank	2
4	Punjab National Bank	37
5	Standard Chartered Bank	1
6	State Bank of India	1
7	Yes Bank	1
	Total	93

Source:-Management information On analysing the transactions in the bank books of CAIPL which appears to be transacted from one bank account to other bank account of CAIPL we noted: There were 254683 transactions aggregating to INR 4,17,768.09 Lacs which appears to be transferred within bank accounts other than TRA during the review period from January 2008 to September2017."

xvii.

That conducting transactions amounting to ₹4,17,768.09 Lacswithin bank accounts other than TRA (Trust & Retention Account) with Punjab National Bank falls within the purview of section 66 of the Insolvency & Bankruptcy Code, 2016.

xviii.

That the forensic auditor has observed;

“Substantial Cash Dealings

We have analyzed the cash ledger for the period April 01, 2010 to March 31, 2016 and observed substantial cash transactions related to collections, deposits and withdrawals.”

xix.

That the corporate debtor indulged in substantial cash transactions, making it impossible to verify actual state of business operations. Making substantial cash transactions, making it impossible to verify actual state of business operations falls within the purview of section 66 of the Insolvency & Bankruptcy Code, 2016.

xx.

That the corporate debtor assigned a brand valuation of ₹94.84 crore as security to Punjab National Bank. Corporate debtor had been incurring recurrent losses before and after furnishing unregistered brand as security with valuation purported to be for ₹94.84 crore.Book Losses incurred by corporate debtor till the financial year 2013-2014amounted to ₹28,752.81 Lakh on a turnover of ₹43,736.70Lakh.In percentage terms losses amounted to 65.74% of turnover. Corporate debtor had incurred losses for six consecutive financial years and revenues were not growing. In aforementioned circumstances, furnishing an unregistered brand as security and valuing the brand at ₹94.84 Crore falls within the purview of section 66 of IBC.

xxi.

That Bad Debts amounting to of ₹457.59 Lacs, pertaining to Related Parties were written off. Despite continually writing off bad debts pertaining to related parties, CD continued to advance loans to related parties in violation of conditions stipulated in loan agreement.

xxii.

That Section 66 of the Code casts a duty upon the resolution professional/liquidator to file an application before the Adjudicating Authority for the transactions covered therein. In view of the above, the Applicant is filing the present Application seeking appropriate directions. The instant application is being filed bonafide and in the interest of justice.

xxiii.

In the aforesaid facts and circumstances, it is most humbly and respectfully prayed:

(a)

That the Hon’ble National Company Law Tribunal may be pleased to allow this application.

(b)

That Hon’ble National Company Law Tribunal may be pleased to pass orders in accordance with section 66 & 67 of IBC.

(c)

That Hon’ble National Company Law Tribunal may be pleased to direct the erstwhile directors and persons related to them to make good the loss suffered by secured financial creditor, due to violation of loan agreement by CD.

(d)

That Hon’ble National Company Law Tribunal may be pleased to direct the Respondents to make contributions of Rs. 6,692.48 lakh to the assets of the corporate debtor on account of selling the fixed assets of corporate debtor and depriving the secured financial creditor of availability security.

(e)

That Hon’ble National Company Law Tribunal may be pleased to direct the Respondents to make contributions of Rs. 1022.52 lakh to the assets of the corporate debtor on account of Loans given to subsidiary and other Related Parties is in violation of purpose of loan specified by the secured financial creditor of corporate debtor.

(f)

That Hon’ble National Company Law Tribunal may be pleased to direct the Respondents to make contributions of Rs. 457.59 Lacs to the assets of the corporate debtor for writing off bad debts pertaining to loans/advances given to Related Parties.

(g)

That Hon’ble National Company Law Tribunal may be pleased to direct the Respondents to make contributions of Rs. 384.79 Lacs to the assets of the corporate debtor for not covering loans given to related parties/making provisions for doubtful debts.

(h)

That Hon’ble National Company Law Tribunal may be pleased to direct the Respondents to make contributions of Rs.661.93 Lacs to the assets of the corporate debtor for making investments in related parties, in defiance of purpose of loans specified in loan agreements.

(i)

That Hon’ble National Company Law Tribunal may be pleased to direct the Respondents to make contributions of Rs.564.63 Lacs to the assets of the corporate debtor for making loans & advances to related parties in defiance of terms/purpose of loans granted by financial creditor.

(j)

That Hon’ble National Company Law Tribunal may be pleased to direct the Respondents to make contributions of Rs.604.17 Lacs to the assets of the corporate debtor for Writing off inventory of corporate debtor and depriving financial creditors of security available to them.

(k)

That Hon’ble National Company Law Tribunal may be pleased to direct the Respondents to make contributions of Rs.17.23 lacs to the assets of the corporate debtor for making payments to elated party Calabasas Ventures Pvt Ltd.

(l)

That Hon'ble National Company Law Tribunal may be pleased to direct the Respondents to make contributions of Rs.44.18 lacs to the assets of the corporate debtor for incurring expenses on behalf of its group companies and also transferring funds to them and not recovering the amount.

(m)

That Hon'ble National Company Law Tribunal may be pleased to direct the Respondents to make appropriate contributions to the assets of the corporate debtor for conducting transactions amounting to Rs. 4,17,768.09 Lacs with bank accounts other than TRA (Trust & Retention Account) with Punjab National bank and for making substantial cash transactions.

(n)

That Hon'ble National Company Law Tribunal may be pleased to direct the Respondents to make appropriate contributions of Rs. 94.84 Crore to the assets of the corporate debtor for assigning brand valuation of Rs. 94.84 crore as security to Punjab National Bank.

(o)

That Hon'ble National Company Law Tribunal may be pleased to direct the erstwhile directors and persons related to them for restitution of the amounts withdrawn by them by way of preferential payments.

(p)

That the Hon’ble National Company Law Tribunal may be pleased to pass such other orders as may be deemed appropriate.

In the Liquidation Process of Carnation Auto India Private Limited in liquidation (Corporate Debtor)

a)

That the instant reply is being filed by Respondent No.2 (hereinafter referred to as ‘Respondent’), who was a Director on the board of the Corporate Debtor way back during the period 2008-2009 and 2014-2015. That at the outset, all the allegations/ submissions / averments made in the instant application are denied in totality. It is most respectfully submitted that the Respondent was the erstwhile Director of the Corporate Debtor. It is relevant to mention that the Respondent herein had demitted office way back in the year 07.01.2015. The insolvency resolution process in the case of the Corporate Debtor were initiated under the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) w.e.f. 25.09.2017 and since the Respondent in the instant case demitted office of Director long back no proceedings can be initiated against the Respondent since none of the transactions fall within the relevant period which is applicable in case of any proceedings under Section 43, 45 and 50 of IBC. Further as regards the applicability of provisions of Section 66 of IBC also no case has been made out against the Respondent in the instant case.

b)

It is noteworthy that the Applicant has not made any specific averment as regards the knowledge if any and consent or connivance of the Respondent herein and thus the instant application against the Respondent herein is legally untenable.

c)

Accordingly, it is humbly submitted that the transactions if any, which can be reviewed and /or looked into in the case of the Corporate Debtor herein can be only w.e.f. 01.12.2016. Accordingly, all the transactions carried on prior to 01.12.2016, are outside the scope and purview of any jurisdiction and/ or review to be exercised by this Hon’ble Tribunal and liable to be rejected on this ground alone. Further since the Respondent herein had demitted office way back in 2015 no proceedings and/or relief can be sought against the Respondent in the instant case.

d)

That it is pertinent to note that the Forensic Audit on which Applicant is solely relying upon is conducted by M/s K.G. Somani & Co. and under its Chapter “Observation on Section 43,45,50 & 60” the Forensic Auditor is of the view that the said transaction do not appear to be the transactions for misappropriation. The relevant portion of the observation of the Forensic Auditor reads as follows:

“On the basis of review of transactions mentioned in pages 40 to 41, on the basis of our discussion with management and our review of documents its appears to be in the nature of business transaction to run the business on a going concern basis and hence do not appear to be transactions for misappropriations.”

Therefore, the Application is of feeble nature and should be out rightly rejected.

e)

Thus the relevant time for considering / taking into account the preferential transaction, if any carried out by Corporate Debtor with unrelated parties is 1 year i.e. between 25.09.2016 (to be read as 01.12.2106 i.e. the date when IBC came into force) to 25.09.2017 and in case of related parties is 2 years i.e. between 25.09.2015 (to be read as 01.12.2106 i.e. the date when IBC came into force) to 25.09.2017.

f)

Further from the analysis of the provisions of Section 43(4) it is clear that the 'relevant time' for review/test of the transactions undertaken by Corporate Debtor with unrelated parties under Section 43 of the IBC is 1 year preceding from the insolvency commencement date and for related parties it is 2 years preceding the insolvency commencement date. As such the provisions of Section 43 of IBC encapsulate preferences accorded in transactions undertaken only during the relevant time and thus the transactions which fall beyond the relevant time, cannot be looked into as preferential in terms of the IBC. In the instant case the Respondent herein ceased to be Director with the Corporate Debtor prior to the relevant period and thus is not amenable to the jurisdiction of this Hon'ble Tribunal in terms of the provisions of the IBC.

g)

That it is submitted that the relevant period is also applicable in the case of Undervalued transaction as defined in Section 45 of IBC and Extortionate Transaction as defined under Section 50 and accordingly, the said provisions are also clearly not applicable in the instant case against the Answering Respondent in the present case.

h)

That from the bare perusal of Section 66(1) of the IBC, it is clear that the provisions of Section 66 of IBC can be invoked in case it is found that any business of the Corporate Debtor has been carried on with intent to defraud creditors of the Corporate Debtor or for any fraudulent purpose. Under Section 66(2) an order can be passed by the Adjudicating Authority, if it is determined that before the insolvency commencement date, a Director or Partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of corporate insolvency resolution process in respect of such Corporate Debtor and such Director or Partner did not exercise due diligence in minimizing the potential loss to the creditors of the Corporate Debtor. In case it is demonstrated that the Director or Partner of the Corporate Debtor exercises due diligence and took reasonable care then any such transaction may not be eligible to be categorized as fraudulent or wrongful trading under Section 66 of IBC.

i)

That in the instant case the Applicant has not filed this application with any definite information or documentary evidence showing that the Corporate Debtor made a preferential payment or fraudulent trading at the given point of time. Therefore, in light of the judgment passed by the Hon’ble NCLT, Chennai Bench in the matter of M/s. Orchid Pharma Limited, this Application of the Applicant is liable to be rejected.

a)

Opinion of the Liquidator that the Corporate Debtor has at a relevant time given preference in the transactions – In the present case from the pleadings of the instant application it is evident that Liquidator has not formed any opinion for the purposes of invoking Section 43 of the IBC. It is submitted that for the purposes of coming to an opinion the Liquidator is required to discharge his obligation and make averment and submission as regards the basis and the rationale for such an opinion.

b)

Further, for the purposes of coming to the conclusion that preference has been given, it is incumbent to establish that there is a transfer of property or interest for the benefit of a creditor for an antecedent debt or other liabilities owed by the Corporate Debtor and such a transfer has the effect of putting such a creditor in a beneficial position than it would have been in the event of distribution of assets under Section 53 of the Code. In the present case, the Liquidator has failed to highlight any transaction which has resulted in preference being given to any creditor by virtue of transfer of any property or interest which has put such a creditor in a beneficial position than in terms of Section 53 of the Code.

“on the basis of review of transaction mentioned in pages 40 to 41, on the basis of our discussion with management and our review of documents it appears to be in the nature of business transaction to run the business on a going concern basis and hence do not appear to be transactions for misappropriations”.

"On the basis of review of transactions mentioned in page 40 to 41, on the basis of our discussion with management and our review of documents it appears to be in the nature of business transaction to run the business on a going concern basis and hence do not appear to be transactions for misappropriations”