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Judgment
M/s. EShakti.com Private Limited, the Corporate Applicant / Corporate Debtor / Company has filed this petition under Section 10 of the Insolvency and Bankruptcy Code, 2016 {“IBC”) with a prayer to initiate Corporate Insolvency Resolution Process against it.
Part-I of the application sets out the particulars of the Corporate Applicant i.e. Eshakthi.com Private Limited. It was incorporated on 15.03.2021 having its Office at 3rd Floor, Capital Building, Anna Salai, Teynampet, Chennai-600 018 with Authorized Capital as Rs.20,30,00,000/- and Paid Up Capital as Rs.3,20,10,300/-. Part-II of the application sets out the particulars of the Proposed Interim Resolution Professional viz., Ramakrishnan Sadasivan having IP Regn. No.IBBI/IPA-001/IP-P00108/2017-18/10215). Part-III of the application lists the particulars of the Financial / Operational Creditors (Annexure VI(c)(i) and VI(c)(ii), amount of debt in default as Rs.156,51,81,104/-(Annexure I(1)) and date of default set out in Annexure-I(1). It also contains the details of loan documents [(Annexure-I(3) to Annexure-I(8)], details of operational debts and other details as Annexure-II(1) to Annexure(3)
It is stated by the Corporate Applicant that it is an online customized clothing Company registered under the Companies Act, 2013. It has built a unique set of intellectual properties by way of technology and technical knowhow. It has two registered patterns and is the leader in customized clothing business exclusively catering to women. It does not have any competition that serves the suite of services it provides. Its brand is serving mainly the mainstream American women and it has also got customers in other countries.
It is stated that EShakti is a private equity backed company which was doing well and expecting to raise capital just before the pandemic hit in March, 2020. Due to pandemic, demand for clothing dropped and the expected capital rise did not happen. Despite best and continuous efforts of bringing in money through potential strategic and financial investors and under the hope that the equity infusion would happen, the company borrowed money at high rates of interest in order to keep the company as a going concern. With a view to keep the revenue from dropping, it gave deep discounts on sale to the customers which affected the profitability of the Corporate Debtor. All these took a toll of the Corporate Debtor’s cash flow and profitability and raised the levels of payables to the creditors. It is stated that the Corporate Debtor could not fulfill the customer’s orders and was unable to meet payroll and manage the day-to-day affairs. It also took loan from the lenders by entering into loan agreements which it failed to repay. It placed on record the copy of the loan agreements at page-73 and 90 of the application. It is stated that it received notice calling off the loan facility of the loan agreements on 05.07.2024. It is stated that despite best efforts, it is unable to repay the debts.
It is stated that the intangible assets including brand of the company are extremely valuable. The replacement cost of a business like EShakti with its brand name is likely to be of the order of USD20Million (since the brand alone has USD25Million of investment made on it cumulatively over ten years). It is stated that over the last ten years, EShakti has exported over Rs.1000 Crores and earned foreign exchange for the country and has ability to do even higher earnings in the coming years. It has a clear road map to revive its operations. It also initiated talks with the potential investors who have indicated their willingness to step in as strategic investors and given their promising outlook. It is stated that these investors in all likelihood will support the promoters to submit a Resolution Plan which will put the Corporate Debtor back on its wheel.
It is stated that with an intent to revive the company and to protect the employment of over 900 persons out of which, about 450 persons are the direct employees and to serve the customers internationally, a Special Resolution was passed by the Promoters/Shareholders in the meeting held on 16.07.2024 to go for the Corporate Resolution Insolvency Process (“CIRP”).
It is stated that the Corporate Debtor satisfies the conditions for filing of the application since there is an existence of debt and default and the Corporate Debtor is not disqualified under Section 11 of IBC, 2016. It is stated that the Corporate Debtor is an MSME as defined under the MSMED Act, 2006.
The Petitioner has enclosed the details of total debts (financial and operational)
Financial Debts
Operational Debts
The Petitioner has also placed the relevant books of accounts evidencing the default, copy of the audited financial statements upto 31.03.2024, Balance Sheet as on 22.07.2024 and its Statement of Affairs. It has also placed the copy of the Special Resolution passed by the shareholders in their Extra-Ordinary General Meeting held on 16.07.2024 including Form MGT-14 filed with the Registrar with an affidavit that it does not suffer from any disqualification under Section 11 of IBC, 2016.
Notice of the petition was directed to be served on the Financial Creditors and the major Operational Creditors.
The Counsel appearing for SEZ, Noida submitted that it has taken possession of the premises from the Corporate Applicant. This Tribunal vide an order dated 24.09.2014, directed the Petitioner to furnish the details mentioned in page-2 to 4 of the order which the Petitioner furnished vide memo S.R. No. 5095 dated21.10.2024. Some of the Operational Creditors though raised objections but they did not file any application except M/s. Sri Lakshmi Venkateswara Texiles. One of the Operational Creditors i.e., Fedex has given objection for initiating the Insolvency Proceedings against the Applicant/Petitioner. DHL Express has filed the written synopsis pointing out accounting anomalies and irregularities, not disclosing all material particulars, preferential transactions with related parties and fraud upon the creditors, JNG Star Services Pvt. Ltd., etc.
It is stated on behalf of M/s. Sri Lakshmi Venkateswara Textiles that the Corporate Applicant has not disclosed the details of its Directors/Promoters and has only disclosed one name i.e., Mr. Balan Gopala Krishnan. It has not disclosed the details clearly as to what the amount of debt is and what the amount is in default or how the defaults have occurred. It is stated that the Certificate of Registration of Charge does not provide any information. It is stated that there are glaring related party collusive transactions which the Corporate Applicant has not mentioned. It is stated that this petition has been filed with malicious intent.
In the written synopsis, it is stated by JNG Star Services Private Limited that the petition requires an enquiry as to whether it has been filed for fraudulent and malicious purposes. The loans given by Mr. Balan Gopala Krishnan and Footprint Leisure Pvt. Ltd. (both admittedly related parties) are suspicious.
We have heard Ld. Counsels for the Petitioner and some of the Operational Creditors.
Ld. Counsel for the Petitioner submits that the application filed under Form-6 furnishes all the requisite and relevant particulars. The Petitioner has furnished various details regarding the financials, compliances and operations of the Company. The Petitioner has also answered to all the allegations of the Financial Creditors by providing additional information on 14.10.2024. Ld. Counsel submits that the Operational Creditors have only alleged the discrepancies on the quantum of debt but have not objected to the existence of debts owed to them. Ld. Counsel submits that the workmen of the Company are protected by Section 53 and Section 30 of the IBC. Ld. Counsel submits that none of the creditors have alleged that the Petitioner is disqualified under Section 11 of IBC. Ld. Counsel referred to the cases of “(1) “Unigreen Pvt. Ltd. V. Punjab National Bank, 2017 SCC Online NCLAT 566”; (2) Leo Duct Engineers and Consultant Ltd. V. Canara Bank, 2017 SCC OnLine NCLAT 547”; (3) Go Airlines (India) Limited, 2023 SCC OnLine NCLT 197; (4) “SMBC Aviation Capital Ltd. Vs. Interim Resolution Professional of Go Airlines (India) Ltd., (2023) 241 Comp Gas 224 (NCLAT; (5) Krishna Kraftex Pvt. Ltd. Vs. HDFC Bank and Ors., [2018] 146 SCL 72; and (6) JKS the Banyaan Private Limited v. Bank of Baroda, 2021 SCC OnLine NCLAT 391” to contend that if the Adjudicating Authority is satisfied that there is debt, default has occurred and there is no ineligibility under Section 11, it has to admit the application under Section 10 of IBC. Non-disclosure of any fact, unrelated to Section 10 or Form-6 cannot be termed as the suppression of facts. Even three is no mandatory requirement to issue notice to the creditors. Issuance of notice at the pre-admission notice stage cannot be claimed as a matter of right. What the Adjudicating Authority has to satisfy that there is a debt, default has occurred, the application is complete in terms of Section 10(2) and 10(3) and the Corporate Debtor is not ineligible under Section 11 of IBC. Ld. Counsel submits that Section 10 of IBC does not provide the Adjudicating Authority to go beyond the records as prescribed under Section 10 and information as required in Form-6 of the Adjudicating Authority Rules.
Ld. Counsel appearing for the Operational Creditors argued on the lines of their replies/written synopsis. However, till date, none of them has filed any application under Section 65 of IBC, 2016.
Section 10 of IBC, 2016 provides as under:
“Section 10. Initiation of corporate insolvency resolution process by corporate applicant.
(1)Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.
(2)The application under sub-section (1) shall be filed in such form, containing such particulars and in such manner and accompanied with such fee as may be prescribed.
(3)The corporate applicant shall, along with the application furnish the information relating to-
(a)its books of account and such other documents relating to such period as may be specified; and
(b)the resolution professional proposed to be appointed as an interim resolution professional.
(c)the special resolution passed by shareholders of the corporate debtor or the resolution passed by at least three-fourth of the total number of partners of the corporate debtor, as the case may be, approving filing of the application.
(4)The Adjudicating Authority shall, within a period of fourteen days of the receipt of the application, by an order--
(a)admit the application, if it is complete; 2[and no disciplinary proceeding is pending against the proposed resolution professional]; or
(b)reject the application, if it is incomplete: 2[or any disciplinary proceeding is pending against the proposed resolution professional:]
Provided that Adjudicating Authority shall, before rejecting an application, give a notice to the applicant to rectify the defects in his application within seven days from the date of receipt of such notice from the Adjudicating Authority.
(5)The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (4) of this section.”
A perusal of record reveals that the Corporate Debtor having got two registered patents was a leader in the customized clothing business. It was doing well but because of pandemic, its business got affected. Despite having made efforts by infusing money through investors and lenders, it could not manage the day-to-day affairs of the Company and fulfill the customers orders. The debts accumulated day by day. It also received notices for recalling of the loans which it failed to repay. It has been averred by the Petitioner that the company has a potential and there is every possibility of revival of the Company. It had about 900 persons in its employment. The Petitioner has placed the financials and the requisite documents as contemplated under Section 11 and Form-6 including the resolution passed by the shareholders in an Extra-Ordinary General Meeting held on 16.07.2024 to initiate the process. The resolution is reproduced as under:
In the instant case, the amount of debt is more than Rs. 1.0 Crore i.e. more than the minimum threshold. The Petitioner has also given the date of default in repayment of loans. The Petitioner has answered the objections raised by the Operational Creditors. It has been submitted that the loans taken are genuine; the money was pumped into the Company through proper banking channels; the proceeds were used for repayment to the lenders and for the operations; there are no suspicious/fraudulent transactions; and the valuation of inventories was carried out independently by the auditors. It has been stated that the loans taken from Footprint Leisure Pvt. Ltd. are genuine. The amount was used for repayment to the lenders. The Lender has discretion to call the loan when there is a default and the Company faces financial difficulties. It is also stated that the loan taken from Mr. BG Krishnan is genuine which can also be seen from the audited financials of FY 2023. It is stated that M/s. Paragon Partners had extended guarantee for the loan taken from Tata Capital.
The Hon’ble National Company Law Appellate Tribunal (hereinafter, Hon’ble NCLAT), New Delhi in M/s. Unigreen Global Private Limited vs. Punjab National Bank and others (Company Appeal (AT) (Insolvency) 81/2017), held that if an application under Section 10 is complete and in absence of any ineligibility of Corporate Applicant, the Adjudicating Authority is bound to admit the application. The relevant portion of the judgement is reproduced hereunder,
“22.Section 10 does not empower the Adjudicating Authority to go beyond the records as prescribed under Section 10 and the informations as required to be submitted in Form 6 of the Insolvency and Bankruptcy (Application to the Adjudicating Authority) Rules, 2016 subject to ineligibility prescribed under Section 11. If all informations are provided by an applicant as required under Section 10 and Form 6 and if the Corporate Applicant is otherwise not ineligible under Section 11, the Adjudicating Authority is bound to admit the application and cannot reject the application on any other ground”
In the case of “Go Airlines (India) Limited, CP/IB-264(PB)/2023, which was affirmed by the Hon'ble NCLAT in Company Appeal (AT) [Insolvency] No. 593 of 2023, it was held as under:
34.Further, we are conscious of the fact that hearing each and every Creditor, under Section 10 of IBC 2016, can cause an inordinate delay in the conclusion of the proceeding, which may result in the erosion of the value of the assets and defeat the very purpose of value maximization and ultimately, the revival of the Corporate Applicant, which is not the objective of the IBC. As we have seen above, in the Application to Adjudicating Authority Rules, 2016, even the right to serve a copy of a Section 10 Application is not conferred to the Creditor(s). Hence, in view of the above, we conclude that in Section 10 proceedings, though there is no mandatory requirement of issuing notice to the Creditor(s) at the pre-admission stage, rather giving notice to the Creditor(s) is a matter of discretion to be exercised on a case-to-case basis on valid grounds. Wherever there is a clear apprehension of deterioration of assets of the Corporate Applicant/Debtor and larger public interest is involved, issuance of notice at the pre-admission stage cannot be claimed as a matter of right.
43.We observe that Section 65 only uses the word “initiates”, and does not make any distinction like the stage of pre-admission or post admission of CIRP, and from the reading of Sub-section (1), it transpires that the provision is applicable not only on the date on which a financial creditor / operational creditor or corporate applicant, as the case may be, makes an application to the Adjudicating Authority for initiating corporate insolvency resolution process but certainly, not limited to and may extend to the period of Liquidation, as the case may be. Needless to say, that fraud vitiates all acts. There could be instances where the fraudulent act is detected much after the commencement of CIRP. If a narrow interpretation of Section 65 of IBC 2016 is taken i.e., limiting its applicability to the pre-admission stage, then Section 65 will have no relevance. Therefore, Section 65 of IBC can be resorted by an aggrieved party at any stage, be it preadmission or post-admission. Accordingly, we conclude that there is no bar in entertaining/considering/adjudicating a Section 65 Application after the initiation of the CIR Process.
44.Further, as we have noted earlier, as of the date of the hearing, there was no Section 65 Application filed/pending/listed before this Adjudicating Authority. Keeping in mind the urgency of the instant case, to protect and maximize the value of the Assets in line with the objectives of IBC, employment involved, and the larger public interest, the judicial propriety demands it will not be apt to wait for the filing of the Section 65 Application. Hence, we would like to proceed ahead with the examination of the Section 10 Application on merits.
This Tribunal is satisfied that there is a default in the repayment of debt and the application filed under Section 10 is complete with all the necessary information. Further, the Corporate Applicant is not ineligible to make an application as per Section 11 of IBC, 2016. Therefore, we are of the view that this Company application is required to be admitted u/s 10 of the Code. We order accordingly.
The Corporate Applicant has proposed the name of Mr. Ramakrishnan Sadasivan having IBBI/IPA-001/IP-P00754/2017-2018/11286 as the Interim Resolution Professional (IRP). However, we appoint Mr. Ebenezar Inbaraj having Registration No.IBBI/IPA-002/IP-N00307/2017-18/10865 (E-mail ID: [email protected]) (AFA Valid till 30.06.2025) forming part of the Panel of IPs recommended by IBBI in accordance with, “Insolvency Professionals to act as Interim Resolution Professionals, Liquidators, Resolution Professionals and Bankruptcy Trustees (Recommendation) Guidelines, 2024” for the period of July 1, 2024 to December 31, 2024, as the IRP in the present application. The IRP who is appointed shall take forward the process of Corporate Insolvency Resolution of the Corporate Debtor. The IRP appointed shall take in this regard such other and further steps as are required under the Statute, more specifically in terms of Section 15,17,18 of the Code and file his report within 20 days before this Bench. The powers of the Board of Directors of the Corporate Debtor shall stand superseded as a consequence of the initiation of the CIRP in relation to the Corporate Debtor in terms of the provisions of IBC, 2016.
As a consequence of the Application being admitted in terms of Section 10 of the Code, moratorium as envisaged under provisions of Section 14(1) and as extracted hereunder shall follow in relation to the Corporate Debtor;
a. The institution of suits or continuation of pending suits or proceedings against the respondent including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
b. Transferring, encumbering, alienating or disposing of by the respondent any of its assets or any legal right or beneficial interest therein;
c. Any action to foreclose, recover or enforce any security interest created by the respondent in respect of its property including any action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
d. The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the respondent.
Explanation.-For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in any other law for the time being in force, a licence, permit, registration, quota, concession, clearance or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license or a similar grant or right during moratorium period;
However during the pendency of moratorium period in terms of Section 14(2) and 14(3) as extracted hereunder;
(2)The supply of essential goods or services to the Corporate Debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.
(2A) Where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the Corporate Debtor and manage the operations of such Corporate Debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such Corporate Debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified.
(3)The provisions of sub-section (1) shall not apply to
(a)such transactions, agreements or other arrangement as may be notified by the Central Government in consultation with any financial sector regulator or any other authority;
(b)a surety in a contract of guarantee to a corporate debtor.
The duration of period of moratorium shall be as provided in Section 14(4) of the Code which is reproduced below for ready reference;
(4)The order of moratorium shall have effect from the date of such order till the completion of the Corporate Insolvency Resolution Process: Provided that where at any time during the Corporate Insolvency Resolution Process period, if the Adjudicating Authority approves the Resolution Plan under sub-Section (1) of Section 31 or passes an order for liquidation of Corporate Debtor under Section 33, the moratorium shall cease to have effect from the date of such approval or Liquidation Order, as the case may be.
The Corporate Applicant is directed to pay a sum of Rs.5,00,000/- (Rupees Five Lakhs only) to the Interim Resolution Professional to meet out the expenses and to perform the functions assigned to him in accordance to Regulation 6 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
Based on the above terms, the Petition stands admitted in terms of Section 10 of the Code and the Moratorium shall come into effect as of this date. A copy of the Order shall be communicated to the Corporate Debtor above named by the Registry. In addition, a copy of the Order shall also be forwarded to IBBI for its records. Further, the Interim Resolution Professional above named shall also be furnished with copy of this Order forthwith by the Registry, who will communicate the initiation of the CIRP in relation to the Corporate Debtor to the Registrar of Companies concerned.