Fusebase Eltoro Pvt. Ltd. & Ors. vs Ms. Shalu Khanna

[Per: Barun Mitra, Member (Technical)]

The present appeal, filed under Section 61 of the Insolvency and Bankruptcy Code, 2016(‘IBC’ in short) by the Appellants arise out of order dated 21.02.2022 (hereinafter referred to as ‘Impugned Order’) passed by the Adjudicating Authority (National Company Law Tribunal, New Delhi, Bench-IV) in I.A. No. 1179/(ND)/2020 in Company Petition No. (IB)/114/(ND)/2018. By the impugned order, the Adjudicating Authority had allowed the application filed by Resolution Professional (present Respondent) under Sections 60(5) and 25 of the IBC directing the present Appellants to jointly and severally pay the Corporate Debtor the principal amount outstanding alongwith interest as claimed by the Resolution Professional. Aggrieved by this, the present appeal has been preferred.

The brief facts and genesis of the case is that a Section 9 application under IBC was admitted by the Adjudicating Authority against M/s Saubhagya Ornaments Pvt. Ltd./Corporate Debtor on 13.03.2019 on an application filed by M/s. SRS Ltd./Operational Creditor. Ms. Shalu Khanna, the present Respondent was appointed as Interim Resolution Professional (‘IRP’ in short) and later confirmed as Resolution Professional (‘RP’ in short). The RP/Respondent during the ongoing Corporate Insolvency Resolution Process (‘CIRP’ in short) on examining the records and financial statement of the Corporate Debtor found that an amount of Rs. 50 lakhs was outstanding for payment from Fusebase Eltoro Pvt. Ltd./Appellant No.1 Company to the Corporate Debtor on account of advance extended by the Corporate Debtor. An application was filed by the RP /Respondent before the Adjudicating Authority seeking directions qua the Appellant no. 1 company and it’s Directors to jointly and severally make payment of the above outstanding amount alongwith 18% interest and furnish details of transactions on the use of the said funds advanced by the Corporate Debtor to them.

The Adjudicating Authority in the impugned order dated 21.02.2022 held that Rs. 50 lakhs being an amount outstanding as per the ledger statement was due and recoverable and directed Fusebase Eltoro Pvt. Ltd./Appellant No. 1 company; Mr. Anuj Gupta, Director of Fusebase Eltoro Pvt. Ltd./Appellant No. 2 and Mr. Ankur Goyal, Director of Fusebase Eltoro Pvt. Ltd./Appellant No. 3 to jointly and severally pay the amounts claimed by the Resolution Professional. Aggrieved by the impugned order, the Appellants have come up in appeal.

Contending that the Corporate Debtor is a sham Company promoted, run and managed by M/s. SRS Ltd., Learned Counsel for the Appellant has submitted that the Corporate Debtor owed Rs. 66.19 crores to M/s. SRS Ltd. On the instructions of M/s SRS Ltd., a sum of Rs. 50 lakhs was paid by the Corporate Debtor to the Appellant No.1 Company which sum has been adjusted as consideration for purchase of shares amounting to Rs. 1.10 crores by M/s. SRS Ltd. of Hotline CPT. Ltd. which was another company of the Appellant No. 1. It has been further pointed out that the date and amount of the payment is duly recorded in the Share Purchase Agreement (‘SPA’ in short) dated 10.03.2016.

It has been further submitted that the financial affairs and accounts of the said Corporate Debtor was being maintained by the employees of M/s. SRS Ltd. and that this fact was very much within the knowledge of RP/Respondent as recorded by her in the first meeting of the Committee of Creditors (‘CoC’ in short) held on 29.04.2019 which is reproduced below: -

It has also been submitted that Shri Anil Jindal, Whole Time Director and Chairman of M/s SRS Ltd had given a statement on 06.10.2020 before the Serious Fraud Investigation Office (‘SFIO’ in short) admitting that he had appointed his known persons as Directors in the Corporate Debtor and that the bank operations of the Corporate Debtor were looked after by the employees of M/s. SRS Ltd. It has also been stated that Ms. Shweta Marwah, the Company Secretary of M/s. SRS Ltd. had submitted a similar statement on 04.04.2019 to SFIO that she was made part of the Secretariat Department at the instance of Shri Anil Jindal. Similar admission has been made on 05.04.2019 before SFIO by Mr. Arun Dutt stating that he was appointed as Director in the Corporate Debtor on instructions of Anil Jindal. It has also been added that Arun Dutt made a similar statement before Enforcement Directorate on 30.05.2019. Similarly on 18.07.2019, another Director of Corporate Debtor, Shri Anil Mittal admitted before the Enforcement Directorate that he was appointed as a Director in the Corporate Debtor by Shri Anil Jindal.

It was also pointed out that since the Corporate Debtor was neither an NBFC nor a financial institution, it could not therefore have given a loan to Appellant No. 1 Company. Moreover, there is no Loan Agreement to substantiate that Rs.50 lakhs was advanced by Corporate Debtor to Appellant No. 1 Company. It has also been argued that even if the alleged advance given to Appellant No. 1 on 18.02.2016 is accepted, it was no longer a legally payable debt since it had become barred by law of limitation with the expiry of three years on 17.02.2019. Furthermore, it has been asserted that for an advance given to a corporate entity, Appellant No. 1 in the present case, the individual Directors of the corporate entity cannot be made personally liable as per settled law. Thus the alleged claim was at best receivable from Appellant No. 1 Company; that no recovery could be sought against other individual Directors of Appellant No. 1 Company and therefore impleadment of Appellant Nos. 2 to 4 is a case of misjoinder of parties.

The Learned Counsel for the Respondent refuting these submissions pointed out that the SPA had been signed between the Appellant No. 1 Company and Mr. Anil Jindal, Director of SRS Ltd on 10.03.2016 with regard to sale of share of M/s. Hotline CPT Limited wherein there is no mention of the Corporate Debtor. There is also no documentary proof to show any authorization having ever been given by the Corporate Debtor to the Appellant No. 1 Company to set off the money received against sale of shares of Hotline CPT Limited to M/s. SRS Limited.

The Learned Counsel for the Respondent has further contended that the story of transfer of shares has been created as an after-thought by the Appellant No. 1 Company when RP/Respondent sought the return of Rs. 50 lakhs from them which it received from the Corporate Debtor. Further substantiating the same, it has also been stated that the annual filing of the list of Share-holders for Hotline CPT Ltd. for the financial years ending 2016, 2017, 2018 and 2019 does not reflect the name of M/s. SRS Ltd. as shareholder and the Appellant No. 1 continues to be reflected as the shareholder of the Hotline CPT Ltd.

It has also been submitted that an amount of Rs. 50 lakhs is found outstanding in the Books of Accounts and audited financials of the Corporate Debtor in the financial year ending 2016-2017. Additionally, Bank Statement has also been referred to by the Learned Counsel for the Respondent to establish the transfer of Rs. 50 lakhs from the Bank Account of the Corporate Debtor to the Appellant No. 1 Company. Based on the Bank Statements, financial records and ledger statements of the Corporate Debtor, the Learned Counsel for the Respondent contended that notwithstanding the absence of any Loan Agreement, the alleged transaction of Rs. 50 lakhs is clearly established between the Corporate Debtor and Appellant No. 1 Company and that this transaction has no nexus with the share purchase transaction between the Appellant No. 1 Company and M/s. SRS Limited. It has also been stated that a Corporate Debtor, by virtue of the provisions of the Companies Act, 2013 can always advance loan to another Company even if it is not an NBFC.

Learned Counsel for the Respondent has also refuted the submission of the Appellants that the Corporate Debtor is one of the group company of M/s. SRS Ltd. It has also been stated that Mr. Anil Jindal, Director of SRS Ltd. was neither the Director nor the shareholder of the Corporate Debtor. As regards statements made by employees of the SFIO and Enforcement Directorate, the Learned Counsel for the Respondent has asserted that their statements have no bearing on the amount due from the Appellant No. 1 Company to the Corporate Debtor and thus needs to be disregarded. On the issue of limitation, it has been argued that there has been no delay on the part of the RP/Respondent in demanding the repayment of outstanding dues from the Corporate Debtor once the Corporate Debtor shifted in the hands of the RP on 13.03.2019.

It has also been argued that since Appellants No. 2 to 4 have control over the conduct and management of the affairs of the Appellant No. 1 Company, and in view of the well settled principle of law that a necessary party is one without whom no order can be made effectively and a proper party is one in whose absence an effective order can be made but whose presence is necessary for a complete and final decision on the question involved in the proceedings, the Appellants No. 2 to 4 are necessary party and therefore liable alongwith Appellant No. 1 Company for refunding the amount due to the Corporate Debtor.

We have duly considered the arguments and submissions advanced by the Learned Counsel for both the parties and perused the records carefully in the light of rival contentions.

The first issue that needs determination is to ascertain whether an amount of Rs. 50 lakh is outstanding for recovery from Appellant No. 1 Company and payable to the Corporate Debtor. We observe that after proper examination of records and financial statements of the Corporate Debtor and after due diligence, the RP has concluded from the ledger account of Appellant No. 1 company as maintained in the books of account of the Corporate Debtor as placed as at page 178 of the Appeal Paper Book (‘APB’ in short) that an amount of Rs. 50 lakhs was outstanding and due for payment. Following this discovery, we find that the RP/Respondent methodically took up the matter, as obligated under the IBC, by sending emails/letters at regular intervals to the Appellant No. 1 company including the statutory auditor as well as to Appellants No. 2 to 4 being Directors of Appellant No. 1 company to make good the outstanding amount along with interest @18% per annum.

It is also noted that Appellant No. 3, who is Director in Appellant No. 1 company on 17.10.2019 has admitted and acknowledged to the RP on behalf of Appellant No. 1 company as at pages 194-195 of the APB that it received Rs. 50 lakhs from the Corporate Debtor while adding the caveat that this amount was used by Appellant No. 1 company against the sale of shares of their other company, M/s Hotline CPT Ltd to M/s SRS Limited. This makes it abundantly clear that the Appellant No. 1 Company received Rs.50 lakhs from the Corporate Debtor by their own admission.

This brings us to the concomitant aspect as to whether the outstanding payment was actually repaid by the Appellant No. 1 Company to the Corporate Debtor. We have noticed that the RP/Respondent wrote to Appellant No. 3 on 22.10.2019 to provide relevant documents, if any, including instructions given by Corporate Debtor to the Appellant No. 1 company for using the advance of Rs. 50 lakhs to issue shares to M/s SRS Ltd. Appellant No. 3 on 06.11.2019 clarified the matter to the RP/Respondent by sending the SPA dated 10.03.2016 as signed between Appellant No.1 company and SRS Ltd. to which the RP informed Appellant No. 3 on 07.11.2019 that the SPA does not provide any evidence that the Corporate Debtor had authorized the Appellant No.1 company to issue shares of LG Hotline Pvt. Limited to SRS Ltd. on its behalf in lieu of the Rs. 50 lakh advanced to them.

We have no reasons to disagree with the findings of the RP/Respondent that the contents of the SPA do not indicate any role of the Corporate Debtor in the entire transaction. We also note that the SPA has been signed by Appellant No. 3 on behalf of Appellant No. 1 company as “seller” and Shri Anil Jindal as authorized signatory on behalf of SRS Ltd. as “buyer” and there is not even a whisper in the SPA about the Corporate Debtor, leave aside a remote trace of any kind of authorization or direction from the Corporate Debtor or on his behalf regarding the aforementioned share purchase transaction. We also note that in the absence of any established link of the Corporate Debtor with this share related transaction between Appellant No. 1 and the SRS Ltd., the Adjudicating Authority has concurred in the findings of the RP/Respondent that the amount of Rs. 50 lakh remains outstanding and recoverable from the Appellant No. 1 Company and other Appellants jointly and severally.

The SPA undoubtedly constitutes the basic legal edifice of the share purchase transaction and it is undisputed that the Corporate Debtor is not a party therein whether express or implied. The assertion of Appellant No. 3 that the Corporate Debtor was a party to the share-purchase transaction is therefore at best a fanciful proposition bereft of any substance. In fact, Appellant No. 3 has himself admitted in his email dated 11.11.2019 that this missing link with the Corporate Debtor was raised during the time of entering the sale-purchase share transaction, but they got persuaded by the oral assurances of Mr. Anil Jindal in believing that the Corporate Debtor is one of the group company of M/s. SRS Ltd. Be that as it may , the gullibility on the part of Appellant No. 3 in believing Shri Anil Jindal, who was neither a share-holder nor the Director of the Corporate Debtor, is not a valid excuse and is outrightly rejected. This argument in no way can help the Apellant side from escaping the liability of recovery of the outstanding amount from them.

As regards, the statements given by Shri Anil Jindal of M/s SRS Ltd. as well as by some other Directors and employees of the Corporate Debtor before the SFIO and Enforcement Directorate that the Corporate Debtor and M/s SRS Ltd. are related parties, it is not within the remit of this Tribunal to comment on the findings of other investigating agencies and we therefore choose not to make any comments. Suffice to say, the Appellants have clearly failed to submit any authentic legal document/certificate/proof which can unimpeachably establish the fact that the Corporate Debtor is managed and promoted by the M/s SRS Ltd.

This brings us to the second point which needs determination and that is whether the recoverable amount of Rs. 50 lakhs is barred by limitation. It has been contended by the Learned Counsel for the Appellants that since the claim pertains to 18.02.2016 being the date of transfer of the said funds, the three year limitation expires on 17.02.2019 and hence the claim is liable to be rejected. From the material on record, there is no quarrel on the fact that the Corporate Debtor had given a loan in the nature of an advance to the Appellant No. 1 company. It is also not in dispute that the Appellant No. 1 company had not yet paid back the same amount directly into the Corporate Debtor’s accounts and therefore remains outstanding and recoverable. The claim that the share purchase transaction between the Appellant No. 1 company and SRS Limited amounted to recovery of the said sum lacks credence in the absence of any documentary substantiation. It is also an uncontested fact that there is no loan agreement between the Appellant No. 1 and the Corporate Debtor in this regard. Furthermore, nothing has been placed on record to indicate that this amount had to be repaid back within any specific time-line. In other words, the said sum was payable on demand anytime. Given the above, we hold that the applicability of limitation period in the present case does not stand to reason. Once the Corporate Debtor has come under CIRP, the logical corollary is that all actionable claims of the Corporate Debtor must be brought back into the corpus kitty of the Corporate Debtor. We find that the RP/Respondent has rightly issued the demand notice on 29.04.2019 and 09.05.2019 to the Appellant No. 1 company as the said amount is due and payable from it.

The last issue which falls for consideration is whether Appellant No. 1 company is alone liable for the recovery of the outstanding advance or the recovery can be jointly and severally sought against Appellant No.2, 3 and 4. It has been contended by the Learned Counsel for the Appellants that the Corporate Debtor had given the outstanding amount to Appellant No.1 company which is a separate and independent body corporate with a distinct legal identity and not to the Appellants No. 2, 3 and 4 and therefore the Adjudicating Authority had erred in fixing personal liability on them. We agree that the Appellant No. 1 company is a legal personality entirely distinct from the Directors. Once a company is incorporated it becomes an ‘artificial person’ and must be treated separately from its members. From the juristic point of view, the company is capable of enjoying rights and for being subjected to duties which are distinct from those enjoyed, exercised or discharged by individual members. Thus liability of the corporate entity cannot be automatically fastened on the individual Directors. Furthermore, we note that the Adjudicating Authority while disregarding the separate legal entity of the Appellant No. 1 company has also not recorded the reasons for holding the individual members jointly and severally liable for the obligations of the corporate entity. The Adjudicating Authority is no doubt entitled to lift the veil of the corporate entity but in doing so must delineate the reasons for piercing the corporate veil and show as to how and to what extent the individual members are liable. This not having been done by the Adjudicating Authority, we are of the considered opinion that the outstanding amount alongwith interest is recoverable from Appellant No. 1 company and not jointly and severally at this stage.

From the aforesaid discussion, we are of the considered opinion, that the Adjudicating Authority has not committed any error in holding that an outstanding principal amount of Rs.50 lakhs along with 18% interest is due and recoverable by the Resolution Professional and to that extent affirm the impugned order. However, we hold that this amount alongwith interest is recoverable only from Appellant No. 1 company and therefore set aside that part of the impugned order which held that this amount is jointly and severally recoverable from Appellants no. 1 to 3. The Appellant No. 1 company is hereby directed to entirely pay the aforesaid amount alongwith interest as claimed by the Resolution Professional/Respondent within four weeks from the date of the order. By the above terms, the appeal is therefore partly allowed and disposed of with no costs.