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Judgment
Ina Malhotra, J
CA 571/2018 has been filed by the Resolution Professional making allegations against the Ex-Directors and invoking the provisions of sections 43, 45, 50 and 66 of the Code in respect of transactions made by the Corporate Debtor. The Resolution Professional has arrayed the three Ex-Directors as Respondent Nos. 1 to 3 and another related party, being a Financial Creditor, as Respondent No. 4.
It would be relevant to note that the Corporate Debtor has already gone into liquidation. However, the Ld. Liquidator is unable to liquidate the assets of the Corporate Debtor in view of a lien being claimed by Respondent No. 4, as a secured creditor over the entire assets of the Corporate Debtor The Ld Liquidator had filed this application impugning the transfer of assets in favour of Respondent No. 4, as being fraudulent and preferential to the detriment of other claimants. In order to proceed with liquidating the assets of the Corporate Debtor for disbursal he has pressed for disposal of this application.
The brief background giving rise to this application is that Respondent No. 4, lather of the suspended Director Respondent No. 3, had provided a personal guarantee to enable the Corporate Debtor avail an overdraft facility extended by a lender, namely, M/s. Bajaj Finance Limited to the extent of Rs. 3 Crores. Initially, a Deed of Hypothecation in favour of the financial lender was executed on 3rd November, 2015. Hypothecation of the plant and machinery and inventory of the stock. apart from all other assets of the Corporate Debtor were offered to secure the said loan. This deed of hypothecation was followed by an Extension Deed dated 26th October, 2016, wherein it was undertaken by Respondent No. 4, that in the event of the loan being recalled, he would discharge the same and in such a case, the payment made by him for and on behalf of the Company, would entitle him to an equity stake in the respondent company by issuances of shares for the said sum. It stated that M/s. Bajaj Finance Limited recalled the loan in June 2017. Respondent No. 4 settled all dues payable to the Financer on 11th July, 2017. On payment of the aforesaid amount. the charge over the assets hypothecated to M/s. Bajaj Finance was transferred in favour of Respondent No. 4. It is the case of Respondent 4, that having discharged the loan, he had stepped into the shoes of the financer. and the right over the securities were subrogated in his favour. The Corporate Debtor also got a charge created over its assets duly recorded with the ROC in favour of Respondent No. 4. Respondent No. 4 has therefore claimed his right over all securities released by M/s. Bajaj Finance as a Secured Creditor.
The Ld. Liquidator has brought it to the notice of this Bench that as per the Extension Deed dated 26.10.2016, it was agreed by Respondent No. 4, that upon liquidating the liability of Bajaj Finance, he would be issued equity shares of the company. However, with a view to defraud creditors, the Corporate Debtor has reflected his transaction as a loan in their records and not as share application money. Respondent No. 4 has filed his claim as a Secured Creditor, claiming his rights over the assets of the Corporate Debtor subrogated in his favour. It is argued that the creation of charge upon the assets of the corporate debtor in favour of the Respondent No. 4 is in contravention to the terms of Extension Deed dated 26.10.2016, which specifically provided for.
"if the lender Bajaj Finance Limited, recalls the financial facility granted to the borrower at any point of time during this period and invokes securities provided by the security provider on borrower's failure to repay, the borrower agrees to issue equity shares in the company to the security provider to the extent of security invoked by the said lender without any further deliberation or discussion".
Ld. counsel for the Liquidator has further emphasized that the deliberate act of contravening the above terms and treating Respondent No 4 as a Secured Creditor fulfills the conditions imposed under section 43(1) of the Insolvency and Bankruptcy Code which can be demonstrated by a bare perusal of section 43(2) of the Code:
43(2) A Corporate Debtor shall be deemed to have given a preference, it
a. there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for on account of an antecedent financial debt or operational debt or other liabilities owned by the corporate debtor; and
b. the transfer under clause (a) has the effect of putting such creditor or surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53."
The learned counsel for the Respondent 4 on the other hand has submitted that the right of the Respondent No. 4 is the right of subrogation in terms of section 140 and 141 of the Indian Contract Act, 1872. Since, Bajaj Finance was the secured creditor, it would entitle Respondent No. 4 to be in the Secured Creditor. Further the impugned transaction is beyond the look back period, considering the Original Deed of hypothecation is dated 03.11.2015.
Though on the first blush, it appears reasonable that having paid off the liability of the Corporate Debtor, Respondent 4, as assignee, acquired a charge over the securities held by M/s. Bajaj Finance, but for the fact that Respondent No. 4, father of Respondent No. 3, had initially agreed to acquire a stake in the company. Sensing the imminent Insolvency resolution and various claims running into crores, the Corporate Debtor has manipulated the transaction to secure and hold a charge over the entire assets of the company through Respondent No. 4, by discharging the debt of. M/s. Bajaj Finance Ltd. and freeing its assets from hypothecation in favour of a family member. The full settlement with Bajaj Finance was made on 11th July, 2017. We find that in gross violation of the terms of the Extension Deed dated 26.10.2016 for issuing shares, the Corporate Debtor has deliberately created a charge over its assets in favour of Respondent No. 4 and filed CHG-I with the ROC. The move of Respondent No. 4 in full collusion of the Ex-Directors of the. Corporate Debtor, a closely related party, was done with the oblique and mala fide intention of securing the assets of the Corporate Debtor within the family of Respondent No. 3. to the exclusion of other Creditors.
We are also unable to appreciate the submission made by the Ld. Counsel for the respondent No. 4 that the initial deed of hypothecation having been executed on 03.11.2015 was beyond the look hack period and therefore can neither be looked into nor questioned by this Bench.
The submission of Respondent No. 4 are based on selective documents. He chooses to ignore the Extension Deed dated 26.10.2016 as well as the fact the loan was actually repaid and assets released to him on 11th July 2017. The charge was created in his favour subsequently. Section 43(4)(a) has to be read with Section 43(2) of the Code i.e. the date when there is a transfer of property or interest of the corporate debtor. The impugned transaction is founded when the creation of charge upon the. assets of the corporate debtor in the name of Respondent No. 4 was effected, i.e. in July 2017 and therefore reliance on the Original Deed i.e. 3rd November, 2015 is misplaced. The Directors of the Corporate Debtor were fully aware that they were in the twilight zone and insolvency was imminent.
Therefore, instead of issuing shares to the Respondent No.4, they created a charge upon the assets of the corporate Debtor in contravention of the terms of the extension deed. putting Respondent No 4 in a beneficial position in terms of section 53 of the Code.
In view of the above facts, we therefore have no hesitation in declaring the impugned transaction as a preferential transaction having taken place in July 2017 within the look back period. The charge was registered with the ROC by the Corporate Debtor in favour of Respondent No. 4 on 18/08/2017 by filing e-Form CHG-1 vide SRN G502390219. Therefore, the impugned transaction falls within two-year time period, as the CIR Process was Admitted in the year 2018.
The impugned transaction also falls under the category of fraudulent transaction as defined under section 66 of the Code, since the act of creation of the charge instead of issuing of shares is in contravention of the terms of the Extension deed dated 26.10.2016 and has been done with the mala fide intention of defrauding the other creditors of the corporate debtor. placing Respondent No 4 at a beneficial position. The Respondents No. 1-3 did not exercise care or due diligence in minimizing the potential loss to the creditors, knowingly and being fully aware of the. financial stress the Corporate Debtor was undergoing.
We therefore allow the Ld. Liquidator's prayer by holding the transaction made in favour of Respondent No. 4 as being preferential and fraudulent. The claim of Respondent No. 4 of having given a loan or being a secured financial creditor is Rejected. He can only be governed by the extension deed, whereby it was agreed that upon liquidating the loan of the financer. he would be. allocated shares, which needless to say. under the present circumstances are worth zilch.
The liquidator shall take steps to liquidate the assets of the Corporate Debtor and distribute them in terms of the waterfall mechanism provided for under Section 53 of the Code.
12 IA-571/C-II/ND/2019 stands disposed off.