M/s. Mithra Yarns Private Limited

Per : Sanjay Puri, Member (Technical)

This Application is filed by the Corporate Applicant Under Section 10 of IBC for initiating the Corporate Insolvency Resolution Process (CIRP) in the case of M/s. Mithra Yarns Private Limited, the Corporate Debtor (CD).

The CD was incorporated on 22.05.2017 under the provisions of the Companies Act, 2013 with its Registered Office in Hyderabad, Telangana. It was also Registered as Small Enterprise with Ministry of Micro, Small and Medium Enterprises vide Registration Certificate^{11.Pg 52 of the Application.} dated 17.03.2018.

After being incorporated, the CD entered into a Lease Agreement^{22.Pg 53-68 of the Application.} on 31.08.2017 with M/s. Sai Damodhar Spinners, whose partners are also Promoter Shareholders of the CD. Under the Lease Agreement, the land of Ac 3-20¼ Gts, situated at Sy.No.314, 315, 316 and 317, Thangapally Mandal, Rajanna Siricilla District, Telangana, was taken on lease for setting up of a Spinning Unit. The period of the lease was stipulated to be 15 years at the rentals of Rs.10,000 per month starting from 31.08.2017.

It is stated in the Application that, the Spinning Unit was established by the CD on the leased land and the business of manufacturing of cotton yarn spinning kitted and crocheted fabrics commenced.

It is also stated that in order to fund the machinery required for manufacturing purposes, the CD had approached the Financial Creditor (FC), Union Bank of India (earlier Andhra Bank) and made an application for sanction of Term Loan and the Working Capital Loan. The FC after appraisal of the project, sanctioned the Term Loan^{33.Pg 99-110 of the Application.} of Rs.4.5 Crores and Rs.1.0 Crore as Open Cash Credit (OCC) on 07.04.2018.

While sanctioning the loan, the FC created Security Interest by way of Hypothecation of stock, finished goods and receivables of the CD in respect of the OCC limits, and Hypothecation of Plant and Machinery and other fixed assets in respect of the Term Loan. Apart from the aforesaid, the FC also obtained the Security Interest by way of equitable mortgage of Industrial Land and Buildings to the Promoter Shareholders of the CD on which the Factory was situated.

As per the Application, the CD commenced its commercial production in January 2020, but due to onset of COVID in March 2020, the Plant could not be run in full capacity. It is further submitted that; the CD was affected adversely by huge fluctuation in cotton prices in the recent past and also did not get the State subsidy amounting to approximately Rs.3.5 Crores which it was entitled to. These combined factors led to financial losses, preventing the CD from breaking-even.

Due to continuous losses and non receipt of the interest Subsidy from the Government of Telangana, the CD committed default in payment of EMI to the FC and its account became Non Performing Asset (NPA) on 28.11.2022.

It is stated that, the FC issued the Demand Notice^{44.Pg 116-119 of the Application.} on 03.12.2022 under Section 13(2) of the SARFAESI Act^{55.Securitization & Reconstruction of Financial Assets & Enforcement of Security Interest Act}, 2002 to the CD and followed up with another Notice on 27.02.2023 under Section 13(4) for taking over the possession of the Assets of the CD.

It is asserted by the CD that, the FC instead of approaching NCLT for initiation of CIRP, has resorted to proceed under SARFAESI Act, to sell the Assets and kill the CD without any resolution and without bothering about the employees and their families whose livelihood is depended on the CD. It is emphasized that, at present there are about 50 employees working at the Factory premises and about 20 families have been employed indirectly.

Under these facts and circumstances, the Corporate Applicant has prayed that the present Application be admitted and CIRP initiated against the CD for which the unanimous resolution^{66.Pg 132-135 of the Application.} has been passed by the Board of Directors of the CD.

Reply by the FC:

In their reply, the FC (Union Bank of India) has opposed admitting the CD into CIRP. It is claimed that the Corporate Applicant is seeking admission into CIRP only to delay the realisation of bank dues. It is submitted that, the continuous losses of the CD are self inflicted and not caused by any outside agents.

It is further asserted that, as the Loan Accounts of the CD having been categorized as NPA, the FC is left with no option but to initiate action under SARFAESI Act. With these submissions, the FC has prayed for the dismissal of this Application.

Decision on the Application:

During the course of hearing on 30.08.2023, the Corporate Applicant was asked to provide the following:

 Latest audited financial results for the year ending 31.03.2023 containing position of loans & advances, debtors and inventory along with auditor’s report.

 Financial/Books of accounts in a pen drive.

 Provide for the fee of the IRP/RP for a period of 6 months.

 An affidavit to the effect that the Applicant has not received SARFAESI Notice and if any SARFAESI Notice has been received and provide details.

 An affidavit to the effect that this Application is not a defeat the purposes of law.

On 05.10.2023, Compliance Memo was submitted which include copy of Audited Financial Statements for the year ending 31.03.2023 and the details of Notice received under SARFAESI Act. Also enclosed was the Affidavit stating that the Application is not for defeating the purpose of the Law.

Going through the Financial Statements which have been provided by the Corporate Applicant for the year ending 31.03.2023, we find that the CD has been managed by two persons i.e. Mr. Sandeep Kumar Karampuri and Ms. Jyothi Karampuri, who are the Shareholders in their individual capacity and also as Partners in the firm M/s. Sai Damodhar Spinners.

The Auditor’s Report attached to the Audited Financial Statements,^{77.Pg 28-35 of the Application.} identifies several irregularities in managing the CD such as;

 Trade Payables and Trade Receivables are routed through Personal Accounts of Directors and Director relatives.

 No proper Document for the Expenses Incurred by the Directors and relatives on behalf of company.

 There were no confirmations for the interest due on loans and loan outstanding as at 31.03.2023 for loans availed from bank after November, hence Interest due payable was calculated by the company on the basis of Interest Rate available.

 Proper Stock Records and stock accounting was not maintained by the company  Confirmation from Trade receivables and Trade Payables were not produced as there is a lot of ambiguity since the same was also routed through the personal accounts of the directors and their relatives.

The Auditors have repeatedly mentioned in their Report that the proper books of accounts have not been kept by the CD. No proper records have been maintained showing full particulars including quantitative details, situation of Property and Plant & Equipment. The Company has also not been regular in depositing undisputed Statutory dues as applicable with the appropriate Authorities.

Clearly, the affairs of the CD have been mismanaged, which is perhaps the reason why the CD has not been able to discharge its obligations in relation to the loans taken by it.

Under the circumstances, while the actions taken by the FC under SARFAESI Act cannot be faulted upon. It is also a fact that, after issuing the Notice under that Act in February 2023, it has not been followed through.

We also noticed from the Audited Financial Statements, which even though cannot be fully relied upon in view of the Auditor’s observation, show a substantial expenditure towards Factory Salaries, Daily Wages, Worker’s welfare. For the year ending March 2023 a sum of approximately Rs.53 lakhs has been spent in this regard, and about Rs.70 lakhs for the year ending March 2022.

Considering these figures coupled with the uncontroverted assertion of the Corporate Applicant that, there are approximately 50 employees working in CD’s Factory, we are of the view that, the resolution of the CD’s insolvency needs to be given a chance. Therefore, we are inclined to admit this Application under Section 10 of IBC and direct as follows:

Accordingly, this C.P. No. 98/10/HDB/2023 is allowed and stands disposed of.