M/s Pammavi Consultancy Limited vs Prashant Agrawal & Ors.

NARESH SALECHA, MEMBER (TECHNICAL)

The present appeal has been filed by the Appellant i.e., M/s Pammvi Consultancy Services Limited who is an operational creditor of M/s Global Syntex (Bhilwara) Limited under Section 61 of the Insolvency and Bankruptcy Code, 2016 (‘Code’) against the Order dated 23.04.2024 ("Impugned Order") passed by the National Company Law Tribunal, Jaipur Bench ("Adjudicating Authority") in Interlocutory Application (IBC) No. 340/JPR/ 2020 in Company Petition (IB) No. 79/7/JPR/2019.

Mr. Prashant Agrawal, who is the Liquidator of M/s Global Syntex (Bhilwara) Limited, is the Respondent No.1 herein.

M/s Bharkha Synthetics Private Limited, who is one of the financial creditors, is the Respondent No.2 herein.

M/s Ahinsa Infrastructure Limited, who is one of the financial creditors, is the Respondent No.3 herein.

M/s Bhilwara Spinners Limited, who is one of the financial creditors as well as Successful Auction Purchaser of the immovable properties of the Corporate Debtor, is the Respondent No.4 herein.

The appellant submitted that it is an operational creditor of the Corporate Debtor, Ms Global Syntex Bhilwara Limited, with an admitted operational debt of Rs. 2,17,04,875/-. The appellant contended that Respondents No. 2, 3, and 4 are the financial creditors, interrelated as Respondent No. 4 is a subsidiary of Respondent No. 3, with directors of Respondent No. 2 interested in Respondent No. 3, and the Corporate Debtor identified as an entity in which directors of Respondent No. 2 are interested as per its balance sheet.

The appellant submitted that CIRP commenced on a Section 7 petition by Respondent No. 2, admitted on 21.08.2019 based on the Corporate Debtor's admission of liability. The appellant contended that the CoC comprised only Respondents No. 2, 3, and 4, who are related parties.

The appellant submitted that the 3rd CoC meeting on 18.01.2020 resolved for liquidation, which was approved and ordered by the Adjudicating Authority on 24.01.2020, with Respondent No. 1 as Liquidator and Respondents No. 2, 3, 4 as financial creditors. The appellant further submitted that the Stakeholders Consultation Committee (SCC) also comprised only these respondents.

The Appellant submitted that the Corporate Debtor was the owner of two prime land parcels:

a leasehold land with a building situated at Plot No. SPL-1, Industrial Area, Biliya Extension, Bhilwara, having a total area of 26,800 Sq. Mt.; and

freehold agricultural land situated at Araji No. 1442/135 and Araji No. 135, adjacent to the aforesaid leasehold land at Industrial Area, Biliya Extension, Bhilwara.

The Appellant stated that in the first meeting of the SCC held on 25.06.2020, permission was granted to the Liquidator to sell the aforesaid immovable properties of the Corporate Debtor. An e-auction was conducted on 31.07.2020 at a reserve price of Rs. 11,13,42,501.50, which failed. A second e-auction on 14.08.2020 reduced the reserve price by 25%, but it also failed. A third e-auction on 31.08.2020 further reduced the reserve price by 10%, wherein Respondent No. 4, the sole bidder with over 60% voting share in the SCC, purchased both properties for Rs. 7,51,56,188.51.

The appellant submitted that auctions occurred hurriedly within one month amid COVID-19, substantially reducing reserve price by 35% overall, far below valuation (market Rs. 15.4 crores, fair Rs. 15.36 crores, distressed value of Rs. 13.86 crores). The appellant contended that sale notices lacked details (plot nos., area, industrial location), deterring third parties and enabling Respondent No. 4's undervalued purchase, violating asset maximization under the Code. The appellant further objected to this process, ignored by respondents acting in collusion.

The appellant contended that Respondents No. 2, 3, 4 inflated claims from principal Rs. 4.66 crores to over Rs. 15.70 Crores via extortionate interest, admitted by Respondent No. 1 without scrutiny; the Adjudicating Authority noted this and directed the Respondent Nos.2, 3, 4 to refund of excess interest of the liquidation proceeds.

The Appellant submitted that the impugned order erroneously disregarded undisputed facts that Respondents Nos. 2, 3 and 4 are related to the Corporate Debtor, as per Respondent No. 2's Balance Sheet stating the Corporate Debtor as an entity in which its Directors are interested.

The Appellant submitted that the impugned order erroneously disregarded undisputed facts that, per registered government valuer's report, market value was Rs. 15.4 Crores and distressed sale value Rs. 13.86 Crores, yet sold to Respondent No. 4 for Rs. 7.51 Crores.

Concluding arguments, the Appellant requested this Appellate Tribunal to set aside the Impugned Order and allow this appeal.

Per contra, the Respondent No.1 denied all averments made by the Appellant as misleading and baseless.

The Respondent No.1 contended that post CIRP of the Corporate Debtor initiated by the Adjudicating Authority vide order dated 21.08.2019, in the 3rd CoC meeting dated 18.01.2020, the resolution to liquidate the Corporate Debtor was approved and the same was confirmed by the Adjudicating Authority vide order dated 24.01.2020.

The Respondent No.1 submitted that the Appellant, being an Operational Creditor, filed its claim of Rs. 2,14,12,584/- based on an ex-parte civil court decree passed at Mumbai, which claim was duly verified and admitted. It was further submitted that the Appellant was represented throughout the process by its authorized representatives, who are practicing advocates, in both CoC and SCC meetings, and no objection whatsoever was raised by them regarding the CIRP or liquidation proceedings. The Respondent No.1 contended that in view of the above conduct, the Appellant is estopped from raising belated objections after completion of the entire CIRP and liquidation process, particularly when the orders initiating CIRP and liquidation have already attained finality under Section 61 of the Code.

The Respondent No.1 submitted that the SCC was constituted on 10.06.2020, inclusive of the Appellant. In compliance with Regulation 34 of the Liquidation Process Regulations, the Asset Memorandum dated 22.06.2020 recorded an average market value of Rs. 15,36,68,908/- and an average liquidation value of Rs. 11,13,42,501/-.

The Respondent No.1 contended that the first sale notice dated 09.07.2020 fixed the reserve price at Rs. 11,13,42,501/- for auction scheduled on 31.07.2020. Although one bid was received, it was subsequently withdrawn. Thereafter, in the 2nd SCC meeting dated 04.08.2020, the reserve price was reduced by 25% in accordance with Schedule I of the Liquidation Process Regulations, without any objection from the Appellant’s representative.

The Respondent No.1 submitted that pursuant to the reduced reserve price of Rs. 8,35,06,876.125/-, the second auction notice dated 08.08.2020 was issued for auction on 18.08.2020, pursuant to which two bids were received. Upon failure of the second auction, the SCC members were informed of a further reduction of 10% for the third auction, to which again no objection was raised by the Appellant.

The Respondent No.1 contended that the third sale notice dated 21.08.2020 fixed the reserve price at Rs. 7,51,56,188/- for auction on 31.08.2020. Two bids were received, out of which one bidder withdrew. Consequently, Bhilwara Spinners emerged as the successful auction purchaser, and the same was duly communicated by emails dated 01.09.2020 and 02.09.2020.

The Respondent No.1 submitted that at no stage did the Appellant challenged the market value, liquidation value, or reserve price during the liquidation process. It was further submitted that the values mentioned in the Asset Memorandum were comparable with the valuation report obtained by the Appellant itself from a registered valuer. It was contended that since the auction proceeds were insufficient even to satisfy the claims of financial creditors, the Appellant, being an operational creditor, was not entitled to any distribution under Section 53 of the IBC.

The Respondent No.1 contended that all decisions relating to the auction were taken unanimously by the SCC members, and the Appellant raised objections only after completion of the sale, vide email dated 03.09.2020. It was submitted that the Appellant is barred by the doctrine of estoppel and the principle of acquiescence, having participated in the SCC proceedings without protest, and reliance was placed on settled judicial precedents.

The Respondent No.1 submitted that the objection regarding conduct of three auctions within one month is untenable, as the auction process strictly followed the model timelines under Regulation 47 of the Liquidation Process Regulations. It was further contended that mere expectation of a higher price, including objections relating to COVID-19 conditions, is not a valid ground to set aside a concluded auction.

The Respondent No.1 contended that the allegation that asset details were not disclosed in the sale notices is misleading. It was submitted that each sale notice clearly specified the existence of two immovable properties of the Corporate Debtor at Bhilwara, Rajasthan, and also mentioned the e-auction service provider.

The Respondent No.1 submitted that for the convenience of prospective bidders, the complete Asset Memorandum was uploaded on the website, the URL of which was provided in the sale notices. It was further submitted that detailed contact information for inspection, e-auction facilitation, and the Liquidator himself was also disclosed.

The Respondent No.1 contended that the allegation of Respondent Nos. 2 to 4 being related parties of the Corporate Debtor is not legally permissible, as the Appellant failed to establish any relationship under Section 5(24) of the Code. It was submitted that reliance on balance sheet disclosures of Respondent No.2 is misplaced and that the Adjudicating Authority has already rejected this objection in the impugned order.

Concluding his arguments, the Respondent No.1 requested this Appellate Tribunal to dismiss the present appeal.

Now we will deal with the submissions of the Respondent No.2 to 4 conjointly as they had argued collectively before us.

The Respondent Nos. 2 to 4 submitted that the Adjudicating Authority has rightly held that the Appellant/Operational Creditor failed to establish that any of the Financial Creditors are “related parties” of the Corporate Debtor within the meaning of Section 5(24) of the Code. The Respondent Nos. 2 to 4 contended that the sole document relied upon by the Appellant/Operational Creditor is the balance sheet of M/s Shree Barkha Synthetics for the year ending 31.03.2019, particularly the heading “Advance to others includes advances to concerns in which directors are interested”, which reliance is wholly misconceived, misleading, and frivolous. The Respondent Nos. 2 to 4 submitted that the said heading is a broad and generic accounting description and is not restricted to, nor does it conclusively establish, a related party relationship as alleged by the Appellant/Operational Creditor. It was further contended that the related party disclosures contained in the said balance sheet do not reflect any relationship whatsoever with the Corporate Debtor or its erstwhile directors.

The Respondent Nos. 2 to 4 pointed out that the erstwhile directors of the Corporate Debtor were Mr. Nitin Singhvi, Mr. Balwantsingh Ranka, Mr. Nathu Tailor, and Mrs. Maya Devi. However, the related parties disclosed in the balance sheet at page 412 of the present appeal make no reference to any of the aforesaid individuals and instead mention only Chandra Singh Kothari, Bhanwar Singh Kothari, and Chandra Singh Kothari (HUF). The Respondent further submitted that even the related party transactions disclosed therein do not evidence any transaction with the Corporate Debtor.

The Respondent Nos. 2 to 4 contended that, in terms of the settled principle, a document must be read holistically to ascertain its true import. The Appellant has selectively relied upon a solitary heading in the balance sheet while completely ignoring the remaining disclosures, thereby attempting to construct a case on an incomplete and distorted reading of the document. It was further submitted that the burden of proof squarely lay upon the Appellant to establish the existence of a related party relationship, in accordance with the settled principle that “he who asserts must prove.”

The Respondent Nos. 2 to 4 submitted that had any of the Financial Creditors been related to the Corporate Debtor, the same would have been duly reflected in the financial statements of the Corporate Debtor, and the absence of any such disclosure clearly establishes that no such relationship exists. It was also contended that even if the Financial Creditors are related to each other, such inter se relationship does not ipso facto render them “related parties of the Corporate Debtor” unless the relationship squarely falls within any of the specific limbs of Section 5(24) of the Code, which alone constitutes the lawful and determinative test for ascertaining related party status.

The Respondent Nos. 2 to 4 submitted that the Appellant has failed to establish any fraud, collusion, or illegality so as to warrant setting aside the CIRP or the auction process. The Section 7 application filed by M/s Shree Barkha Synthetics was admitted on 21.08.2019 on the basis of the same term sheets, addenda, and balance sheets which are now belatedly questioned by the Appellant with gross delay and laches. The Corporate Debtor participated throughout the proceedings and never disputed the existence or legality of the financial debt. The Appellant was also represented in the CoC and SCC meetings but did not raise any objection at any stage of the CIRP.

The Respondent Nos. 2 to 4 submitted that the Corporate Debtor repeatedly acknowledged the outstanding financial debt in its audited balance sheets for the years ending 31.03.2018, 31.03.2019, and 31.03.2020, which constitutes valid acknowledgment of debt as settled by the Hon’ble Supreme Court in Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal [(2021) 6 SCC 366]. It was further contended that the CIRP admission order and the admission of claims were never challenged within limitation and have thus attained finality. In view of the settled law on delay and laches, the Appellant cannot reopen the CIRP at this belated stage.

The Respondent Nos. 2 to 4 submitted that the Appellant has failed to establish any violation of the statutory provisions of the Code or the Liquidation Process Regulations in relation to the auction conducted by the Liquidator. The Respondents contended that the Adjudicating Authority has exhaustively dealt with the auction process in paragraphs 25 to 39 of the Impugned Order. It was submitted that the CoC, in its 3rd meeting dated 18.01.2020, resolved to liquidate the Corporate Debtor, pursuant to which the liquidation order dated 24.01.2020 was passed and remained unchallenged. Thereafter, the Asset Memorandum was prepared on 22.06.2020 and the Liquidator proceeded to conduct e-auctions strictly in accordance with Regulation 33 read with Schedule I of the Liquidation Process Regulations.

The Respondent Nos. 2 to 4 further submitted that three public e-auctions were conducted on 31.07.2020, 18.08.2020, and 31.08.2020 with complete disclosures. The reserve price was reduced first by 25% and thereafter by 10%, strictly in terms of Schedule I of the Liquidation Regulations as applicable at the relevant time. All such reductions were duly informed to all members of the Stakeholders’ Consultation Committee, including the Appellant, who was an SCC member under Regulation 31A.

The Respondent Nos. 2 to 4 submitted that the allegation that the assets were sold at a “throw-away price” is completely baseless. As per the Asset Memorandum, the average market value of the Corporate Debtor was ₹15.36 crore and the average liquidation value was ₹11.13 crore, which closely aligns with the valuation figures reported by the valuer appointed by the Appellant itself. Thus, the valuation data consistently demonstrates that the auction price was in line with market realities.

The Respondent Nos. 2 to 4 further submitted that upon failure of the first and second auctions, the Liquidator reduced the reserve price strictly in accordance with Schedule I of the Liquidation Regulations, after duly intimating all SCC members, including the Appellant. Reliance was placed on the judgment of this Appellate Tribunal in Kerala State Co-operative Bank Limited v. Mr. Aravindhakshan Nair R, wherein it was held that reduction of reserve price in the prescribed manner does not amount to violation of the Liquidation Regulations in the absence of any documentary proof.

The Respondent Nos. 2 to 4 also relied upon the judgment of this Appellate Tribunal in Jai Agarwal v. Satyendra Prasad Khorania (Liquidator) [CA(AT) (INS) No. 30 of 2024], wherein it was held that interference with a concluded auction is unwarranted unless allegations of manipulation are supported by cogent evidence, as speculative challenges would undermine the certainty and finality of liquidation proceedings.

The Respondent Nos. 2 to 4 submitted that the Liquidator duly informed all SCC members about the successful conclusion of the third auction and the Appellant raised objections only thereafter, for the first time, which objections were duly replied to by the Liquidator. It was contended that the Appellant thereafter filed the impugned application belatedly on 04.10.2022, much after completion of the auction process, in gross violation of statutory timelines and without any supporting material, warranting outright dismissal.

The Respondent Nos. 2 to 4 further submitted that the Appellant was present in all SCC meetings and never raised any objection to the reduction of reserve price or auction timelines at the relevant time. Accordingly, the belated objections are barred by the principles of acquiescence.

The Respondent Nos. 2 to 4 submitted that all auction notices duly disclosed the details of the immovable properties, contained links to the Asset Memorandum, and clearly specified that the e-auction would be conducted through the designated service provider. Therefore, no procedural irregularity or regulatory violation has been established by the Appellant, and the findings of the Adjudicating Authority on this issue do not warrant any interference.

Concluding their arguments, the respondents requested this Appellate Tribunal to dismiss the present appeal.

At the outset we note that an application under Section 7 was filed by Shree Bharkha Synthetics Limited i.e., Respondent No. 3 herein against the Corporate Debtor which was admitted and CIRP was initiated on 21.08.2019 and Respondent No. 1 was appointed as Resolution Professional. We further take into consideration the fact that Respondent No. 1 constituted the CoC consisting of Respondents No. 2, 3 & 4 herein and further Respondent No. 1 invited EoI. However, in absence of suitable response for resolution of the Corporate Debtor and based on an application filed by Respondent No. 1, the Adjudicating Authority passed order for imitation of liquidation of Corporate Debtor vide order dated 24.01.2014 appointing Respondent No. 1 as Liquidator.

We also note that the claims were collated by the Resolution Professional earlier and position of admitted claims reads as under :-

We would also like to take into account the Asset Memorandum of the Corporate Debtor prepared by liquidator in terms of Regulation 34 of Liquidation Regulation and the assets of the Corporate Debtor are mentioned as under :-

It will be pertinent to note that the E-auction was conducted on 31.072020 at reserve price of 11,13,42,501/- which failed and subsequent to which the reserve price was refused by 25% to Rs. 8,35,06,876/- which also failed and the reserve price was further reduced by 10% to Rs. 7,51,56,188/- and M/s Bhilwara Spinners Limited submitted its bid at reserve price and was declared successful, subsequent to which M/s Bhilwara Spinners Limited paid complete consideration and the sale proceedings were distributed among the creditors of the Corporate Debtor as per Waterfall Mechanism in the following manner :-

At this stage, the Appellant challenged the auction proceedings as well as CIRP proceedings. The Appellant raised the issue regarding fraudulent action of the Corporate Debtor and Shree Bharkha Synthetics Limited, the Respondent No.2 who initiated Section 7 application as Director of Shree Bharkha Synthetics Limited were interested and related party of the Corporate Debtor. The Appellant stated that being Operational Creditor, it provided its services to the Corporate Debtor way back and its operational debts amounting to Rs. 2,17,04,875/-remained outstanding from the Corporate Debtor. The Appellant submitted before us that Corporate Debtor had two available property of land parcels at the prime locations Bhilwara. The Appellant brought various facts and events to establish the fact that the CoC contesting Respondent No. 1, 2, 3, & 4 in connivance kept on reducing the reserve price and sold the immovable properties to Respondent No. 2 at throw away prices.

We note that the issue is broadly regarding incorrect initiation of CIRP as well as alleged flawed liquidation process.

As regard, the CIRP is concerned, in terms of the Section 7 of the Code, the Adjudicating Authority is required to establish the debt and default and once this is established, the Adjudicating Authority ought to have to allowed the CIRP of the Corporate Debtor. We note that in present case, an application under Section 7 of the Code, in CP (IB) No. 79/7/JPR/2019, was initiated by Respondent No. 2 and the Adjudicating Authority after being fully satisfied, passed an order initiating CIRP of the Corporate Debtor vide its order dated 21.08.2019. Thus, we do not find any logic in the Appellant’s contention that CIRP was illegal. Despite the fact that prima facie, the loans were not required by the Corporate Debtor at that stage, since its operation was shut way back and also keeping into consideration that no due process of CIRP governance was followed by Corporate Debtor including non-registration of charge or passing any resolution of the BoD while taking loans from the unsecured Financial Creditors/ the Respondent No.2, 3, &4 , however the fact remain that the transaction did happen between the Financial Creditors and the Corporate Debtor. No one has disputed this fact nor anyone has not been brought to our notice, that loan money was not disbursed by the Financial Creditors to the Corporate Debtor. Having established that the loan money has been received by the Corporate Debtor, the Adjudicating Authority was duty bound to allow Section 7 application filed by the Respondent No. 2. In this background, we do not find much merit in the contention of the Appellant that the CIRP was incorrect and illegal.

Now we will examine the other irregularities pointed out by the Appellant w.r.t. the liquidation process carried out by the liquidator i.e the Respondent No.1 under supervision of CoC constituting of Respondents No. 2,3 &4.

We take into account the submissions of all the stakeholders as well as the rational of the Adjudicating Authority contained in the Impugned Order. As regard, the contention of the Appellant that the Financial Creditors (Respondents No. 2,3 &4) were related party, we take into consideration the fact that the Appellant could not establish the relationship between the Financial Creditor and the Corporate Debtor in terms of the Section 5(24) of the Code. We note that the Appellant relied upon the balance-sheet of the Corporate Debtor of the Respondent No. 2 for the period 31.03.2019, where it has been indicated that “advance to other includes advance to concern in which directors are interested”. We also note that the said balance-sheet does not contain names of the alleged interested party. As such, the plea of the Appellant is not found to be valid which has correctly been adjudicated by the Adjudicating Authority in the Impugned Order.

Now, we shall examine the other allegations of the Appellant about other alleged illegalities in the liquidation process as adjudicated in the Impugned Order.

It is noted that the relationship between Ahinsa Infrastructure and Developers Limited and M/s Bhilwara Spinners Limited being subsidiary company relationship exist but do not alter status of financial creditor as there is no embargo for such related parties to lend money to any corporate entity.

We are also not inclined to accept logic of the Appellant that CoC did not try for resolution of the Corporate Debtor seriously and jumped to Liquidation process in haste. The Adjudicating Authority has correctly given its finding in this regard after evaluating all details under Section 33(2) of the Code and also taking into account the judgement passed by this Appellate Tribunal in the case of Sunil S. Kakkad v/s Atrium Infocom [(2020) SCC OnLine NCLAT 1160] where it was held that:

(Emphasis supplied)

Thus, we reject contention of the Appellant on this issue.

Further, as regard the alleged fraudulent nature of loans, the Adjudicating Authority has correctly recorded that the transactions indeed happened between the Financial Creditor and the Corporate Debtor albeit at much higher rate interest of 24% per compounded monthly. We are aware that the Adjudicating Authority held that the loan was not required by the Corporate Debtor since, its operation was shut long ago. There was no documentation of loans, no charge was created and no interest has been provided for in the financial statements of the Corporate Debtor. We tend to agree with the same, however, the fact remains that the money lent were transferred from the Financial Creditors to the books of the Corporate Debtor. As such, the loan amount was payable by the Corporate Debtor to the Financial Creditors. However, we do not find fault in disallowing the exorbitant interest by the Adjudicating Authority as detailed in other connected judgement of CA (AT) (INS) NO. 1456 of 2024 in the matter of M/s. Bhilwara Spinners Limited & Ors. vs Prashant Agarwal Liquidator of M/s Global Syntex (Bhilawara) Ltd.

The Appellant has pointed out that whole process of liquidation was done in great haste and CoC kept on reducing the reserved price. We note that no specific instance of any violation of the timeline has been provided to us w.r.t. CIRP Liquidation Regulation as well as the manner and to the extend to which reserve price could not have been reduced as alleged by the Appellant has been brought out, as such we do not find any error in the Impugned Order on this issue.

Prima-facie, the Respondent No. 1/ Liquidator had carried out Liquidation process in accordance with laid down process under the Code and the CIRP Liquidation Rules 2016. In view of this background, we are not convinced by the logic of the Appellant that the liquidation process was illegal which need to be interfered with.

We have gone into detail of the Impugned Order and found it logical and rational. Based on above detailed analysis, we do not find any error in the Impugned Order. The Appeal devoid of any merits stands rejected. No Cost. I.A., if any, are closed.