Mr. Gajesh Labhchand Jain vs Dnyaneshwar Chaudhari & Ors.

Per: Chandra Bhan Singh, Member (T)

This is an application being IA 107 of 2021 in CP(IB)2995/MB/2019 filed by Mr. Gajesh Labhchand Jain, Resolution Professional of E & G Global Estates Limited, under section 66 read with Section 60(5) of Insolvency & Bankruptcy Code, 2016 (Code) against Dnyaneshwar Chaudhari, Suspended Director of E & G Global Estates Limited, Respondent and others, and sought inter alia, the following prayers: -

This Bench vide an order dated 24.06.2020 admitted the petition resulting into initiation of Corporate Insolvency Resolution Process.

The Applicant states that during the course of CIRP, forensic auditor viz. Mazars Business Advisors Pvt. Ltd. were appointed to undertake the forensic audit of the books of the Corporate Debtor for the period from 01.04.2014 to 24.06.2020.

Subsequently, the Forensic Auditors have filed their report dated 14.01.2021 which provides sufficient reasons to believe that the Respondents have undertaken certain transactions with an intent to defraud the creditors which are covered under the provisions of Section 66 of the Code.

The Applicant further submits that the present application throws light on the fraudulent transactions entered into by the Respondent No. 1 & 2 (suspended directors) in connivance with some of the home-buyers who are also Respondents i.e. Respondent Nos. 3 to 7 to this application thereby mis-leading the Applicant RP to believe these Respondents Nos. 3 to 7, home-buyers as financial creditors, while the transaction relating to amounts so invested by these Respondent Nos. 3 to 7 were reversed by the Respondent suspended Directors and repaid to the "related parties" of the Respondent Nos. 3 to 7 in to a different bank account.

Such doubtful acts of Respondents have led to creation of a Committee of Creditors of the present Corporate Debtor which includes Respondent home-buyers who cannot be considered as financial creditors in light of these facts and that the amount so invested by them was paid back to the account of the relatives of these Respondent Nos. 3 to 7 practically within 24 hours of the receipt into the account of the Corporate Debtor, routed through the personal account of the Respondent Nos. 1 and 2 (being suspended directors). aggregate value of such transactions is Rs. 70 lacs.

The forensic auditors while going through the details and financial data especially the bank statement of Respondent Nos. 1 and 2 which was made available to Applicant by another suspended director, Mr. Sushil Uttarwar. The Applicant upon receiving such information and after looking into the bank account statements of the Corporate Debtor and observed that Respondent Nos. 1 and 2 withdrew the exact amount of funds on the same date on which these funds were infused by Respondent Nos. 3 to 7 into the Corporate Debtor's bank account and subsequently, have claimed to be "home-buyers" by filing their respective claims with the Applicant.

Furthermore, Respondent Nos. 1 and 2 upon withdrawal of the said funds from the account of the Corporate Debtor and transferring it into their personal bank account, subsequently, proceeded to return these exact amounts of funds back to the "related parties" of Respondent Nos. 3 to 7 either on the same day or immediate next working day. Thereby effectively creating the following false impression that the Respondent Nos. 3 to 7 are "home-buyers" who based on such mis-representation were made part of the CoC of the Corporate Debtor, while they continued to enjoy this position without having invested any penny since the entire investment was routed back to the account of their respective related parties by Respondent Nos. 1 and 2.

Thereafter on 12.01.2021, the Applicant sent emails to each of the beneficiaries i.e. respective related parties of Respondent Nos. 3 to 7 to whom the funds were refunded by the Respondent Nos. 1 and 2 through their individual personal account inquiring and seeking confirmation of having received such funds. These related parties of Respondent Nos. 3 to 7 also reverted vide individual emails dated 13.01.2021 in affirmation and agreeing to have received the said funds back into their accounts.

The Applicant submits that it is also clear that the Respondent No. 1 to 7 had clear intent to defraud the creditors and such act is squarely covered under Section 66(1) and 66(2) of the Code. In fact, on perusal of all the emails received from respective Respondents/their relatives, it is also evident that the emails as annexed to this Application, are precise with a clear "acceptance" of receiving the said funds back and is a clear case of collusion amongst Respondent No. 1 to 7. Accordingly, the Respondent No. 3, 4, 5, 6 and 7 ought not be treated as "financial creditors" and cannot be given corresponding voting rights which is otherwise prejudicial to the interests of other stakeholders including Respondent No. 9 i.e. SIDBI who is made a formal party to the present Application.

The said transactions with Respondent Nos. 3 to 7 (home buyers) were in the ordinary course of business, untainted with any fraudulent intent and was done prior to the Insolvency Commencement date. Moreover, it is an undisputed fact that neither the Respondent Nos. 3 to 7 nor their alleged relatives are related to Respondent No. 1.

By way of purported application, the Respondents mentions that the Applicant is seeking reversal of the -

The Respondent mentions that the forensic report cannot be relied upon by the Applicant as it is an incomplete report as the same is prepared without considering the audited financial statements of the 2016-17 to 2019-20 of the Corporate Debtor. The auditor has prepared the forensic report without considering the purchase contracts, ledgers, year wise fixed asset register and secretarial records of the Corporate Debtor. Further the forensic report cannot be relied upon as the auditor in the said report states that the auditor has not conducted a detailed review of the operations of the Corporate Debtor and the observations in the forensic report are on the basis of the limited review as per the scope of work. Therefore, it is submitted that the forensic report cannot be relied upon and ought to be dismissed in limine.

The Respondent No. 1 and 2 mention that it is a mere allegation that the Respondents in collision on 06.09.2019 transferred an amount of Rs. 30,00,000/- from the account of the Corporate Debtor to the proprietary firms managed by the husband of Respondent No. 7, arises from the forensic report. However, it is pertinent to note that the Forensic Report states that "While reviewing the villa sales proceeds, it has been observed that in that in case of Mina Gopal Gokhale, funds amounting to INR 30 lacs received on 6-Sep-19 were utilized for payment to two parties namely Asha Accounting Services (INR 15 lacs) and V M Associates (15 lacs). On conducting discreet enquiry about the parties, it is understood that both the above firms are owned by Mina Gopal Gokhale's husband; thereby resulting in diversion of funds... Note: Relationship between the above-mentioned parties and the firms has been identified through discreet enquiry and no specific evidence of the same is available."

The Respondent No. 1 and 2 mentions that the sampling methodology adopted by Forensic Auditors as provided at page no. 46 of the Forensic Audit Report has the following inherent limitations-

The Respondent No. 1 and 2 mention that the contents of the Forensic Audit Report hold no ground as there is no material or conclusive evidence on record to corroborate the aforementioned allegation. Similar allegations have been levied on respondent No. 3 to 6, and the Applicant has supported the same by annexing bank statement of Respondent No. 1. However, no statement of accounts has been annexed or relied upon by the Applicant while levying the said allegation against Respondent No. 7. Similarly, the forensic audit report, mentions the name of Respondent No. 3 to 6/their alleged related parties in the "Details of the Related Party Transactions" and "Sales Proceeds Diverted from Bank", but the name of the Respondent No. 7 has not mentioned in either of them.

The Respondent No. 7 states that there is no iota of proof on record, stating that the two proprietary firms belonged to or were managed by the "related party" of Respondent No. 7. On the contrary, the allegation of the "related party" is based on information obtained via a discrete enquiry and the forensic auditor admits that there is no specific evidence to show that the two proprietorship firms are controlled by the husband of Respondent No. 7.

The Respondent 1 and 2 mentions that the content of the Applicant that there is a clear collusion between the Respondents to defraud the creditors is not correct. The Applicant states that an email dated 12.01.2021 was sent by him, enquiring and seeking confirmation from the respective "related party" of the Respondent Nos. 3 to 7, who were alleged receivers of the purported fund transfer made by Respondent No. 1 and 2. To which the Applicant received a revert from the respective "related parties" of Respondent No. 3 to 7 on 13.01.2021, affirming and agreeing to have received the said purported funds. The Respondent 1 and 2 contends that a perusal of the emails show that they are only confirmations from related parties of respondent No. 3 to 6. There is no confirmation or admission with respect to Respondent No. 7. Respondent No. 7 denies the allegation of the existence of any "related party". The same can be inferred from the email trails annexed to the Application which evidently show that although, there are email trails exchanged between the Applicant and the alleged related parties of the Respondent No. 3 to Respondent No. 6, there are no emails on record that show any communications between the alleged related party of Respondent No. 7 and the Applicant, concerning the alleged fund transfer.

IA 107 of 2021 in CP 2995 of 2019 has been filed by the Resolution Professional, Mr Gajesh Labhchand Jain, under section 60 (5) of the IBC against the Respondents as mentioned below:

The Applicant /RP mentions that during the course of CIRP, a forensic auditor viz. Mazars Business Advisors Private Limited was appointed to undertake the forensic audit of the books of the Corporate Debtor for the period from 1st April 2014 to 24th June 2020. Further, the forensic auditor has filed its report on 14th January 2020 which provided sufficient reasons to come to a conclusion that Respondent(s) have undertaken certain transactions with intent to defraud the creditors and these transactions are adequately covered under section 66 of the Code.

The Bench notes that Respondent No. 1 and 2 are suspended directors who in connivance with the Respondent No. 3 to 7 entered into fraudulent transactions through home-buyers in the Corporate Debtor Company.

The Bench notes that Respondent No. 3 to 7 (home buyers) in connivance with Respondent No. 1 and 2 (Suspended Directors) entered into surreptitious transaction which enabled them to be treated as home buyers and therefore, as a part of the CoC of the Corporate Debtor. However, the Bench further notes that the entire money invested by these Home Buyers have been rooted back to the relatives of Respondent No. 3 to 7 through the personal account of Respondent No. 1 and 2 by taking out the money from the Corporate Debtor company into the personal accounts of Respondent No. 1 and 2 and thereafter rooting the same money back to the relatives of Respondent No. 3 to 7. The total value of such circuitous related party transaction amounts to Rs. 70 lacs. In all these cases, Respondent No. 1 and 2 upon withdrawal of said funds from the accounts of the Corporate Debtor company transferred into their own personal account and thereafter returned the exact amount of the fund back to the related party either on the same day or next working day. Thereby effectively creating false impression that Respondent No. 3 to 7 are homebuyers. It is as a result of this misrepresentation that they became home buyers and part of the CoC. All these fraudulent homebuyers became part of the CoC of the Corporate Debtor when having invested no money since the entire investment was rooted back to the account of respective related Party by Respondent No. 1 and 2.

The Bench notes that Resolution Professional (RP) after discovering such act has sent an Email on (12^{\text{th}}) January, 2021 to each of the beneficiaries of Respondent No. 3 to 7 to whom the funds were refunded from Respondent No. 1 and 2 and each of these related parties have agreed to have received the said fund back into their account.

The Bench notes that vide this IA, the RP has brought to fore Five such fraudulent transactions involving Respondent No. 1 and 2 (suspended directors) on one side and Respondent No. 3 to 7 on another.

The Bench in this case finds that on (26^{\text{th}}) August 2019, the Respondent No. 3 had infused Rs. 10 lacs into the account of Corporate Debtor company on the same day that is on (26^{\text{th}}) August 2019. Respondent No. 1 withdrew this Rs. 10 lacs from the said account of Corporate Debtor Company into his own personal account maintained with the Bank of Baroda.

Thereafter Respondent No. 1 transferred the said Rs. 10 lacs from his own personal account to one "Mr Vishnu Gujrati HUF", an HUF created by husband of Respondent No. 3 i.e. Mrs. Bela Gujarati (one of the home buyer) where Respondent No. 3 is a coparcener of the said HUF. This whole process clearly shows that Respondent No. 3 who invested Rs. 10 lacs to become homebuyer and Financial Creditor of the Corporate Debtor received from Respondent No. 1 the total amount of Rs. 10 lacs on the same day.

The Bench notes that Respondent No. 1 to 3 had concealed the said fact of the circuitous transaction and Respondent No. 3 had filed claims with the RP as a home buyers and enjoyed the position as financial creditor based on this alleged financial debt.

The pictographical depiction of the circuitous transaction is represented as below-

In the above graphical depiction, the arrow denotes money trail and the flow of funds amongst the parties. It clearly shows that the fraudulent transactions by Respondent No. 3 i.e. Bela Gujarati (one of the home buyer) Rs. 10 lacs has returned back to her HUF.

The Bench notes that there has been a similar transaction of Rs. 10 lacs on 26th August 2019 between the Respondent No. 1 and Respondent No. 4 wherein the Respondent No. 4 has received Rs. 10 lacs from the Respondent No. 1 on the same day from the personal account of Respondent No. 1 into the account of Mr. Girish Mallani who is husband of Respondent No. 4. In other words, effectively Respondent No. 4 received back alleged financial Debt of Rs. 10 lacs on the same day.

A depiction of this transaction is as under:

Similarly, transaction has also happened between R 1 and R 5 and also between R 1 and R 6 on 26^th August 2019 for an amount of Rs. 10 lacs each wherein effectively R5 and R6 have received back the alleged Financial debt of Rs. 10 lacs on the same day i.e. on 26 August 2019.

The Bench notes that there has been circuitous transaction between R2 and R7 on 6^th September 2019 where R 7 has infused Rs. 30 lacs into the accounts of Corporate Debtor and on the same day R2 and R7 in collusion transferred the said Rs. 30 lacs to two proprietary firms of the husband of R7 i.e. Asha Accounting Services and VM Associates, there by R 7 effectively received back the financial debt of Rs. 30 lacs on the same day.

It is very clear to the Bench that R1 and R7 in the above-mentioned transactions have defrauded the Corporate Debtor Company and such an act is squarely covered under Section 66 (1) and 66 (2) of the Code.

R1 and R2 who are the suspended directors in their defense have mentioned that the forensic report is incomplete and that the auditors have not conducted detailed review of the operations of the Corporate Debtor company. The Bench notes that the Respondent Number 1 and 2 who are the suspended directors have raised baseless technical objection regarding choice of sampling method and sampling technique. It is clear to the Bench that they have no defense regarding their conduct in the whole matter wherein they had fraudulently taken out money from the Corporate Debtor's Bank account and had paid back same amount to the related parties of the alleged homebuyer.

The Bench also notes that from amongst these alleged home buyers/Respondents only R7 (Meena Gokhale) has submitted a reply to this fraudulent application. The Bench note that the contention of R7 are feeble and baseless. R7 mentions that the allegations against them is devoid of any corroborative evidence and that no material of conclusive evidence has been put up against the aforesaid mentioned allegation.

The Bench therefore notes that R7 has not provided any proper explanation regarding its collusion and being a party to the fraudulent transactions.

In view of the above the Bench directs the following:

IA 107 of 2021 in CP 2995 of 2019 is disposed off in terms of Para 37 above.