Mr. L.V. Shyam Sundar vs Mr. Unnamalai & Ors.

Per: SANJIV JAIN, MEMBER (JUDICIAL)

This Application under Sec.66 of IBC has been filed by the Applicant / Resolution Professional seeking the following reliefs:

The facts relevant for the disposal of the Application are that the Corporate Debtor M/s. A School India Private Limited was admitted to CIRP on an application filed by the Operational Creditor u/s 9 of IBC, 2016 vide an order dated 08.11.2019. Shri S.R. Krishnan was appointed as IRP of the Corporate Debtor. Committee of Creditors was constituted. During the process, four claims were received from the Operational Creditors. Thereafter the Tribunal appointed the Applicant as the RP of the Corporate Debtor.

It is stated that neither the RP nor the IRP received any documents from the erstwhile promoters of the Corporate Debtor and therefore IRP moved an application u/s 19(2) of IBC, 2016. It is stated that during the CIRP, CoC members informed the Applicant that a franchise agreement as Annexure 4 was entered into between the corporate debtor and the operational creditors / franchisee to run the playschool etc. Since the Corporate Debtors failed to obtain licenses to operate the schools / educational institutions, it received a notice from the Department of Education for closure and direction from the Hon'ble High Court as Annexure 5 which order was upheld by the Hon'ble Supreme Court. The franchisees being aggrieved from the actions and inactions of the corporate debtor invoked the Arbitration clause under the franchise agreements and the sole arbitrator passed the following arbitral awards on 10.08.2016 in favour of the operational creditors as detailed below:

It is stated that the operational creditors then approached the corporate debtor to pay the amount but by then the corporate debtor was under CIRP. This made the Operational Creditors file claims before the IRP. They informed the Applicant that in terms of the franchise agreements, the money collected from the students as fees were directly paid in the name of A School, details given in annexure 7. On verification it is found that the bank account in which the funds were deposited did not belong to the corporate debtor but to 'Rajah Sir Annamalai Chettiar Foundation', though as per the agreement clause 9.2, the receipts should have been only in the name of the franchisor i.e. A School India Private Limited.

It is alleged that the erstwhile promoters of the Corporate Debtor diverted the funds to the related party i.e., the 3rd respondent with an intention to defraud their creditors. The applicant sent mails requesting the promoters / erstwhile directors to provide the information / details and the reasons for diversion of funds of the corporate debtor to the trust but did not receive any response. It is stated that the Applicant placed the above facts before the CoC in the meeting held on 07.01.2021 and decided to file this application qua fraudulent / wrongful trading.

On getting notice of the Application, Respondent No.3 filed the reply wherein it denied the averments made in the application. It is stated that respondent no.3 is a trust which is not governed by the provisions of IBC. It has nothing to do with the functioning of the Corporate Debtor. It operates various schools of its own to impart education to the children. It wanted to expand its footprint by establishing more schools in order to impart education and for that purpose it entered into a partner agreement dated 11.03.2021 with the corporate debtor whereby it granted the Operational Creditor the right to the use / license its trademarks and other materials necessary to establish schools and curriculums. A fee was agreed and by way of this agreement, the 3^rd respondent gave rights to the corporate debtor to establish schools and use the trademarks. In order to ensure a streamlined manner of fee collection from the students, it was decided that the fees paid by the students would go to the designated bank account of the trust and thereafter the trust would pass it on to the corporate debtor after deducting the license fee as provided under clause 5.1 of the agreement. It is stated that the franchisees of the corporate debtor were the entities who had the right to use the license, trademarks and the program materials. The corporate debtor was obligated to ensure that the fees received from such franchisees be deposited only in the designated account of the 3^rd respondent. It is stated that there was no interference in the affairs of the corporate debtor by the 3^rd respondent.

It is stated that from the records, that the entire amounts to the corporate debtor received from the students in respect of the franchise schools has been paid back after deducting the license fee under the agreement as detailed in para 9 of the reply. It is stated that there is no fraudulent transaction or siphoning of / diversion of funds as alleged by the Applicant. It is alleged that this application has been filed without seeing the bank statements of the corporate debtor.

In reply, Respondent No.1, 2 & 4 have stated that the Respondent No.4 is the erstwhile promoter of the corporate debtor. They denied the averments made in the application and stated that the application is untenable as no grounds set out under section 66 is made out. It is stated that the applicant / RP has not even formed an opinion regarding the existence of the fraudulent / wrongful transaction. He has acted mechanically without due application of mind. Respondent no.4 stated on the line of respondent no.3 regarding entering partner agreement with the respondent no.3 and franchises agreements with several franchisees / Operational Creditors. It is alleged that the RP without verifying the facts made the false allegations against the corporate debtor. It is stated that based on the contractual framework, money was deposited in the designated bank account of the 3^rd Respondent which the franchisees were well aware and the Respondent No.3 remitted back the money to the corporate debtor after deducting the license fee. It is stated that from the records it can be culled out that the schools were operational between 2011 – 2014. 3^rd respondent had received about Rs.9 crore from the schools / franchises and remitted back the entire sum to the corporate debtor after deducting the fee as per the agreement.

We have heard Ld. Counsel for the Applicant Mr. K.S. Elangovan and the Liquidator, Shri Vishnu Mohan for Respondent no.1, 2 & 4 and Shri Prahalad Bhatt for Respondent No.3 and perused the records.

Section 66 of The Insolvency and Bankruptcy Code, 2016 reads as under:

From the plain reading of Sec 66, it is clear that the Tribunal can pass an order if it is found that any person has carried on the business of a corporate debtor with an intent to defraud its creditor, such person can be directed to make contributions to the assets of the corporate debtor and directors / partners can be subjected to personal liability if they fail to take reasonable steps to minimize the potential loss to the creditors and the directors / partners can be made liable to make contributions of the corporate debtors.

From the averments of Respondents and the documents, it is seen that the Corporate Debtor was into the business of imparting education to the children. It entered into franchisee agreements with the franchisees to run playschools etc., and provide holistic online curriculum for the education of children. It however failed to obtain licenses required to operate the schools. As a result it had to close down all the schools under its name and brand. There was an arbitration clause in the franchisee agreements. The franchisees invoked the arbitration clause and filed the claims before the arbitrator who passed the awards on 10.08.2016 in favour of the operational creditors / franchisees for a total sum of Rs.4,06,10,976/-. By that time CIRP against the corporate debtor had been initiated which made the franchisees file their claims before the IRP.

It is true that in terms of the franchise agreement, the money collected from the students as fees were directly paid in the name of A School as per the details provided by the Corporate Debtor but record show that the Corporate Debtor had entered into a partner agreement dated 11.03.2021 with the 3^rd Respondent i.e. Rajah Sir Annamalai Chettiar foundation whereby the trust granted right to the corporate debtor to use license /trademarks and other materials necessary to establish schools and to impart education to children for which some fee was fixed. An arrangement was made that the fees paid by the students would go to the designated bank account of the trust, the trust would account for the same and pass it on to the corporate debtor after deducting he license fee under the agreement. It is not the case that it was an oral arrangement rather the agreement was reduced in writing which had clause 5.1 regarding payment of fees and its remittance. The record shows that there was no interference of the trust / 3^rd respondent into the affairs of the corporate debtor.

It is seen that the amount of Rs.4.06 crore as alleged fraudulent transaction matches with the amount ordered to be paid by the Arbitral Tribunal as mentioned in para 3 above.

In the present case, through his counter the 3^rd respondent has given the details how the amount was remitted back to the corporate debtor received from the students in respect of franchisees schools after deducting the license fee which the 3^rd respondent was entitled to. This fact was also acknowledged by Respondent No.4 in his reply. Feeble and untenable arguments were raised during the hearing by the Applicant. Applicant did not deny that payments were not received by the Corporate Debtor.

It appears that the Liquidator, who took over the matter from the RP, did not verify the record nor examined the bank statements of the Corporate Debtor and filed this application alleging that the company had fraudulently diverted the funds of the corporate debtor to the 3^rd respondent / trust with an intention to defraud its creditors and usurp the monies of the corporate debtor. In the present case, the money was duly paid back by the 3^rd respondent / trust after deducting the license fee as per the agreement. Under no circumstances, the said transactions made by the corporate debtor can be said to be fraudulent trading or wrongful trading not can it be said that the respondents / erstwhile directors had carried on the business of the corporate debtor with an intent to defraud the creditors. Therefore no liability can be fastened on the directors to make contributions to the assets of the corporate debtor as prayed for.

During the hearing, observation of the Bench were made known to the Liquidator and question was put to the Liquidator as to whether he wishes to continue to press the present application. The Liquidator replied that he is pressing the application.

For the aforesaid reasons the application being devoid of merits and appears to be frivolous is dismissed with cost of Rs.5000/- to be deposited by the Applicant in the “Prime Minister’s National Relief Fund” within a period of 7 days from the date of this order.

Nothing mentioned hereinabove shall tantamount to be an expression of opinion on the merits of the case. Any observation made in the order would not stand in carrying out the liquidation process against the corporate debtor by the applicant / Liquidator.

The Application is accordingly disposed of.