Mr. Vaibhav Khandelwal vs Biharji Consultancy Private Limited & Ors.

Per Balraj Joshi, Member (Technical)

This court convened viaHybrid mode.

This is an application filed filed by the liquidator of the Corporate Debtor under sections 43, 44and 66 of the Insolvency and Bankruptcy Code, 2016 (IBC) seeking the following reliefs against the suspended board of Directors and other Respondents herein:

The Corporate Debtor was admitted into Corporate Insolvency Resolution Process (CIRP) vide order passed by this Adjudicating Authority on 03.08.2021 in C.P. (IB) No. 1685/KB/2019 whereby Mr. Arun Kumar Khandelia was appointed as the Interim Resolution Professional (IRP) by the Adjudicating Authority, who was later on confirmedas the Resolution Professional (RP) by the Committee of Creditors (CoC) on 15.09.2021.

As IRP, the Applicant made public announcement regarding the initiation of CIRP and submission of claims on 05.08,2021 in two newspapers viz. Financial Express and Aajkal. The IRP also intimated the suspended board of directors and other key managerial persons of the Corporate Debtor regarding the same and requested them to provide various documents and information. The IRP sent several reminders and requests to the suspended board of directors and other personnel on 04.04.2021, 03.08.2021, 04.08.2021, 06.08.2021, 10.08.2021, 14.08.2021 and 16.08.2021 but received no assistance or cooperation from them.

The Applicant again requested the suspended board of directors for the documents and information at the 1^st Meeting of Committee of Creditors (CoC) held on 02.09.2021 but the respondents failed to provide the same. Thereafter, upon finding wrongful preparation and certification of financial statements for the Financial Years (F.Y.). 2018-2019 and 2019-2020, the IRP with the CoC’s consent obtained at the 2^nd CoC Meeting, filed a complaint on 01.10.2021 with the Registrar of Companies, West Bengal (RoC) as well as the disciplinary committee of the Institute of Chartered Accountant of India against the Respondent No. 7 and the statutory auditors who had signed the said financial statements.

In discharge of his statutory duty, the Applicant filed I.A. (IBC) 762/KB/2021 under section 19(2) and 19(3) of the Code. Vide order^{11.Annexuer F to the Application} dated 10.11.2021, this Adjudicating Auhtority directed the Corporate Debtor to furnish the requested documents within 48 hours. Pursuant to the said order, the Respondents No. 7 and 8 provided only a few documents and a copy of the tally data for the F.Y. 2018-19, 2019-20 and 2020-21.

Subsequently, the Adjudicating Authority, vide order dated .04.01.2022, allowed the Applicant to take steps in accordance with law, in case of future non-cooperation on part of the suspended management of the Corporate Debtor.

Due to the failure on part of the Corporate Debtor in providing the Applicant with the requested documents, the Applicant could not make a determination within the time stipulated under Regulation 35A of the CIRP Regulations. The Applicant was only able to form an opinion regarding the transactions entered into by the Corporate Debtor. On 03.01.2022 at the 5^th CoC Meeting^{22.Annexure I to the Application}, after perusal of all financial statements, ledgers, books of accounts of the Corporate Debtor. Accordingly, M/s P S Roy & Associates, chartered accountants were appointed for conducting the forensic audit of the Corporate Debtor.

On the basis of such findings in the forensic audit report received on 11.03.2022, the Applicant has filed the present Application seeking the avoidance of preferential, undervalued and fraudulent transactions entered into by the Corporate Debtor with various parties under Sections 43, 45 and 66 respectively, of the Insolvency and Bankruptcy Code, 2016, ("Code") during the relevant period and for which the Respondent Nos. 1 to 9 are responsible and to seek contributions amounting to Rs.8,57,97,667/- from the respondents.

For the sake of convenience,the transactions mentioned in the application i.e the transactions entered into by the Corporate Debtor that purportedly fall under the category of preferential, undervalued and fraudulent transactions have been tabulated hereinunder:

Submissions of the Respondents No. 5 and 6 in the reply affidavit are summarized hereinafter:

The applicant has failed to adhere to the timelines provided under Regulation 35A of the CIRP Regulations, 2016. As such, the purported application is ex-facie barred by the Laws of Limitation. Further, the loan transaction executed between the Corporate Debtor and the respondent No.5 was on 28 August, 2017 and the Corporate Debtor and the respondent No.6 was on 4th April, 2016 which are all beyond the lookback period. As such, the instant application is again barred by the Laws of Limitation.

The applicant failed to demonstrate that the transactions between the corporate debtor and the answering respondents were preferential during the review period. The answering respondents have argued that their transactions occurred in the ordinary course of business and need not be questioned.

Further, the answering respondents have been wrongly and illegally arrayed as party respondents in the purported application. Hence the instant application should be dismissed on the ground of misjoinder of parties.

The purported application is solely based on a misconceived Transaction Report with false allegations. The genesis of the transaction between the respondent Nos. 5 or 6 and the Corporate Debtor is missing in the purported application as well as in the purported transaction report. The transactions with the Corporate Debtor and the answering respondents are not in question. It is the subsequent adjustment and/or assignment with the other respondents which are under challenge in the present proceeding. For the same, the answering respondents need not have been made parties in the present proceeding. As such, it is clear that there is complete non-application of mind by both the applicant and the transaction auditor which also indicates that no independent opinion has been formed by the applicant.

The assignment of the loan amount has been made through a tripartite agreement between the Corporate Debtor, the respondent No.2 and the respondent No.5. The respondent No.5 is the borrower company. The loan amount has been assigned by the Corporate Debtor to the respondent No.2 and, as such, the liability of the respondent No.5 company remains unaffected irrespective of such assignment. The respondent No.5 is not in any advantageous position because of such tripartite agreement as its liability to repay the debt remains. The transaction of assignment was mainly between the Corporate Debtor and the respondent No.2. The respondent No.5 has been kept in the loop as it is the borrower company. As such, no preference of any nature is being shown in this transaction to the answering respondent.

The respondent No.6, in the usual course of its business and in good faith has given an amount of Rs.10 lakh to the Corporate Debtor. What the Corporate Debtor does with the said amount received is of no concern to the respondent No.6 . Whatever the Corporate Debtor does with the said money that needs to be explained by the Corporate Debtor or its suspended board. The respondent No.6 has no role to play in this. As such, the respondent No.6 has been unnecessarily dragged into this litigation and has been made a party wrongfully.

Submissions of the Applicant in the Rejoinder are summarized hereinafter:

Any potential delay in filing of the instant application, as per Regulation 35A of the Insolvency and Bankruptcy Board of India (CIRP Regulations), is due to the non-cooperation from the suspended Board of Directors and/or management of the Corporate Debtor.The non-cooperation by the suspended Board was taken note of by the Adjudicating Auhtority, leading to directions for disclosure of records and information on multiple occasions.The non-cooperation by the suspended Board significantly impeded the RP's ability to form opinions and make determinations in accordance with Regulation 35A over an extended period.

Further, Regulation 35A's provisions and timelines are considered directory, not mandatory, as established by the Hon'ble National Company Law Appellate Tribunal.

The former Resolution Professional (RP) has independently explained in paragraphs 19, 23, 24, and 25 of the application how he formed an opinion and determination about various preferential, undervalued, and fraudulent transactions involving the Corporate Debtor, leading to the filing of the application.

A Respondent Nos. 5 and 6 are asserted to be proper and necessary parties in the application due to their involvement in purported loans and related transactions during the Financial Year 2020-2021.

A loan which was initially given to Respondent No. 5, a related party, was supposedly assigned to Respondent No. 2, another related party, during the mentioned financial year.In the same period, the Corporate Debtor received Rs. 10,00,000 from Respondent No. 6, which was then transferred to Respondent No. 9, another related party.Another loan of Rs. 2,56,81,497 given to Respondent No. 6 by the Corporate Debtor was also allegedly assigned to Respondent No. 4 during the Financial Year 2020-2021.

The interlinked transactions between the Corporate Debtor and its related parties during F.Y. 2020-2021 are characterized as mischievously woven, especially after the filing of the Company Petition under section 7 of the IBC in October 2019.The intention to defraud, deprive, or deny creditors of the Corporate Debtor is claimed to be evident from the constructed financial web during F.Y. 2020-2021 when the initiation of Corporate Insolvency Resolution Process (CIRP) was imminent.

The suspension of powers of the Board of Directors and management of the Corporate Debtor was also imminent during the financial web's construction in response to the pending admission of the Company Petition.

The Corporate Debtor itself disclosed Respondent Nos. 2, 5and 6 as related parties in its financial statements for the fiscal year ending on 31.03.2018. As such, they are considered crucial elements in the constructed web of transactions aimed at disadvantaging creditors when the Corporate Debtor was inevitably heading into CIRP.

Respondent No. 5, despite relying on the alleged tripartite assignment agreement in its reply affidavit, has failed to disclose it, indicating potential suppression and revealing a nefarious plot involving related parties to harm the creditors of the Corporate Debtor.

Commencement of Corporate Insolvency Resolution Process (CIRP) implied a loss of influence for the suspended management and/or Board of Directors over the Corporate Debtor's operations, leading to an immediate advantage for Respondent No. 5 through the purported assignment of the loan to Respondent No. 2.This purported assignment provided Respondent No. 5 and/or Respondent No. 2 with a potential defense against legal actions for debt recovery or CIRP initiation by the erstwhile RP or present Liquidator.

It is asserted without prejudice that it is unclear from Respondent Nos. 5 and 6's affidavits whether any repayments were made to the Corporate Debtor and/or Respondent No. 2 regarding the loan at any relevant time, questioning the bona fide borrower status of Respondent No. 5.Respondent No. 6's denial in its affidavit glosses over the RP's averments regarding the loan assignment to Respondent No. 4 during Financial Year 2020-2021.An immediate advantage had accrued to Respondent No. 6 through the loan assignment to Respondent No. 4, providing a purported defense against legal actions.The overall narrative suggests a complex scheme involving alleged suppression, mischievous transactions, and purported defenses by related parties to manipulate the Corporate Debtor's financial position during the pending Company Petition and initiation of CIRP.

The purported assignments of loans occurred in Financial Year 2020-2021, disputing the claim that the transactions complained of are beyond the lookback period and barred by the Laws of Limitation.

Heard the Ld. Counsels on behalf of Liquidator i.e the erstwhile RPand the Ld. Counsel on behalf of the Respondents No. 5 & 6 and perused the records.

It is noted that the order for liquidation of the Corporate Debtor was passed on 14.09.2022 whereby Mr. Vaibhav Khandelwal[Reg. No. IBBI/IPA-001/IPP02157/2020-2021/13348]was appointed as the liquidator of the Corporate Debtor. The cause title of the instant application was amended accordingly vide order dated 25.10.2022.

Before going into the merits of the instant case, we first adjudicate upon the maintainability of the instant application on the grounds of limitation. The Respondents No. 5 and 6 have contended that the instant application has been filed after the time period allowed under Regulation 35A has elapsed.

In this regard, we rely upon the decision of the Hon’ble NCLAT in the matter of Aditya Kumar Tibrewal RP vs. Om Prakash Pandey, Suspended Director and Ors.^{44.Company Appeal (AT) Insolvency No. 583 of 2021, decided 06.04.2022}, wherein the Hon’ble Appellate Authority has held that:

It is evident from the records that the suspended board of directors failed to extend cooperation to the erstwhile RP and failed to provide the requested information and books of accounts of the Corporate Debtor in time. The delay in filing of the instant application can be attributed to the delay in gathering of the required information and documents. In light of the said facts and the aforementioned decision of the Hon’ble NCLAT, we are inclined to allow the instant application even though the samemay not strictly adhere to the timeline mentioned in Regulation 35A of CIRP Regulations, 2016.

Coming to the merits of the case, the Applicant has categorised the transactions mentioned in Table A given above as preferential, undervalued or fraudulent which have been dealt with separately as follows:

In order to adjudicate upon the issue of the alleged Preferential Transactions, we need to refer to the decision of the Hon’ble Supreme Court in the matter of Anuj Jain vs. Axis Bank Ltd. and Ors^{55.MANU/SC/0228/2020}. The relevant paragraphs from the said judgment are reproduced hereinunder:

In the case of Anuj Jain (Supra), the Supreme Court examined section 43 of the Code and provided significant insights. Addressing the issue of the Respondents' intention, the Supreme Court, following an analysis of section 43 of the Code, clarified that the intention of the parties holds no significance in determining whether a transaction is preferential. Further, in order to establish a clear categorization of a transaction as preferential, the Supreme Court outlined the following procedural steps.

a. Determining “Relevant Time” concerning Section 43 :-Two years in case of related party and one year in case of unrelated parties (both to be calculated from insolvency commencement date) ;

b. Determiningwhether there has been a transfer of property or transfer of an interest of the Corporate Debtor;

c. Establishing the fact whether the beneficiary is a creditor or guarantor or surety in relation to the Corporate Debtor;

d. Analysingwhether the transaction is made on account of financial debt or an operational debt or any other liability; and

e. Analysingwhether the said transfer puts the transferee in a beneficial position than it would have been in the event of distribution of assets as per section 53 of the Code.

Coming to the first step mentioned in Anuj Jain (supra), the Forensic Audit Report annexed on Page 210 to 230 of the application mentions the following respondents as related parties of the Corporate Debtor:

Further, the Applicant has also mentioned that Respondent No. 2 is a shareholder of the Corporate Debtor, having more than 10% of its shares according to the shareholding list dated 31.03.2019^{66.Annexure K} . As such, Swaraj Vanijya Private Limited being Respondent No. 2, is also a related party of the Corporate Debtor.

Further, according to the the Transaction Audit Report, Respondents No. 1,3,4,5 and 6 have been mentioned to be companies over which the Corporate Debtor had “significant influence”. In this regard, it is pertinent to note that according to the public document i.emaster data given in the official website of Ministry of Corporate Affairs, the directors of Respondent No. 4 and the directors of the Corporate Debtor are same. Further, the directors of the other four companies being Respondents 1, 3, 5 and 6 are Gayatri Singh [DIN 08938077] and Rohit Kumar Singh [09521687]. In light of the aforesaid facts, Respondents No. 1,2,3,4,5 and 6 should also be categorised as related parties for the purpose of determination of “relevant time” under section 43 of the Code.

Keeping in mind the aforementioned facts and the law laid down in Anuj Jain (supra), the observations/ determination regarding the alleged preferential transactions are provided hereinafter:

It is clearin light of the decision in Anuj Jain (supra) that while determining if a transaction falls within the category of preferential transaction or not, the intention of the parties becomes irrelevant. Even though the Respondent No. 7 i.e the suspended director of the Corporate Debtor has attempted to provide an explanation regarding the said transactions on pages 236- 242 of the application, the Adjudicating Authority needs to decide upon the same in light of the law down before it. Upon going through each of the transactions given in the instant application, we find that the transactions fulfill the parameters set by the Hon’ble Supreme Court in Anuj Jain (Supra).As such the reliefs sought by the Applicant can allowed.

In order to adjudicate upon the issue of the alleged undervalued Transactions, we first refer to the provision of section 45 which is reproduced hereinunder:

According to the aforementioned provision, any transaction entered into during the “relevant period” by the Corporate Debtor, wherein, transfer of one or more assets by the corporate debtor takes place for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor or the written down value (WDV) in the instant case shall be deemed an undervalued transaction. Further, the transaction should not have taken place in the ordinary course of business of the Corporate Debtor.

Regarding the alleged transactions, while the Applicant has claimed the following transactions as undervalued, the same has not been backed by any evidence. Mere ledgers and vouchers provide no proof towards establishing the claims of the Applicant. As such, the same cannot be taken into consideration.In light of the same, our observations about the alleged transactions are as follows:

Contention Type of Explanation TransactionPage 21 of 29

10,00,000/- received from undervalued that the said transaction was for a R.6 was transferred to a a consideration which is significantly less different related party i.e than the value of the consideration Mr. Harshit Bajaj (R.9) in provided by the corporate debtor or the F F.Y. 2020-21. written down value (WDV) r

At this juncture, it relevant for us to refer to the provisions of section 66 of the Code. The said sections are reproduced hereinunder:

From section 66(1), it becomes clear that the intent of the directors to defraud the creditors is an essential ingredient when it comes to establishing that a transaction is covered under the category of fraudulent transaction under section 66 of the Code.

In the instant case, there are five transactions categorized as fraudulent transactions by the Applicant. In respect of the same, the suspended director has given explanations which are annexed to the application on pages 236 to 242. Our determination in respect of the alleged transactions,In light of such explanations and other documents on record, are provided hereinafter, in a tabular form:

From the aforesaid facts and findings, it becomes clear that the following transactions need to be reversed and accordingly, the amount payable by the Respondents to the Applicant are given hereinafter:

In light of the aforementioned facts, findings and the case law cited above, we hereby allow the application and direct that:

The amount shall be deposited in the liquidation estate of the Corporate Debtor.

With the above directions, , I.A.360/KB/2022 is hereby disposed of.

List CP No. 1685/KB/2019 on 02.02.2024.

The registry is directed to send e-mail copies of the order forthwith to all the parties and their Ld. Counsel for information and for taking necessary steps.

A certified copy of this order may be issued, if applied for, upon compliance with all requisite formalities.