Mr. Vamsi Kambhammettu vs Umesh Purushotam Jethwani & Ors.

PER BENCH

This application was originally filed by Mr. KV Srinivas, the ‘Resolution Professional’ (hereinafter referred as ‘RP’) of M/s. ‘Meena Jewellers Exclusive Private Limited’ (hereinafter referred as ‘Corporate Debtor’) under Sections 118,128 and 213 of ‘The Companies Act, 2013’ (hereinafter referred as ‘The Act’) and Section 66(1) of ‘The Insolvency and Bankruptcy Code, 2016’ (hereinafter referred as ‘IBC’) read with Rule 11 of The NCLT Rules, 2016. The reliefs sought for in the present application are as follows:

The Corporate Debtor was admitted into ‘Corporate Insolvency Resolution Process’ (hereinafter referred as ‘CIRP’) by this Tribunal vide order dated 26.11.2019 in C.P.NO. 663/7/HDB/2018 and Mr. KV Srinivas was appointed as the RP of the Corporate Debtor. Subsequently, a Forensic Audit was conducted over the affairs of the Corporate Debtor and a report was submitted to the RP by the Forensic Auditor on 01.02.2021. This report pertains to the affairs of the Corporate Debtor for the period 01.04.2015 to 26.11.2019. Basing on this Forensic Audit Report and other available records of the Corporate Debtor, the RP filed the present application seeking the reliefs as prayed for.

Subsequent to the filing of this application, the Corporate Debtor was put into Liquidation by an order dated 26.04.2021 in I.A. No. 673 of 2020 by appointing Mr. Vamsi Kambhammettu as the Liquidator of the Corporate Debtor. On initiation of the Liquidation proceedings of the Corporate Debtor, the RP was replaced by the Liquidator and the Liquidator is pursuing the present application.

It was submitted that Respondent No.1 and 2, being the Directors of the Corporate Debtor, siphoned off the funds of the Corporate Debtor by transferring an amount of Rs.19,90,63,152/- to Respondents No.3 to 6. It was submitted that Respondent No.1 and 2 also diverted the stock of Corporate Debtor amounting to Rs.88 crores to Respondents No.3 to 6.

It was submitted that the Corporate Debtor availed financial facilities from ‘State Bank of India’ (‘SBI’) (Annexure 1 of the Petition), but defaulted in paying the same by illegally disposing off the inventory charged to the Financial Creditor. That on account of not servicing the financial facilities, SBI declared the account of the Corporate Debtor as NPA on 27.09.2016.

It was submitted that as part of the statutory duties, when the RP visited the Registered Office of the Corporate Debtor on 06.12.2019 to take control and custody of all the records and assets of the Corporate Debtor after initiation of CIRP, it was found that there were no records at the Registered Office of the Corporate Debtor. It was submitted that the RP requested the suspended management/Respondent No.1 and 2 herein to provide the information regarding the business transactions and books of accounts of the Corporate Debtor for a smooth conduct of CIRP, but that the suspended management did not provide with any document as requested by the RP. It was submitted that there was no cooperation from the suspended management of the Corporate Debtor in conducting the CIRP. It was further submitted that the Corporate Debtor does not carry any business and was made a shell company with no employees, business and assets (Audited Financial Statement - Annexure 4 of the Application).

It was submitted that by an order dated 10.02.2020 in IA No.51 of 2020 which was filed under Section 19(2) of IBC, this Tribunal directed the suspended management (Respondents therein) as follows:

It was submitted that the Respondents (the suspended management) did not obey the said orders of this Tribunal and did not provide any requisite information of the Corporate Debtor for a smooth conduct of CIRP. It was submitted that there were several requests from the RP seeking information from the Respondent No.1 and 2, but that these Respondents did not submit even a single document pertaining to the Corporate Debtor. It was submitted that the suspended management of the Corporate Debtor also failed to maintain the records of the Corporate Debtor and violated Sections 118, 128 of The Act. That the same is evident from the panchnama recorded while handing over the possession of the Corporate Debtor to the RP (Annexure 3 of the Petition).

It was submitted that there was no single paper found at the registered office of the Corporate Debtor so as to show that the business of the Corporate Debtor was conducted in accordance with law. It was submitted that the RP came to a conclusion that the business of the Corporate Debtor was conducted with an intent to defraud creditors of the Corporate Debtor and for fraudulent purpose attracting the provisions of Section 66(1) of IBC. That in support of this contention, reliance was placed on the Report of Forensic Audit Report of the Corporate Debtor dated 01.02.2021 (Annexure 5 of the Application).

Basing on the Forensic Audit Report, it was submitted that the sale of jewellery by the Corporate Debtor was not routed through the designated Cash Credit Account of the Corporate Debtor maintained with SBI, the Financial Creditor. It was alleged that out of Rs.884 crores of sales made by the Corporate Debor for the Financial Years between 2016 to 2020, the Corporate Debtor reported negligible bank receipts of worth Rs.70 crores in the said Cash Credit Account. That this revenue was reflected neither in the receivables nor in the receipts of the Corporate Debtor and an inference was drawn by the RP that these revenues were routed into unknown accounts. It was submitted that this act is in violation of the terms of the loan sanction document dated 22.12.2012 and is an act done with an intent to defraud the creditor i.e., SBI (Page 30 of the Forensic Audit Report).

It was submitted that the Inventory available with the Corporate Debtor was not properly valued as per the established standards of valuation. It was submitted that the Corporate Debtor availed loan facility from SBI by over valuing the stock worth Rs.32 crores. It was further submitted that the diamond stock available with the Corporate Debtor was valued at 85% lower to the actual value since 28.02.2017. It was also submitted that there is a mismatch in the stock statements provided by the bank and the Corporate Debtor. It was further submitted that there were discrepancies in the stock statement and VAT returns of the Corporate Debtor. It was also submitted that there were transactions made by the Corporate Debtor with 5 suspicious creditors to a tune of Rs.19,90,63,152/-.

It was submitted that the Forensic Auditor concluded that the accounts of the Corporate Debtor will fall within the meaning of fraud as given in explanation to Section 447 of The Companies Act, 2013 and also as per Reserve Bank of India circular dated 07.05.2015 “Framework for dealing with loan frauds.” It was stated that the Respondent No.1 and 2 (suspended management) having taken large amount of loans from State Bank of India and by wilfully submitting audit reports with many discrepancies, committed a fraud against the creditors of the Corporate Debtor.

It was submitted that the Respondents have not handed over any of the original statutory records of the Corporate Debtor including the books of accounts and also the assets as mentioned in the audited Financial Statements other than the building belonging to Meena Jewellers Exclusive Pvt. Ltd. situated at Basheerbagh, Punjagutta and Begumpet respectively till 29.08.2020. It was submitted that in this regard separate proceedings were also initiated against Respondent No.1 and 2 as per Section 236 of IBC.

It was submitted that the Respondents concealed the books of accounts with an intention of hurdling the CIRP of Corporate Debtor and handed over a password protected CPU on 21.07.2020 stating that the said CPU contains records of all the 3 companies. That the RP requested the Respondent No. 1 & 2 to share the password of the said CPU but that there was no response (Annexure 6 of the Application).

It was submitted that the Respondents acted hand in glove prior to the commencement of CIRP of the Corporate Debtor and are collectively responsible for defrauding the creditors i.e., SBI for an amount of Rs.80 crores (Value of stock siphoned off as on 31.01.2017 - Page 58 of the Report).

In the above backdrop, the Applicant sought for the reliefs under Section 213 of The Act and under Section 66 of IBC.

Denying all the averments made in the Application, Respondent No.1 submitted that the present application is false and baseless and is thereby liable to be dismissed.

It was submitted that the RP have filed various applications against the Respondents for non-cooperation and that the Respondents extended all cooperation by providing the documents and information as required and requested by the RP. It was submitted that the Respondents conducted the business of the Corporate Debtor in an honest manner and acted only in the interests of the Corporate Debtor.

It was submitted that the RP conducted a forensic audit of the affairs of the Corporate Debtor and that the forensic auditor during the time of audit sought various clarifications from Respondent No.1. It was submitted that Respondent No.1 received a questionnaire from the Forensic Auditor vide email dated 27.01.2021 seeking certain clarifications with a direction that the same be provided by the next day. That the Respondent No.1 sought for a time of three weeks to provide the clarifications as Respondent No.1 was tested Covid positive. It was submitted that the Respondent No.1 provided the required clarifications to the forensic auditor by way of an email dated 11.02.2021 (Annexure 1 of the Counter).

It was submitted that the forensic auditor submitted the report to the RP without taking into consideration the information submitted by Respondent No.1. Hence, it was submitted that the forensic audit report is false and untrue and, in this regard, Respondent No.1 relied on the disclaimer of the Forensic Audit Report which is as follows:

It was submitted that the Forensic Auditor considered only the information available in the public domain and the information submitted by Respondent No.1 was not taken into account. It was further submitted that the Forensic Audit Report was submitted without any proper evidence and hence, the present application which was filed basing on the said forensic report is liable to be dismissed.

It was submitted that the trading of the Corporate Debtor was conducted in a normal manner and that the allegation of the RP that the Respondents siphoned off Rs.19,90,63,152/- of the Corporate Debtor is without any proof. It was submitted that no such amount of Rs.19,90,63,152/- was shown in the balance sheets or any other documents of the Corporate Debtor and hence these averments are false and baseless.

Denying the allegations of illegally disposing off the inventory of the Corporate Debtor, it was submitted that these allegations were already answered in the Counter of the Corporate Debtor in Section 7 Petition filed by SBI. Denying the allegation of making the Corporate Debtor as a shell company, it was submitted that the Corporate Debtor was carrying the business activities till 2018 even after declaration of the Corporate Debtor as an NPA by SBI. It was submitted that due to the downfall and losses of the business of the Corporate Debtor, the employees left the Corporate Debtor.

It was submitted that the Corporate Debtor has 3 assets (jewellery showrooms) situated at Basheerbagh, Punjagutta and Begumpet. It was submitted that Respondent No.1 invited the RP to take the possession of these buildings, but that the RP delayed in doing the same. That the building at Basheerbagh, Begumpet and Punjagutta were handed over to RP on 13.07.2020, 15.07.2020 and 29.08.2020 respectively (Panchnama at Annexure 2 of the Counter).

It was submitted that the delay in handing over possession of property at Punjagutta was because of the unwarranted delay caused by the RP. It was submitted that the RP refused the possession of this property until the floof water accumulated was cleared and major repair works of the property are completed by Respondent No.1 (Email of RP confirming the receipt of Punjagutta Property at Annexure 3). It was further submitted that the RP took the possession of property at Punjagutta only after the direction of this Tribunal (Order dated 08.08.2020 and 17.08.2020 – Annexure 10 and Annexure 4 respectively).

It was submitted that the Respondent No.1 was always supportive in providing the information of the Corporate Debtor and that Respondent No.1 sent a series of emails to Mr. Bhavesh Vithlani, Auditor and valuer of the Corporate Debtor appointed by the erstwhile RP and that the same was brought to the notice of the erstwhile RP (Annexure 5 of the Counter).

It was submitted that all the statutory records of the Corporate Debtor including the audited and provisional balance sheets as required by the erstwhile RP were already submitted through email (Annexure 5 of the Counter) and that the IT records, annual returns, and other forms filed by the Corporate Debtor with the statutory authorities are available in public domain. It was also submitted that the passwords relevant for obtaining information from the websites were also submitted by Respondent No.1 to the erstwhile RP.

It was submitted that as per the directions of this Tribunal, all the required information and documents were submitted to the Resolution Professional in the form of hard copies and emails dated 24.09.2020 and 27.10.2020 (Annexure 7 of the Counter). That as per the directions of this Tribunal, the RP was handed over with the CPU of the Corporate Debtor (Annexure 6 of the Counter). It was submitted that the employee who was handling the accounts of the Corporate Debtor left the organisation few years back and the efforts made by the management of Corporate Debtor to trace the whereabouts of this employee so as to recover the passwords went in vain and that the same was informed to the RP and this Tribunal. It was submitted that this Tribunal also directed the RP during the hearing in IA 467/2020 to take possession of the CPU and engage a cyber expert to unlock the CPU and recover the documents from the CPU. That the RP failed to comply with these directions and is now levelling allegations against the Respondents.

It was submitted that the Respondents provided all the required details, documents and information to the erstwhile RP. It was submitted that the RP was given the reasons for the non-availability of records of Corporate Debtor at the registered office which is as follows (Annexure 8 of the Counter):

It was submitted that there was a fire breakdown at the registered office of the Corporate Debtor in the year 2018 which led to the destruction of the statutory registers, minutes, books of accounts and other documents of the Corporate Debtor. That the Respondent No.1 was in the process of collecting and collating the information as required under The Act. It was submitted that other than the minutes of the Board Meetings, shareholders meetings, statutory registers, the Respondent No.1 provided all the documents and information including the handing over of the properties, provisional and audited balance sheets of the Corporate Debtor to the erstwhile RP. It was further submitted that the erstwhile RP was provided with all the login credentials of the Corporate Debtor to access records maintained with statutory authorities viz., RoC, Income Tax so as to enable the erstwhile RP to download the required information from the websites.

It was submitted that the erstwhile RP levelled various allegations of siphoning off funds without any proper proof or evidence, one among those being siphoning of Rs.88 crores of the Corporate Debtor.

It was submitted that the Corporate Debtor complied with the terms and conditions as mentioned in the SBI loan agreement dated 22.12.2012. It was submitted that the nature of business of Corporate Debtor is such that the profit margin is very low. It was submitted that the sales and purchases of gold and diamonds are mostly settled and exchanged and hence, there are low cash/credit transactions except for the amounts received by the Corporate Debtor. That the payments received by the Corporate Debtor towards making charges are comparatively very small and that the same were deposited by the Corporate Debtor in the SBI CC Account. That the sales and purchases of gold and diamonds be referred from the VAT returns filed by the Corporate Debtor wherein corresponding Input Credit is claimed by the Company against the said purchase and sales. That this clarification was also given to the RP, forensic auditor and SBI in the reply letter dated 11.02.2021.

It was further submitted that the receipts of Rs.884.27 crores and payments of Rs.890.59 crores as stated by the Forensic Auditor at Page 30 and 31 of the Forensic Audit report are the gold and diamonds sold by the Corporate Debtor in exchange of gold and diamonds and hence, there was no movement of money through these transactions (VAT Return for the month of May, 2017 – Annexure 11).

Denying the allegations made in respect of Inventory, it was submitted that the Corporate Debtor never availed any credit facility by overvaluing the stock. It was submitted that the closing stock includes the purchases and sales and also the opening stock, issues and receipts brought forward from the previous months. It was submitted that the price value of the opening stock and other purchases, receipts and sales are also required to be considered to derive the effective closing stock. The Respondent No.1 relied on the statement showing the calculation of valuation of stock (Annexure 13 of the Counter).

It was submitted that “Clause 13 – Changes in Inventory” of the Financial Statement of the Corporate Debtor for the year 2016-17 mentions the calculation of inventory which includes opening stock, issues, closing stock and the increase/decrease in the inventory. It was submitted that the Corporate Debtor had sales of higher value diamonds during the month of February, 2017 and that hence, the balance closing stock of diamond price dropped subsequently from February, 2017. It was also submitted that the Forensic Auditor considered only the unit rate of stock-in and hence the undervalue reports are incorrect (Annexure 14 of the Counter).

It was submitted that the Respondent No.1 noticed the technical discrepancies in the stock statement submitted to SBI for the month of September, 2016 and that a revised stock statement was submitted to SBI. It was submitted that this information was given to the erstwhile RP and that on non-receipt of hardcopy by the erstwhile RP, the Respondent No.1 shared the scanned copy of the revised stock statements by way of email dated 30.09.2020 (Revised Stock Statement – Annexure 12 of the Counter).

It was submitted that there are no suspicious transactions of the Corporate Debtor as alleged in the application and that there is no evidence to substantiate the same. It was submitted that the Forensic Auditor opined that the corporate Debtor had suspicious transactions with the Respondent No. 3 to 6 for the only reason of Mr. Palem Mahender Kumar being the owner of all these entities and that all these were located in the same premises.

It was submitted that the purchase and sales reported by the Corporate Debtor in the monthly stock statement and in the VAT returns are tallying. It was submitted that the stock statement submitted to SBI includes purchase, sales, receipts & issues, the amount of stock defers but that the VAT returns are calculated only on purchases and sales. That the differences in the values are not intentional and are only differences in calculation.

It was submitted that the provisional balance sheet as on 26.11.2019 and the audited financial statement as on 31.03.2020 were already sent to the RP and that a perusal of the same would state that the Corporate Debtor do not have any assets other than those handed over to the RP (Copy of email communication providing balance sheet -Annexure 16 of the Counter).

The Applicant and the Respondent No.1 filed the written submissions and relied on the rulings of judicial forums. In the light of the contest put forth as above by both the parties, the points that emerge for the consideration of this Tribunal are as follows:

Whether the Respondent No.1 and 2 carried on the business of the Corporate Debtor with an intent to defraud the creditors of Corporate Debtor or for any fraudulent purpose? If so, for what relief?

Whether the Applicant has made out a case for ordering an investigation into the affairs of the Corporate Debtor under Section 213 of The Companies Act, 2013?

We have heard Mr. VVSN Raju, Ld. Counsel for the Applicant/Liquidator and Ms. Devangi Kariya, Practicing Company Secretary, for Respondent No.1, perused the record and the submissions.

Whether the Respondent No.1 and 2 carried on the business of the Corporate Debtor with an intent to defraud the creditors of Corporate Debtor or for any fraudulent purpose? If so, to what relief?

Reiterating the contents of the application, the Applicant filed written submissions. In support of the contentions raised, the applicant relied on Mr. Lagadapati Ramesh vs. Mrs. Ramanathan Bhuvaneshwari, Company Appeal (AT) (Insolvency) No.574 of 2019 dated 20.09.2019, Hon’ble NCLAT, New Delhi which is as follows:

On behalf of Respondent No.1, written submissions were filed and reliance was placed on some of the judicial pronouncements which are as follow: MD Sadique Islam and Ors. vs Niraj Kumar Agarwal and Ors., (2024) ibclaw.in 128 NCLAT

Shalabh Kumar Daga, Liquidator of Silver Proteins Pvt Ltd vs Himanshu J Domadia, (2024) ibclaw.in 294 NCLT:

The RP of the Corporate Debtor conducted a Forensic Audit of the Corporate Debtor and basing on the said report, the following allegations were levelled in the present application against the Respondent No. 1 and 2:

In addition to these, it was also pleaded on behalf of the Applicant that the Respondents did not cooperate with the RP in handing over the records of Corporate Debtor and other information as sought for. It was also stated that a CPU, protected with password was handed over to RP stating that the records of the Corporate Debtor are in the said CPU. It was stated that though the RP asked for the password of the CPU, the same was not provided.

Refuting these allegations, it was stated on behalf of the Respondent No.1 that the Respondents extended co-operation as sought by the RP and provided with the required information.

Refuting the allegations of siphoning off funds, it was stated that the forensic auditor did not consider the explanations of Respondent No.1 and prepared the forensic audit report based on the information available in the public domain. It was also stated that the allegations of siphoning off funds of the Corporate Debtor is without any evidence or proof.

This Tribunal vide order dated 10.02.2020 in I.A. No. 51/2020 directed the Respondents therein (Respondent No.1 and 2 herein) as follows:

The information sought for in the said application i.e., I.A. No. 51/2020 is extracted at Para 2(e) of the said order dated 10.02.2020 and the same includes the books of accounts of CD maintained in ERP or in any other format for the last 8 financial years as per Companies Act. The allegations levelled in the present application also includes that the Respondent No. 1 and 2 are not providing these books of accounts of the Corporate Debtor to the RP.

Subsequently, on 08.09.2020, this Tribunal passed an order in I.A. No. 467/2020, the operative portion is as follows:

The allegations levelled in the present application also includes the same non-disclosure of password of the CPU in which the data of the Corporate Debtor is stated to be present.

The defence set up by Respondent No.1 in respect of these allegations is as follows which is evident from the pleadings and also the email communications:

It is pertinent to refer to the statements made in the Independent Auditor Report of the Corporate Debtor for the years 2017, 2018 and 2019 which are as follows:

In addition to the above, it can be observed from FORM NO.3CA annexed to the Independent Auditors’ Report for the years 2017 and 2018 which states that the Corporate Debtor did not provide details in respect of various matters as enumerated therein.

Though Respondent No.1 would contend that the allegation of siphoning off of funds is without any evidence or proof, but on perusal of the Audited balance Sheet of the Corporate Debtor for the year ended on 31.03.2017 (Page 102 of the Application) and 31.03.2018 (Page 133 of the Application), we observe as follows:

In view of the above factual aspects from the audited balance sheet of the Corporate Debtor, this Tribunal does not require any other proof or evidence as the balance sheet itself speaks of diversion of funds. We further find that the Report of the Independent Auditor of the Corporate Debtor also contains the above stated observations in respect of the records of the Corporate Debtor. Moreover, the Respondent No.1 also failed to show the compliance of the order of this Tribunal dated 08.09.2020 in I.A. No.467/2020 as to the providing of the passwords, especially that of the CPU where all the records of the Corporate Debtor are available. The submission of Respondent No.1 that the management of Corporate Debtor is unable to trace the whereabouts of the employee who handled the said CPU is not a valid and genuine one. It is the duty of the management of the Company to make sure that there is access to the MIS data of the Company because it is the management who runs the company with the help of employees.

It is also observed that mere statement of Respondent No.1 that the records of the Corporate Debtor are in the possession of IT Department, and the newspaper report showing the fire breakdown at the registered office of the Corporate Debtor does not absolve the Respondent No.1 from providing information. It is to be noted that there was no document provided by the Respondent No.1 to show that the records of the Corporate Debtor are in the possession of the IT Department. Also, no document was produced by the Respondent No.1 issued by the concerned department or agency stating that there was a breakdown of fire at the registered office of the Corporate Debtor in which the records or any materials of the Corporate Debtor were damaged. In the absence of these records, this Tribunal is unable to accept the contentions of the Respondent No.1 in this regard.

Relying on the disclaimer of the Forensic Audit Report, it was submitted on behalf of Respondent No.1 that the Forensic Auditor did not consider the information given by Respondent No.1 and the Forensic Audit was done based on the information available in the public domain. But we also place reliance on the following statements of the same Forensic Audit Report which are as follows:

This clearly states that the Forensic Audit Report was prepared based on the information provided and available with the Corporate Debtor. It also states that the information provided by the directors was also taken into account.

Though it was submitted on behalf of Respondent No.1 that the allegation of siphoning off of funds of the Corporate Debtor is not substantiated, but as observed at Paragraph 53 of this order, the financial statements of the Corporate Debtor itself prove that the stocks, receivables and other current assets have been sold and the money have been diverted to some unknown source without using the same for reduction of bank borrowings. The Forensic Audit Report also observes fraudulent transactions over the inventory and the same is in violation of the terms of Loan entered with SBI.

In lieu of the above discussion, we observe that the explanation as offered by the Respondent No.1 in this regard and the defence set up thereby cannot be taken to be reasonable.

It is hereby concluded that Respondent No.1 and 2 have diverted the stock, inventory and other current assets of the Corporate Debtor amounting to Rs. 88 crores and the same is liable to be returned to the Corporate Debtor.

The point is answered accordingly.

Whether the Applicant has made out a case for ordering an investigation into the affairs of the Corporate Debtor under Section 213 of The Companies Act, 2013?

In so far as the prayer of Applicant to direct for investigation into the affairs of the Corporate Debtor in terms of Section 213 of The Companies Act, 2013 is concerned, we found that no information or record of the Corporate Debtor has been handed over to the RP by the suspended management even after the directions of this Tribunal. In that aspect, even as per the Forensic Audit Report, no relevant information has been provided by the Respondent No.1 and 2. The Respondent No.1 and 2 continuously took up the defence that the registered office of Corporate Debtor “caught up” with fire and the records were lost. Therefore, under these circumstances, we observe that an investigation under Section 213 of The Companies Act, 2013, even if ordered, will serve no positive purpose, benefitting the Corporate Debtor. Moreover, an application for dissolution of the Corporate Debtor is also pending. We find that no purpose would be served if an investigation under Section 213 of The Act is ordered at this stage of the proceedings.

Hence, we are not inclined to order any investigation into the affairs of the Corporate Debtor under Section 213 of The Act.

The point is answered accordingly.

In light of the findings on the points above, we hereby hold that

The application is therefore allowed in part, however with no costs.