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Judgment
ORDER
PER: SH. L. N. GUPTA, MEMBER (T)
Mr. Vijay Jain and 13 others (for brevity, the “Applicants”) have filed the present petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (for brevity, the ‘IBC, 2016’) read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 with a prayer to initiate the Corporate Insolvency process against M/s Laxmi Foils Private Limited (for brevity, the “Respondent”).
The Respondent namely, M/s Laxmi Foils Private Limited is a Company incorporated on 10.03.2000 with CIN U74899DL2000PTC104341 under the provisions of the Companies Act, 1956 having its registered office at Shop No. G-22 (UGF) D-l, (K-84) Green Park Main, South Delhi, Delhi -110016, which is within the territorial jurisdiction of this Bench. The Authorized Share Capital of the Respondent Company is Rs.50,00,000/- and the Paid-up Share Capital of the Company is Rs.47,36,480/- as per the Master Data.
It is submitted by the Applicant that the Respondent is engaged in the business of manufacturing aluminum hot-rolled products, aluminum cold-rolled products and aluminum sheets, etc. It is further submitted that the Respondent approached each of the Applicants, requesting them to extend certain credit facilities towards the capital expenditure and general corporate expenses of the Respondent. The total credit facilities of Rs.1,66,34,037/-were extended by the Applicants to the Respondent. The Respondent has already utilized the said credit facilities. Most of the Applicants were shareholders of the company and as such the said facilities were extended to the Respondent as interest-free unsecured loans. In December 2021, the discussion between the erstwhile shareholders and M/s OMAT Business Private Limited (a subsidiary of OFB Tech Private Limited) commenced for the sale of the shareholding of the Respondent Company. Subsequently, the Applicants’ entire shareholding was acquired by M/s OMAT Business Private Limited and Asish Mohapatra on 05.03.2022, in terms of the Share Purchase Agreement dated 03.02.2022, and new management took over the affairs of the Company. During the course of discussions leading to the execution of the share purchase agreement, it was agreed with the new management of the Respondent that the said unsecured credit facilities would be repaid by the Respondent upon the transaction being finalized. The particulars of the unpaid Financial Debt claimed including the total amount of default and the date of default are mentioned in Part IV of the application, which reads thus:
As per Part IV of the application reproduced above, the Applicant has claimed an outstanding financial debt of Rs.1,82,09,029/- and relied on 04.03.2022 as the date of default.
In support of their claim, the Applicants have relied on the following documents -
Copy of table containing workings for computation of outstanding amount.
ii) Copy of the Finance Facility Agreements executed on 11.02.2022.
iii) Copy of the cheques that are signed by the Applicants in the discharge of the liability.
iv) Copy of provisional Balance Sheet as of 04.03.2022.
Copy of the relevant WhatsApp communications.
vi) Copy of the notices dated 20.07.2022 and 26.07.2022.
vii) Copy of the Bank Statement/certificate of the Applicants.
Based on the aforesaid facts and documents, the Applicants have prayed for initiation of CIRP against the Respondent.
On issuance of the notice, the Respondent filed its reply stating that:
The Applicant Nos. 1-10 in the Memo of parties are the erstwhile Shareholders of the Corporate Debtor (hereinafter referred to as “erstwhile Shareholders”) and Applicant Nos. 11-14 are related parties to Applicant Nos. 1-10 (hereinafter referred to as “Related Parties”), which is effectively owned and controlled by Applicants Nos. 1-10 and their family members themselves and are alter egos of the same.
During December 2021 the erstwhile shareholders of the Respondent approached OMAT Business Pvt. Ltd. with the intent of selling their 100% share in the Respondent to OMAT Business Pvt. Ltd.
For acquiring the shareholdings of the erstwhile Shareholders, valuation of the shareholdings of the Respondent along with audit report was conducted by DNS & Associates, Chartered Accountant on 01.02.2022. The erstwhile Shareholders provided the balance sheets, profit and loss accounts, and other accounting documents for the purposes of carrying out the valuation, pursuant to whereof the valuation was carried out. The balance sheet contained an entry of related party transaction as an unsecured loan of Rs.1,66,34,037/- (shown as granted to the Respondent by the Applicants, including the erstwhile Shareholders).
Pursuant to the valuation report dated 01.02.2022, the erstwhile Shareholders executed a Share Purchase Agreement dated 03.02.2022, vide which the current management i.e., OMAT Business Pvt. Ltd. took over the Respondent, and thereby, making the Respondent a wholly owned subsidiary of OMAT Business Pvt. Ltd.
The valuation, which formed the consideration for the transfer of shares from the erstwhile Shareholders to the current shareholders, contained the effect of the alleged loan transaction carried out by the erstwhile Management. It is in this view of the matter that under clause 6.5 of the said Share Purchase Agreement, the erstwhile Shareholders on behalf of the Applicant Nos. 1-10 have released/waived/discharged/relinquished all/any rights and claims against the company/ Respondent, including the right to recover the aforesaid amount. Clause 6.5 is reproduced herein below for ready reference -
“Each Seller, hereby irrevocably and unconditionally as on the Closing Date, release, waives and discharges, and undertakes and confirms that all the Affiliates of such Seller have irrevocably and unconditionally released, waived and discharged, for all purpose any and all of their respective rights (whether contractual or otherwise), claims, demands, damages, losses, costs, expenses, actions or causes of action or lawsuits (in law or in equity), of any nature, whether known or unknown, fixed or contingent, direct or indirect that such Seller or any of its Affiliates, or their respective assigns and successors (collectively, the “Releasing Parties') may have against the Company or Company's past or present directors, officers, employees, agents, assigns, successors, shareholders, investors (collectively, the “Releasing Parties”) in relation to any and all claims and all amounts payable and/or due in respect of any event prior to the Closing Date and arising from or relating to Company's obligations and all liabilities arising out of or in relation to Releasing party and any Released Party prior to the Closing Date, whether asserted by any Releasing Party or any Person on behalf of any Releasing Party or by any successor, assignee or transferee of any Releasing Party.” Hence, it is clear that the Applicants do not have any rights or claims against the Respondent and as such, the application under Section 7 seeking payment of Rs.1,66,34,037/- is not maintainable, as the alleged debt amount is neither due nor payable by the Respondent.
In terms of the Share Purchase Agreement, the closing of the transaction was done on 04.03.2022. Accordingly, the provisional Balance Sheet as on 03.03.2022 and as on 04.03.2022 (closing date) was prepared by the erstwhile Shareholders.
Pursuant to the said Share Purchase Agreement, the entire shares held by the erstwhile Shareholders in the Respondent were transferred to OMAT Business Pvt. Ltd. at a consideration of Rs.10,62,51,650/-, out of which an initial consideration of Rs.7,96,88,812/- was paid and an amount of Rs.2,65,62,937/- was deferred. The initial consideration amount was paid in terms of representation, warranties of promise, assurances, undertakings, indemnities, and other covenants contained in the Share Purchase Agreement. The amount of Rs.2,65,62,937/- was deferred only with the intent to verify the authenticity and genuineness of the transaction and representations, warranties, promises, and assurances contained in the Share Purchase Agreement.
Upon taking over the Respondent, the representations and warranties were found to be untrue and incorrect, pursuant whereof the Respondent suffered a loss of Rs.1,39,75,100/- and Rs.3,44,32,024/- towards (i) labour retainership for the financial year up to February 2022, (ii) expenses incurred towards the change of auditor (as the auditor appointed by Applicant was disqualified from being appointed as statutory auditor), (iii) towards repair and replacement of various parts in the plant of the Respondent due to its dilapidated and damaged condition, and (iv) expenses of Rs.3,44,32,024/-towards the maintenance of the plant and machinery.
Other than the above losses, the Respondent, post-closing, received demand notices from 4 alleged operational creditors under Form-3 of IBBI regulations, i.e. (i) demand notice dated 02.08.2022 issued by M/s Mandark Consultants Pvt. Ltd. for an amount of Rs.1,86,18,168/-, (ii) demand notice dated 02.08.2022 issued by Shashi Beriwal & Co. Pvt. Ltd. for an amount of Rs.1,76.92,265/- (iii) demand notice dated 02.08.2022 issued by Tisyaketu India Pvt. Ltd., for an amount of Rs.1,35,58,860/- (iv) demand notice dated 02.08.2022 Windbear Multiservices Pvt. Ltd. for an amount of Rs.1,11,72,968/-) for a total amount of Rs.6,10,42,261/-.
It is for the first time when the aforesaid notices were issued by the Operational Creditors, that the Respondent came to know about the liabilities that the erstwhile Shareholders being the Applicants no.1-10 in the present application had incurred post 31.12.2021 i.e., Accounts Date (defined in the Share Purchase Agreement). This transaction was neither informed to the new management nor was this transaction done in the ordinary course of business. The demand notices issued by the aforesaid Operational Creditors were supported by the acknowledgment signed by Mr. Rajesh Jain (who is one of the Applicants in the present application) for and on behalf of the Respondent, post execution of the Share Purchase agreement, which, admittedly, was without any authority whatsoever, and done dishonestly.
Since some of the material representations and warranties made by the erstwhile Shareholders under the Share Purchase Agreement turned out to be untrue and false, due to the mala fide and wrong representation by the erstwhile Shareholders, OMAT Business Pvt. Ltd. issued a legal notice dated 25.08.2022 (invoking the right of indemnification in terms of Clause 10 of the Share Purchase Agreement) seeking recovery of Rs.10,94,49,385/- being, (i) arising out of and in relation to the Share Purchase Agreement dated 03.02.2022, (ii) a sum of Rs.3 Crores for the damages for the loss of profit and legal expenses and management etc., and (iii) most importantly, terminated the Share Purchase Agreement dated 03.02.2022, thereby, simultaneously invoking arbitration in terms of Clause 12 of the Share Purchase Agreement.
In response to the legal notice dated 25.08.2022, the erstwhile Shareholders vide reply dated 22.09.2022 sought to justify their stand inter alia stating that the said transaction leading to the Share Purchase Agreement was executed after the satisfaction and due diligence by the management of OMAT Business Pvt. Ltd. Interestingly, in para 18 of the said response, the Applicants have stated that-
“In fact as far as the payment of unsecured debts of the erstwhile shareholders was concerned, the Facilities Agreement had been got drafted and executed at your Client's behest. In terms of the said agreement the company had duly accepted and acknowledged its liability in respect of the unsecured loan amounts and agreed to repay the same. In terms of the understanding the cheque for the purpose of discharge of the said liability had been prepared on 04.03.2022 and had been assured by your Client that the same shall be sent to our Clients within next couple of days. The said cheques had been sent for counter signatures of Mr. Lokesh Garg, of your Client and the respective accounting entries had also been given effect to in the books of accounts. However, it is apparent that at the time of execution of the said agreement there was a malafide and fraudulent intent on the part of Your Client to cheat our Clients and it is with the said criminal intent that it had failed to make payment of the outstanding liability till date despite repeated request and demand for the same. Our Clients, reserve their right to pursue appropriate legal proceedings against your Client as well as the Respondent M/s Laxmi Foils Pvt. Ltd which has in the instant case failed to discharge its outstanding debts.”
The above-quoted portion alleges that some cheques which were signed by Mr. Rajesh Jain were sent to Mr. Lokesh Garg, the authorized representative of the Complainant (also appointed as the representative of M/s Laxmi Foils Pvt. Ltd.) herein for the purposes of clearance of the alleged liability of the erstwhile shareholders, which were allegedly not signed by Mr. Lokesh Garg. If this would have been the case, then the original cheques ought to have been in the custody of the Respondent, which is not true.
Further to the aforesaid response, the Applicants agreed with the invocation and as such, issued notice appointing an arbitrator for adjudication of the disputes.
Considering the aforesaid facts and circumstances, the current management of the Respondent i.e., OMAT Business Pvt. Ltd. filed a police complaint with the DCP, EOW, Mandir Marg under various provisions of the Indian Penal Code including Sections 378, 405, 406, 409, 420, 425, 426, 463, 464, 465, 467, 468, 477A, 120-B and 34 of IPC, vide its complaint dated 10.10.2022 and Additional Complaint dated 12.01.2023.
The present Petition, thus, has been filed in retaliation to the police complaint filed by OMAT Business Pvt. Ltd., only with the intent to harass and extort money from the present management of the Respondent, seeking payment for an amount of Rs.1,66,34,037/- as debt amount due and payable by the Respondent.
The present petition under Section 7 of IBC was served on 10.12.2022, one day before the actual hearing before this Hon'ble Tribunal and it is for the first time that Respondent came to know that there are actually 14 cheques bearing Nos. 160562, 160563, 160564, 160565, 160566, 160567, 160568, 160569, 160570, 160571, 160572, 160573, 160574, 160575, all dated 04.03.2022 which allegedly indicated that Laxmi Foils Pvt. Ltd./Respondent owes a sum of Rs.1,66,34,037/- to the Applicants. It is stated that the said cheques have been allegedly issued in favour of other Applicants by Mr. Rajesh Jain, who himself is an Applicant in the present petition, on 04.03.02022 i.e., on the closing date, as per the Share Transfer Agreement. It is most astonishing to note that all these cheques bear the signatures of Mr. Rajesh Jain who signed these cheques on the last day i.e., on 04.03.2022, and that too without any authorization for signing these cheques for and on behalf of Respondent. And, all the Applicants are related parties i.e., family members of Mr. Rajesh Jain. On this aspect, the additional complaint dated 12.01.2023 was filed. This act of Mr. Rajesh Jain of issuing alleged cheques without any authorization upon other Applicants, who are related parties to Mr. Rajesh Jain, clearly evidences mala fide intent of the Applicant to cheat and cause wrongful gain to themselves and wrongful loss to the Respondent.
It is stated that the Respondent was taken over by OMAT Business Pvt. Ltd., and Mr. Rajesh Jain who is one of the Applicants in the present petition, was retained by the Respondent so as to keep the Respondent as a going concern. It is most pertinent to state that the cheques that are relied on by the Applicants are dated 04.03.2022, whereas the closing date as enunciated as the Share Purchase Agreement is 04.03.2022, which clearly states that no amount was due and payable by the present management of the Respondent. It is most astonishing to see how the cheques dated 04.03.2022 were issued on the closing date i.e., 04.03.2022 when the entire transaction with the Applicants was over and executed by 04.03.2022 and funds were infused by the present management on 05.03.2022. This fact is further proved and evident from the balance sheet dated 04.03.2022 filed with the Section 7 application by the Applicants (page no.105 of the application), wherein loan from directors and shareholders are shown as blank, which clearly shows that there is no debt due and payable to the Applicants by the Respondent as on 04.03.2022. Thus, the cheques alleged to have been issued are forged and fabricated, which have been prepared only with the intent to cause wrongful loss to the Respondent and its current Management.
It is most pertinent to mention that the said balance sheet is also acknowledged by Mr. Rajesh Jain and Mr. Vijay Jain and as such, it is evident that no amount whatsoever as claimed by the Applicant is due and payable.
From the above facts, it is evident that the alleged cheques dated 04.03.2022 relied on by the Applicants are forged instruments only made with an intent to extort money from the management of the Respondent and initiate insolvency proceedings against the Respondent fraudulently and with malicious intent. Thus, it is a clear case whereby there is an existing dispute between the parties and as such, the amount is neither due and payable nor is recoverable. This existing dispute is also admitted by the Applicants while appointing the arbitrators.
The mala fide intent of the Applicant is furthermore evident from the fact that the alleged Financial Agreement upon which reliance has been placed by the Applicant is dated 11.02.2022 and is only signed by Applicant no.1 and 6. The said Financial Agreement does not bear the signature of any of the Respondent or any person from the management of the Respondent. It is stated that once the closing has been achieved by the present management of the Respondent, and the same has been acknowledged by the Applicant no.1 and 6 upon signing the balance sheet dated 04.03.2022, the issue with respect to any amount due and payable by the present management of the Respondent does not arise. Thus, proving that no financial agreement dated 11.02.2022 was ever executed between the parties. Further, the Applicants had not brought on record any documentary evidence to show that the said Financial agreement dated 11.02.202 was ever executed between the parties.
The mala fide conduct of the Applicants specifically, Applicant nos. 1, 6 and 7 is furthermore evident from the fact that several police complaints and First Information Report (FIR) are registered against the Applicants no. 1, 6, and 7 wherein the Respondent has also been arrayed as an accused for the alleged offenses of forgery and fabricating Documents allegedly committed by the aforesaid Applicants way before the Respondent was acquired by the present management and notice(s) have even been issued to OMAT Business Private Limited to join the investigation which is nothing less than harassment being faced by the present management due to alleged offenses committed by the Applicants herein.
The Applicants have filed their rejoinder and stated that the Respondent has admitted the balance sheet of the Respondent as of 03.03.2022 and 04.03.2022 which duly reflects the finance/credit facilities, subject matter of the present petition, as advanced by the Applicants. As such there can be no dispute whatsoever as to the existence of the Financial Debt. Furthermore, till date and despite demand for the same, the Respondent has admittedly failed/ defaulted to make repayment of the said credit facilities advanced. It is only after the said demands that the Respondents for the first time, vide its notice dated 28.08.2022 sought to raise a sham and illusory defence, inter alia, that the said amounts were purportedly waived pursuant to the execution of the share purchase agreement dated 03.02.2022. The said contention is ex-facie wrong and erroneous, as in the event that there was actually a waiver pursuant to the execution of the SPA dated 03.02.2022, then the abovementioned credit facilities would not have been reflected in the balance sheet dated 03.03.2022. Admittedly, the said balance sheet and even the balance sheet dated 04.03.2022 duly reflected the credit facilities, and as such the false case of waiver is ex-facie found to be wrong and erroneous.
We heard the submissions of both parties and perused the documents placed on record. On perusal of the application, it is observed that the present application has been jointly filed by the following 14 Applicants claiming the default of their individual facility amount as indicated against their names:
During the course of the hearing, it was stated by the Ld. Counsel appearing for the Applicants that Applicants No. 1 to 10, as given in the table above, are the erstwhile shareholders of the Respondent Company.
It is alleged by the Ld. Counsel appearing for the present Management of the Respondent that the non-Shareholders from serial no. 11 to 14 are related parties of the Applicants.
In order to prove the existence of the alleged Financial Debt, Applicants No. 1 to 10 have referred to the “Facilities Agreement” annexed with the application from page no. 57 to 95, the relevant extracts of which (page no. 57, 69 and 95) read thus:
xxxx xxxx xxxx xxxx
xxxx xxxx xxxx xxxx
On bare perusal of the Agreement (ibid), it is observed that the said Facility Agreement is un-dated. Therefore, it cannot be determined when this Facility Agreement was indeed executed by and between the parties herein.
It is contended by the Respondent that the erstwhile management/ shareholders/Applicants No. 1-10 had sold its shareholding in the Respondent to M/s OMAT Business Pvt. Ltd by executing the Share Purchase Agreement dated 03.02.2022, which was signed by the erstwhile Shareholders of the Respondent, and they were settled at lump sum amount, and on payment of such amount, the debt of the Applicants No. 1-10 stood discharged. The relevant extracts of the Share Purchase Agreement dated 03.02.2022 read thus:
xxxx xxxx xxxx xxxx
xxxx xxxx xxxx xxxx
xxxx xxxx xxxx xxxx
On perusal of the aforesaid extracts of the Share Purchase Agreement dated 03.02.2022, it is observed that “Each of the Promoters and Other Shareholders referred to individually as a “Seller”, had sold their shareholding /stake in the Respondent Company to OMAT Business Private Limited in terms of the said Agreement. Further, on perusal of Schedule 1A and 1B of the Share Purchase Agreement (ibid), it is observed that the new management of the Respondent had settled the deal with all the Shareholders at a lump sum amount of Rs.10,62,51,750/-, the individual shareholder-wise details of the amounts settled so, are given from Page 98 to 104 of the reply, which reads thus:
It is contended by the Respondent that it had paid an initial consideration of Rs.7,96,88,812/- in terms of representation, warranties of promise, assurances, undertakings, indemnities, and other covenants contained in the Share Purchase Agreement. The payment of the remaining amount of Rs.2,65,62,937/- is deferred only with an intent to verify the authenticity and genuineness of the transaction and representations, warranties, promises, and assurances contained in the Share Purchase Agreement. The Respondent has further contended that upon taking over the Respondent, the representations and warranties were found to be untrue and incorrect, pursuant to which it had suffered losses of Rs.1,39,75,100/-and Rs.3,44,32,024/- towards (i) labour retainership for the financial year up to February 2022, (ii) expenses incurred towards the change of auditor, (iii) repair and replacement of various parts in the plant of the Respondent due to its dilapidated and damaged condition, and (iv) expenses of Rs.3,44,32,024/-towards the maintenance of the plant and machinery.
The Respondent has further averred that the post-acquisition, it had received demand notices from 4 operational creditors, viz., (i) demand notice dated 02.08.2022 issued by M/s Mandark Consultants Pvt. Ltd. for an amount of Rs.1,86,18,168/-, (ii) demand notice dated 02.08.2022 issued by Shashi Beriwal & Co. Pvt. Ltd. for an amount of Rs.1,76.92,265/-, (iii) demand notice dated 02.08.2022 issued by Tisyaketu India Pvt. Ltd., for an amount of Rs.1,35,58,860/-, (iv) demand notice dated 02.08.2022 Windbear Multiservices Pvt. Ltd. for an amount of Rs.1,11,72,968/-). The Respondent has placed copies of the demand notices on record.
Further, on perusal of the Provisional Balance Sheet of the Respondent – “Laxmi Foils Private Limited” as of 04.03.2022, it is noticed that the unsecured loan owed to the Directors and Shareholders of the Respondent Company is shown as ‘Nil’, which implies that the same is written off. We further notice that this document has been signed and authenticated by Applicant No. 1 - Mr. Vijay Jain and Applicant No. 6 - Mr. Rajesh Jain (as per the memo of parties) themselves. The relevant extracts of the Balance Sheet (ibid), annexed by the Applicants themselves as part of the application, are reproduced below:
From the aforesaid facts, events, and analysis, we observe that the alleged debt claimed by the Applicants is doubtful since (a) the Facility Agreement relied upon by the Applicants in support of their debt is un-dated, (b) as per the Provisional Balance Sheet of the Respondent as of 04.03.2022 (which has been signed and authenticated by the Applicant No. 1 and 6 themselves), the unsecured loan owed to the Directors and Shareholders of the Respondent Company is shown as ‘Nil’, (c) the new management of the respondent has reportedly paid an amount of Rs.7,96,88,812/-out of the total consideration of Rs.10,62,51,750/- to the all the shareholders and the debt of the Respondent is discharged in terms of Clause 6.5 of the Share Purchase Agreement dated 03.02.2022, and (d) the Respondent had shown cogent reasons, by bringing on record the Section 8 Demand Notices issued to it as the reason for non-payment of the balance amount of Rs.2,65,62,937/-.
Thus, in our considered view, Applicants No. 1-10 have failed to prove the existence of any debt that is crystallized or exists beyond any doubt. As regards the alleged debt claimed on behalf of non-shareholders/Applicants No. 11 to 14, it is noticed that their default amount is less than the minimum threshold amount of Rs. 1 Crore prescribed under Section 4 of IBC 2016. Hence, we have no option but to reject the Application. The Application is accordingly dismissed.
It is, however, made clear that nothing expressed in this order would be construed as an opinion for the purpose of the parties seeking relief under any other proceedings at any forum.
Further, we observe that the instant application has been preferred by the Applicants due to certain disputes between the erstwhile and current management of the Respondent/Corporate Debtor, for which they have already resorted to Arbitration proceedings. Hence, the intent of the Applicants is not to seek resolution of the Corporate Debtor. In view of this, we think it appropriate to impose a cost of Rs.75,000/- (Seventy-Five Thousand) only to be paid by the Applicants collectively to the Prime Ministers Relief Fund, the proof which shall be uploaded on the DMS and filed with the Court Officer within 15 days of this order.