Ms. Namrata A. Randeri Resolution Professional vs Treasure Management Malls Pvt. Ltd. & Ors.

Per: Prabhat Kumar, Member (Technical)

This Application IA 1236/2020 is filed by Ms. Namrata A. Randeri, the Resolution Professional (“Applicant”) of Turning Point Estates Private Limited (“Corporate Debtor”) in the Corporate Insolvency Resolution Process (“CIRP”) in terms of Section 25(2)(J) read with Section 43 and Section 66 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). The Applicant has sought following reliefs -

It was submitted by the Applicant that only prayer “b” is pressed and remaining prayers i.e. “C” to “E” can be dispose of as not having been pressed.

The Respondent No.1 i.e. Treasure Management-Malls Pvt. Ltd. is a company in which a sum of Rs.3.00 Crores was invested in the Debenture issued by such company. The Registered Office of this Company is situated at an address which was registered office of the Corporate Debtor in Financial Year 2014-15.

The Respondent No. 2 Mr. Manish Kalani is the Director of Corporate Debtor from 20.02.2007 and was also appointed as Director in Respondent No.1 Company on 28.09.2019. The Respondent No.2 was Director in Respondent No.1 Financial Year 2007-08 and was also Director of Corporate Debtor.

The Respondent No.3 Mr. Vinayak Kalani holds 50% shares in Respondent No.1 Company and remaining 50% are held by Respondent No. 4 i.e. Mr. Saurabh Kalani.

The Corporate Debtor was admitted into CIRP by NCLT, Mumbai Bench vide order dated 10th January 2020, wherein the Applicant was appointed as Interim Resolution Professional (“IRP”) of the Corporate Debtor and later on was confirmed as the Resolution Professional (“RP”) of the Corporate Debtor. The Applicant made a public announcement dated 15th January 2020, inviting claims from the creditors of the Corporate Debtor and constituted a Committee of Creditors (“CoC”).

The Applicant in discharge of her duties as the Resolution Professional and with prior intimation to the CoC appointed Raj Niranjan Associates Chartered Accountants (“Transaction Review Auditors”) on 5th March 2020 to conduct the transaction review and forensic review of the Corporate Debtor for the period 13th January 2018 to 13th January 2020 (“Transaction Review Report”).

The Transaction Review Auditor submitted his audit report dated 11.04.2020 thus providing their observations by way of details of the transactions as analysed specifically under section 43, section 45, section 50 and section 66 of the IBC.

It is the applicant’s case that on perusal of the Transaction Audit Report of the Corporate Debtor, following observations were observed and highlighted to fall under Section 43 and Section 66 of IBC, 2016

It is to be noted that Corporate Debtor (“CD”) is a private limited company incorporated under Companies Act, 1956 whose main object as per memorandum of association (“MOA”) is to carry on business of real estate, construction of residential houses/flats/apartments and Commercial buildings, builders and developers of land, constructors, colonizer, civil contractor and undertake any residential, commercial or industrial construction, in India or abroad either independently or jointly in partnership, joint venture, or an agency or sub contract basis either on behalf of an individual, firm, body corporate, association of society, central or state government.

The Corporate Debtor did not conduct any business activities since years and its revenue is by way of income from interest on fixed deposits and not from operations of the business. For the FY 2015-16 to 2017-18 the revenue in total was only Rs.39,989 (being revenue of Rs. 13,557 for FY 2017-18, Rs. 12,601 for FY 2015-16, FY 2016-17 and Rs. 13,831 for FY 2015-16) by way of interest on fixed deposit with Axis Bank.

The Corporate Debtor was having a bank account in Indian Overseas Bank and UCO Bank but apart from using these bank accounts, one new bank account has been opened on 26.09.2019 with Axis Bank bearing A/c. No. 919020074757177 without prior intimation or NOC from the financial creditors and within four days of opening the Axis bank account, the Corporate Debtor received CENVAT credit / refund (i.e. refund towards the credit of the various purchases made during the construction period) of Rs. 309.85 lakhs (Refund + interest on refund) on 30.09.2019. On receipt of the refund amount in the Axis bank account, within 3 days i.e. on 03.10.2019 itself an amount of Rs. 300.00 lakhs has been transferred to “Treasure Management-Malls Pvt. Ltd.” to a potentially related party of the corporate debtor as observed in the transaction report. On enquiry by the Applicant and as reported in the transaction audit report, it was observed that this amount of Rs. 300 lakhs was transferred towards subscription to Debentures of “Treasure Management Malls Pvt. Ltd.” It is thus evident that this account was opened specifically to receive credit of cenvat refund and transfer the proceeds to potentially related parties.

It is further observed that Total receipts in Axis Bank account is Rs. 312.10 Lacs since opening of account (being a gross amount as the net amount after considering Rs. 4 lakhs cash withdrawal and Rs. 2 lakhs cash deposit is Rs. 310.10 lakhs) and balance as on 22 January 2020 is only Rs. 5,927/. Apart from investing Rs. 300.00 Lakhs in Debentures, the Corporate Debtor has withdrawn Rs. 12.04 Lakhs (being a gross amount as the net amount after considering Rs. 4 lakhs cash withdrawal and Rs. 2 lakhs cash deposit is Rs. 10.04 lakhs) for which no documentary evidence has been produced.

It is pertinent to mention that carrying out such a transaction of investment in the debentures is also a blatant violation of the credit sanction advice dated 21.10.2008 by the Indian Overseas Bank inter alia especially in relation with non-observance of escrow account obligations, utilisation of receipts obligations and prior permission before making investment obligations. Similar obligations under the sanction letter dated 15.03.2008 are breached by the said act of alleged investment in debentures.

The general business of the Corporate Debtor is not that of an Investment Company wherein such huge investments would have to be made and further, there was no surplus funds available with the Corporate Debtor for making such investments instead of making payment to secured creditors or utilizing for completion of the existing under-construction project at Mohali.

It is pertinent to note that Respondent No. 1 company is a loss making company not carrying out any significant business activities and having negative net worth of Rs.27,82,49,376. It is also evident from the fact that the valuation report of the company conducted by CA Navin Khandelwal {IBBI/RV/05/2019/10779} dated 9 August 2019, has reported the value as “Zero” and has also stated that the company is having no business.

Subsequently, on perusal of Audited Financial Statements of Respondent No.1 company for FY 2018-2019 it is observed that the company has issued debentures of Rs. 2,221.30 lakhs to its related party M/s Wanderland Real Estates Pvt. Ltd., the proceeds of which have been utilized towards the payment of unsecured loans of body corporates, particularly group companies or companies in which Directors/promoters/shareholders are interested.

It is also pertinent to mention that the utilization of proceeds from Debentures were made for repayment of unsecured short-term borrowings i.e. short-term borrowings were actually converted to long- term borrowings by giving the option of converting the same into equity on a future date.

Further, on reviewing Form PAS – 4 dated 05.09.2019 submitted to ROC by Respondent No.1 company, it is observed that it had placed private placement offer to various companies (all of them being group companies) including the Corporate Debtor for Rs. 24 Crores even when there was no bank balance available as on 05.09.2019 with the Corporate Debtor for investment purpose.

It is also imperative to mention that total receipts in Axis Bank account is Rs. 312. 10 lakhs including CENVAT credit of Rs 309.85 lakhs and balance as on 22.01.2020 i.e. last date of transaction as per the bank statement is Rs. 5,927/-.

Hence, after analyzing the documents and perusing the documents on record, following conclusions can be drawn:

a. The entire exercise of issuing Debentures and transferring money without any proper justification is highly suspicious and since the valuation of the company M/s Treasure Malls Management Private Limited is “zero” and there were no business activities in the company for last few years there can be no justification for Corporate Debtor to invest such a huge amount of Rs. 3 crores.

b. The nexus between the Respondents clearly establishes that it was a pre-planned transfer of amount of refund from Corporate Debtor under the garb of investment in debentures especially in view of the fact that Corporate Debtor did not have any regular substantial income. The amounts refunded by CENVAT were taken in the Corporate Debtor’s account.

c. The Corporate Debtor has opened a new bank account with Axis Bank on 26th September 2019 and as evident that the account was opened with the intention to receive CENVAT credit / refund on 30th September 2019 and immediately invested in Debentures of Respondent No.1 company (company with negative Net Worth) on 03 October 2019 i.e. within a period of 3 days as there was no bank balance available with the Corporate Debtor for investment purpose at the time of offer of Private Placement dated 05.09.2019 made by Respondent No.1 company.

d. It is further to be noted that Investment in Debentures are made without passing a Special Resolution in Extra Ordinary General meeting for subscription of Debenture as required u/s 186 (2) of the Companies Act, 2013 and also in violation of Sec 186 (5) of the Companies Act, 2013, which requires that there should be no default in repayment of loan installment or payment of interest thereon as per the terms and conditions of loan.

e. The objects of issuing Debentures were to either liquidate earlier debenture or entering into new business activities. As stated in above paragraphs, both the options were not upstream and should have required some brainstorming before investing such a huge amount of Rs. 300 Lakhs. The offer was valid for a period of 12 months, and there exists no urgency for making such an investment in rush.

f. The Impugned Transactions had been entered into at a time when the Corporate Debtor had already been declared Non- Performing Asset by various lenders and was facing severe liquidity crunch / no significant cash flows in previous few years and no future viability of business. It is pertinent to note that the CENVAT refund received to Corporate Debtor was for work done during the execution of existing projects for which secured lenders have extended finance. Hence, any refund received from CENVAT should have been primarily utilized for the purpose of repayment of loan to secured lenders or completion of the existing failed project. However, the Corporate Debtor has chosen to invest the said amount in Debentures of potentially related entities, the financial credentials of which is also doubtful and any future business viability.

g. The Corporate Debtor had entered into the Impugned Transactions in utter disregard of their fiduciary obligations. They had failed to exercise due diligence in minimizing the potential losses to secured creditors, while instead, providing benefits to its own potential related party. The entire transaction done by Corporate Debtor has been carried out in a pre-planned manner without any valid explanation and reasoning, solely with a purpose to defraud secured creditors.

h. Therefore, it is pertinent to note the fact that the amount of Rs. 300.00 Lacs transferred to Respondent No.1 company on instructions of Respondent No.2 cannot be denied. Had the amount would not have been transferred; the secured creditors of the Corporate Debtor would have got preference over the same. Since there is no valid justification for transferring such a huge amount to a potential related entity without any underlying operational activity, it creates doubt on the genuineness of such a transaction. Hence, the said transfer of funds is deemed to be done to defraud secured creditors.

We have heard the Ld. Counsels and perused the materials available on record.

We find that the account of Corporate Debtor was classified as NPA on 01.03.2013 and action under SARFAESI Act was initiated in the month of May 2015. The Corporate Debtor was admitted into CIRP on 10.01.2020 on an Application u/s 7 of the Code was filed on 20.10.2019.

The Corporate Debtor opened a new account without information to the lenders on 26.09.2019 and a refund amounting to Rs.280,33,104/- and Rs.29,77,230/-aggregating to Rs.309,85,334/- from the central excise department was received therein on 30.09.2019. It is noted that an amount of Rs.3.00 Crores was transferred on 30.10.2019 to Respondent No.1 allegedly towards subscription of its debentures. The Applicant has placed on record the financial statement on the Respondent No.1 for the year ended 31.03.2019, which shows the negative business networth of Rs.-27,81,49,376/- which led the auditor to state that “a material uncertainty exists that may caste significant doubt on the company’s ability to continue as going concern”. Further, the terms of debentures suggest that investment was made for the tenure of 15 years and carried a coupon rate of 1%, however, overall IRR of 1% was committed. It is interesting to note that rate of interest at which the Corporate Debtor was borrowed the money was more than this IRR.

In view of these facts, we find that this transaction was taken up to keep this money out of the reach of the lenders and element of fraud being played upon the creditors cannot be ruled out. The Applicant has sought order in terms of section 43/66, however, we find that no relief can be granted in terms of Section 43 as there was no antecedent debt which is a sine-qua-none for invocation of section 44. However, section 66 of the Code deals with any business of the Corporate Debtor carried with intent to defraud its creditors. It was vehemently argued by the Respondents that this investment was in ordinary course of business and was fetching 9% IRR. Considering that this amount was paid from an account opened without bringing to the knowledge of the secured creditors and the transaction was carried out immediately prior to filing of section 7 application, we are of the view that respondent No.2 was in complete knowledge that there was no reasonable prospect of avoiding the commencement of CIRP. Instead of minimizing the loss to the creditors this action has aggravated lost to the creditors by keeping the amount of refunds beyond their knowledge. Further, the Respondent No.1 is also indirectly connected to the Respondent No.2 through Respondent No. 3 & 4 who are stated to be residing in the same house. In view of these facts, we direct Respondent No.1 to 4 to contribute to the assets of Corporate Debtor a sum of Rs. 3,00,00,000/- either singly or jointly. In case, there is any debt owed by the Corporate Debtor to any of such person, the amount ordered to be contributed shall be a charge on such debt.

In view of foregoing, IA 1236 of 2020 is disposed of as partly allowed.