Pallavi Joshi Bakhru vs Universal Buildwell Private Limited

PER: SH. ASHOK KUMAR BHARDWAJ, MEMBER (J)

The CD viz. Universal Buildwell Pvt. Ltd. was admitted to CIRP in terms of the order dated 03.07.2018 passed in IB-456(ND)/2018. Subsequently, the RP filed IA-1550/2019, seeking approval of the plan for Resolution of the Insolvency of the CD, approved by CoC in its meeting dated 11.11.2019 with 70.44% voting in favour of the plan. Considering the application, this Adjudicating Authority passed the order dated 11.06.2021 remitting the Resolution Plan to CoC for modification in terms of the payments to the objectors, namely, DHFL, Kotak Mahindra Bank Limited and Kotak Mahindra Prime Limited. The ground perceived by this Adjudicating Authority to take such a view was that the two NBFCs/bank (ibid) could not be kept attached to the Corporate Debtor till completion of project and they were entitled to get the payment of Rs.3 Crores within a specified period.

Assailing the aforementioned order, the Kotak Mahindra Bank Limited and Kotak Mahindra Prime Limited preferred Company Appeal (AT) (Insolvency) No.661 of 2021 before the Hon’ble National Company Law Appellate Tribunal. The appeal was dismissed in terms of the order dated 11.04.2023, with the view that the directions contained in para 49 of the order dated 11.06.2021 were to be affirmed while those contained in para 50 thereof were to be deleted.

Nevertheless, as the appeal was dismissed, the order passed by this Adjudicating Authority remitting the Resolution Plan to CoC for modification in terms of the payment as specified in the order viz., DHFL, Kotak Mahindra Bank and Kotak Mahindra Prime Limited were to be paid cash and could not be made attached to the plan/project till execution/completion of the same attained finality. Para 49 of the order passed by this Adjudicating Authority on 11.06.2021, as affirmed by the Appellate Authority in terms of the order dated 11.04.2023 reads thus: -

After the order dated 11.06.2021 passed by this Adjudicating Authority, the CoC circulated notice and Agenda for the 16^th meeting of CoC scheduled to be held on 25^th June, 2021. The Financial Creditors, AR and Suspended Directors were apprised of the agenda.

As can be seen from paras 54, 59 and 60 of the IA-5003/2021, the Resolution Professional calculated the liquidation value for Financial Creditors on the basis of unsold area available in the project which they had financed. However, the secured Financial Creditor did not concur with the view of the Resolution Professional. The aforementioned paras of the application read thus: -

The prayer in the captioned CA reads thus: -

The captioned application raises the issue of the undervalued transaction conducted in terms of the settlement agreement dated 18.02.2018, in terms of which the Corporate Debtor transferred the development rights qua the super area measuring 66,702 square feet in a project as also the amount of INR 9.42 crores in lieu of development rights qua the area measuring 22,706 square feet in the project and INR 3.50 crores.

Stating succinctly, the facts as canvassed in the captioned CA are that the Suspended Directors of the Corporate Debtor are untraceable and are absconding since 15.07.2018 i.e., from a date just after 12 days from the commencement of CIRP. Neither they appeared before this Adjudicating Authority nor they extended any support to the RP in conducting the CIRP. Even the warrants, both the bailable and non-bailable, issued by this Adjudicating Authority to secure their attendance could also not bring the desired results. Thus, the RP had to manage the CIRP qua the CD with little or no aid from the management and staff of the Corporate Debtor. Resultantly, he had to face considerable difficulty in ascertaining details of transactions conducted qua the CD during the period preceding the commencement of CIRP. Nevertheless, Mr. Sunil Kumar Janghu (Deputy Manager Projects) and Mr. Saurabh Kashyap (IT Executive) extended support to RP to ascertain and understand the facts regarding the business of the Corporate Debtor.

The RP deputed a team of professionals to ascertain the status of each project of CD. In the process, the RP came across with certain documents pertaining to, Market Square – a Commercial Project. According to RP, the Settlement Agreement dated 18.01.2018, executed in relation to the project by the ex-directors of CD and Samyak Project Private Ltd (‘SPPL’) was not only undervalued but also amounted to defrauding the creditors/real estate allottees of the Corporate Debtor.

As has been averred in para 5 of the application, the RP/Applicant could file CA-253/2019 seeking status quo qua the project viz. Market Square-Commercial Project. In terms of the order dated 07.03.2019, this Adjudicating Authority directed status quo to be maintained in respect of the land and other assets of the company which could fall within the look-back period. The order dated 07.03.2019 reads thus: -

To obtain a true and accurate understanding of the transactions made by the Corporate Debtor during the, ‘look back period’ of two years prior to the commencement of CIRP, in terms of the engagement letter dated 13.02.2019, the RP/Applicant appointed Ms BDO India, LLP (‘BDO’) to conduct a transaction audit. The transaction audit was meant to examine the transactions entered into on behalf of the Corporate Debtor on the anvil of PUFE.

The LLP, BDO submitted its report (Transaction Audit Report) to Applicant (RP), concluding that the various transactions conducted by and on behalf of the Corporate Debtor (Suspended Board of Directors) violated the provisions of the Code. Qua the, Market Square-Commercial Project, the report revealed that the UBPL (CD) transferred its right qua super area of 66,702 Sq. Ft., the value of which was assessed as INR 9.42 Crores (INR 7.35 Crores given as non-refundable security deposit and INR 2.07 Crores spent on the project development) for a consideration of INR 3.50 Crores and rights qua super area of 22,700 Sq. Ft. in Market Square-Commercial Project. In the Report of Transaction Audit, it could be found that the undervalued transaction caused a potential loss of INR 5.92 Crores as also that of super area of 44,0002 Sq. Ft. Thus, the transaction was undervalued. The report also revealed that when the CD had already committed a super area of 39,662 Sq. Ft. to the buyers, in agreeing to take 22,700 Sq. Ft. area in lieu of 66,702 Sq. Ft. area, it deceived the buyers. A copy of Transaction Audit Report has been placed on record as Annexure-2 to the CA. The relevant excerpt of the Transaction Audit Report as reproduced in para 8 of the applications reads thus:

The Applicant/RP has saliently espoused for restoration of the Settlement Agreement in relation to the Market Square-Commercial Project as it existed prior to 18.01.2018. To refer to the position qua the project, as it existed anterior to 18.01.2018, the Applicant/RP narrated that the Market Square-Commercial Project was a project undertaken to be carried/developed in terms of the Collaboration Agreement dated 27.12.2010, executed between SPPL and CD. A copy of the agreement dated 27.12.2010 has been enclosed as Annecure-3 to the CA.

On 10.03.2010, the Director of Town and Country Planning, Gurgaon, Haryana (‘DTCP’) granted license No. 18/2010 to Ansal Properties & Infrastructure Limited (‘APIL’), Ansal Townships Infrastructure Limited (‘ATIL’) and others to develop a residential colony on the area measuring 111.594 Acres falling in the revenue estate of village Badshahpur in Sector-67, Gurgaon. Out of the above, an area of 1.75 acres (‘Subject Land’) was marked for developing a commercial complex having a total FSI of 1,33,403 Sq. Ft. On 01.12.2010, APIL and ATIL entered into an agreement to sell, with SPPL (Respondent No.1) to sell the Subject Land for consideration of Rs.41,55,50,345/-. On 27.12.2010, SPPL entered into a Collaboration Agreement with the Corporate Debtor. The terms and conditions of the agreement dated 27.12.2010 as reproduced in para 10(c) of the application reads thus: -

Before the expiry of the period of three years (construction period of 30 months + 6-months grace period) i.e., on 17.04.2013, the SPPL (Respondent No.1) and the Director of the CD, since suspended, entered into a compromise qua the proceedings under Section 9 of the Arbitration and Conciliation Act, 1996, pending in the court of Ld. Additional District Judge Gurgaon. They filed a joint application under Order 23 Rule 3 read with Section 151 of CPC in this regard. Taking note of the compromise enshrined in para 3 (3.1 to 3.35) of the application, the Ld. Additional District Judge passed an order dated 17.04.2023 disposing of the proceedings under Section 9 of the Arbitration and Conciliation Act, 1996. The salient terms of compromise, mentioned in the application, as reproduced in para 11 of the application reads thus: -

Upon the invitation of claim qua the CIRP process, the RP received claims from 35 allottees qua the ‘Market Square’ Commercial Project amounting to approximately Rs.4.44 Crores. Further, as per the Management Information System (MIS) - the records maintained at the office of the Corporate Debtor and as ascertained in the Transaction Audit Report, the Corporate Debtor has sold 75 units in the project to 62 buyers, totalling to a super area of approximately 39,664 sq. ft. for a total consideration of Rs.25 crores.

It is the case of the Applicant/RP that the Suspended Directors of the Corporate Debtor, in collusion and cahoots with SPPL, extinguished the development rights of the CD qua the ‘Market Square’ Commercial Project vide Settlement Agreement dated 18.01.2018 and also defeated the claims of the allottees in the project. The area of 22,700 Sq. Ft. assigned to the CD is definitely not adequate since the Corporate Debtor has already sold/allotted an area of 33,664 Sq. Ft. in the project. Besides, owing to the Settlement Agreement, the CD has incurred a loss of Rs.5.95 Crores already invested in the project.

No other Respondent except the Respondent No.1 filed any reply qua the Company Application. The reply filed on behalf of the Respondent No.1 is dated 25.03.2021. The salient contentions put forth on behalf of the Respondent No.1 are: - (i) the transaction between the CD and Respondent No.1 i.e., SPPL is not covered by Section 45 read with Section 49 of the IBC, 2016. The transaction was undertaken in ordinary course of business and is a pure financial transaction; (ii) the answering Respondent extended full cooperation with the Resolution Professional and made all the details/particulars and documents qua the transaction to the RP; (iii) the RP is unable to show that the CD could take bookings qua 39,664 Sq. Ft. of the project land; (iv) in the Settlement Agreement dated 18.01.2018, the Corporate Debtor could categorically represent that it had not booked/sold/ allotted any area qua the project and had not created any third party interest in respect of the same.

We heard the counsels for the parties and perused the record. One of the contentions raised by the CD is that the Settlement Agreement dated 18.01.2018 was a transaction entered into between the parties in the ‘Ordinary Course of Business’, thus the same cannot be described as undervalued transaction in any manner. To deal with the plea, we may decipher the expression ‘Ordinary Course of Business’. The general meaning of the expression is the regular or customary condition of course. Many dictionaries defined the term as part of doing regular business. According to Black’s Law dictionary, it means the normal routine in managing a trade or business. Though, the expression ‘Ordinary Course of Business’ used in Sections 67(3)(a), 117(3)(g), 179(3), 180(1)(c), 185(3)(b), 186(11)(a), 188(1) fourth proviso, 189(5)(b), 329 and 336(1)(a) of the Companies Act, 2013, but the term has not been defined in the Act. We could also not find the definition of the expression in the IBC, 2016. In the wake, the Board of Directors of Companies are left to have their own different understanding and interpretations of the term, thus creating confusion. The lack of definition or framework could reserve discretion to the Board and Audit Committees to use the expression as per their subjective understanding. Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, provides that the listed entities shall formulate a policy on materiality of related party transactions including clear threshold limits duly approved by the Board of Directors and such policies shall be reviewed by the Board of Directors at least once in every three years. The provision makes it advisable for the company to define the term ‘Ordinary Course of Business’. Thus, we need to understand the expressions, ‘Ordinary’, ‘Course’, and ‘Business’ independently. The term ‘Ordinary’ means normal, natural and something what happens in routine either everyday or in general or traditionally. The term ‘Course’ means procedure, series, chain, link or string. The term ‘Business’ refers to an organisation or enterprising entity engaged in commercial, industrial, or professional activities. The term ‘Business’ also refers to efforts and activities undertaken by individuals to produce and sell goods and services for profit. The real estate business is one of the examples of industry. In this industry, the builder provides construction service. Thus, the business of the CD is to provide construction service. Therefore, apparently, the ‘Ordinary Course of Business’ is supply of goods or providing service by an organisation or an individual as part of its/his effort to earn profit in a routine manner. Supply of goods or service should be an ordinary/routine affair as part of efforts/activities undertaken by the concerned. In the wake, neither the compromise scheme filed by the CD and the Respondent No.1 before Additional District Judge (ibid) nor the Settlement dated 18.01.2018 can be treated as the act or activity performed in ‘Ordinary Course of Business’. The Settlement Agreement in fact is enumeration of terms and conditions qua the Collaboration entered into between two investors who had agreed to invest in ‘Market Square Project’. The Agreement between two investors to invest into a project cannot be treated as an act done by them in an ‘Ordinary Course of Business’. As could be ruled by High Court of Australia in Downs Distributing Co Pty Ltd vs. Associated Blue Star Stores Pty Ltd (in liq) : (1948) 76 CLR 463, noted by Hon’ble Supreme Court in Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Limited Etc. Etc. (Civil Appeal Nos. 8512-8527 of 2019), ‘Ordinary Course of Business’ supposes the ordinary and common flow of transactions in affairs of business and does not refer to any special or particular situation. In the present case, the Settlement Agreement dated 18.01.2018 is not the ordinary and common flow of transaction but is a particular situation regarding the share of the CD and Respondent No.1 in a particular project. The division of shares in a project cannot be called ‘Ordinary Course of Business’. For convenient reference, the relevant excerpt of the judgement of Hon’ble Supreme Court (Supra) is reproduced below: -

In the backdrop, the contention put forth by the Respondent No.1 that the Settlement Agreement dated 18.01.2018 providing for payment of an amount of Rs.3.50 Crores in lieu of 9.42 Crores and 22,700 Sq. Ft. land in lieu of 66,702 Sq. Ft. of land by the Respondent No.1 to CD is in ‘Ordinary Course of Business’ is nixed.

As far as the issue of the transaction, being undervalued transaction or not, as can be seen from Section 45(2) of IBC, 2016, a transaction shall be considered as undervalued where the Corporate Debtors transfer one or more of its assets for a consideration the value of which is significantly less than the value of the consideration provided by the Corporate Debtor and such transaction has not taken place in the ordinary course of business. In the present case, indubitably, in terms of the compromise filed before the Ld. District Judge Gurgaon, in which he took note of in his order dated 17.04.2013, the CD was liable to deposit Rs.7.35 Crores as non-refundable security i.e., the amount which the CD had deposited with Respondent No.1. Additionally, the CD had spent Rs.2.07 Crores on the project. The total liability which the CD had borne qua the project was to the extent of Rs.9.42 Cr. The Applicant has tried to put the matter in a simple way i.e., the transaction entered into in terms of the Settlement Agreement dated 18.01.2018 was undervalued, as the agreement could cause a loss of 44,002 Sq. Ft. of land and 5.92 Crores of money to the CD. Things are not so simple as the Applicant has tried to project. The facts not in dispute are:- (i) Director of Town Planning and Country Planning, Gurgaon, Haryana (DTCP) granted license No. 18/2010 to APIL, ATIL and others to develop a residential colony on the area measuring 111.594 Acres; (ii) on 01.12.2012, APIL and ATIL entered into an agreement to sell 1.75 Acres of land having total FSI of 1,33,403 Sq. Ft. to SPPL (Respondent No.1) for Rs.41,55,50,345/-; (iii) in terms of Collaboration Agreement dated 27.12.2010, CD was to develop and construct a commercial building on the aforementioned i.e. 1.75 Acres; (iv) in terms of the agreement, the super built-up area was to be owned by the CD and the Respondent No.1 in the ratio of 50% each; (v) the Corporate Debtor was to invest Rs.36 Crores in the project; (vi) Additionally, it was to pay Rs.7.35 Crores to Respondent No.1 as non-refundable security; (vii) in terms of the compromise filed in the court of Ld. Additional District Judge, Gurgaon, the share of the CD qua the project was to be 43%; (viii) in the event of non-completion of construction within the prescribed period of 30 months with grace period of 90 days, the CD was to pay penalty to Respondent No.1 qua 57% area @ Rs.20 Sq. Ft. per month for the period of delay for first 12 months, and 25% per Sq. Ft. per month thereafter; (ix) in terms of Settlement Deed dated 18.01.2018, the CD was to get Rs.3.50 Crores and 22,700 Sq. Ft. of super built area qua the project.

Nevertheless, there are certain facts, which are in dispute. Such facts are:-

Besides, the aforementioned, there are several other factors qua which in-depth analysis needs to be made before arriving at the conclusion regarding the actual area required to be vested in CD as also qua the amount to be paid/reimbursed by Respondent No.1 to CD. A conclusion also needs to be arrived at regarding the amount of Rs. 25 Cr. allegedly paid by the allottees of 75 units to the ex-management. It needs to be checked as to whether the said amount of Rs. 25 Cr. was credited to the accounts of CD or not.

The Transaction Audit Report is general regarding the affairs of the CD and does not deal with the ‘Market Square Project’ in detail. The brief details mentioned about the said project, in the Transaction Audit Report reads thus:-

As can be seen from the aforementioned, the Transaction Audit Report has not dealt with the terms of the Compromise/Settlement Agreement while taking the view that the Settlement Agreement dated 18.01.2018 entered into by the Suspended Board of Directors of CD with Respondent No.1 amounted to an undervalued transaction. It is observed that both the application and the Transaction Audit Report are quite sketchy.

We may also not be oblivious to the fact that the compromise filed before Additional District Judge Gurgaon entailed the counter liability of the CD to invest Rs.36 Crores in the project. The 43% of the share in the project was consideration qua the investment of Rs.36 Crores. At the cost of repetition Para 11 of the application filed by the Applicant reads thus: -

In any case, indubitably, the terms of the compromise which formed part of the order of the Ld. Additional District Judge, Gurgaon, passed on 17.01.2013 were varied on 18.01.2018 i.e., during the look-back period. The transaction being liable to be reversed with reference to the point of time at which the same took place and the same being covered by Section 45 to 49 of IBC, 2016 are different aspects. Nevertheless, ex-facie the transaction appears to be undervalued. The facts which need to be verified inter alia, are how much amount out of Rs.36 Crores could be invested by the CD, whether 75 units qua the project had been sold or not, whether the CD received Rs.25 Crores from the allottees qua the project and whether the amount was credited to the accounts of the CD and whether an area of 39,664 Sq. Ft. out of the project could be allotted by the CD. The RP was expected to be satisfied with such factual propositions before filing the application. We also expected the RP to arrive at the definite area qua the property/project to be restituted to the CD and the specific amount to be paid by the Respondents to the CD as a result of the transaction being found as undervalued. The expected exercise has not been done in the matter at the end of the RP. In the wake, we consider it appropriate to appoint Mrs. Rashmi Chopra (Mob. No. 9810311218) Standing Counsel for Delhi High Court as Court Commissioner to examine the entire affairs qua the ‘Market Square’ Commercial project since 10.03.2010, verify the records of CD in custody of RP with reference to the project including the balance sheet to check the amount spent/invested by the CD qua the ‘Market Square’ Commercial Project since 27.12.2010. The Court Commissioner would specifically verify and ascertain the list of the buyers/allottees qua the said project and the payment received from them by the CD in its books/account as consideration of allotment for the units allotted to them (if any). The Court Commissioner would also find out the present status of the ‘Market Square’ Commercial project. With reference to aforementioned examination/verification and such other steps/scrutiny which the Court Commissioner deems appropriate to take/perform, a report shall be submitted to the RP within 4 weeks from today. The RP shall extend all requisite logistic/clerical/professional/expert/ any other support needed by the Court Commissioner to perform her duties. The Auditor, who conducted the transaction audit, is also directed to assist the Court Commissioner in this respect. The local district administration is also directed to extend all such support to the Court Commissioner, as needed by her to discharge her duties effectively.

In the report to be given by the Court Commissioner to this Adjudicating Authority, she will specifically indicate the area qua ‘Market Square’ Commercial Project required to be restituted by the Respondent No.1 to the assets of CD and the amount of money to be refunded by Respondents Nos.1 and 3 to 4 to the accounts CD maintained by RP.

The consolidated fees of the Court Commissioner quantified as Rs.2 lacs would be borne equally by the Applicant and the Respondent No.1 and would be paid forthwith (in advance). All other (contingent) expenditure to be incurred by the Court Commissioner shall be borne by the RP and would be treated as the cost of CIRP.

Till the acceptance of the report of the Court Commissioner by this Adjudicating Authority the parties shall maintain status quo qua the ‘Market Square’ Commercial Project.

Both the CAs 891/2019 and 253/2019 stand disposed of accordingly. RP/Court Officer shall make a copy of this order available to the Court Commissioner (ibid) forthwith.