Pray Projects Pvt. Ltd. vs Rajender Kumar Girdhar

[Per.: Dr. Alok Srivastava, Member (Technical)]

Two appeals viz. CA(AT)(INS) No.938/2022 (filed by Appellant Pray Projects Private Limited) and CA(AT)(INS) No.941/2022 (filed by Appellant Fervent Securities Private Limited) have been preferred under section 61 of the Insolvency and Bankruptcy Code, 2016 (in short ‘IBC’) assailing the common order dated 3.6.2022 passed by the Adjudicating Authority (National Company Law Tribunal, Mumbai) in IA 3155/2019 in CP(IB)-4190(MB) of 2018 (in short ‘Impugned Order’). Both the appeals are being disposed of by this common judgment.

The Appellants in the two appeals are aggrieved by the Impugned Order whereby the claims lodged by both the Appellants in the Corporate Insolvency Resolution Process (in short ‘CIRP’) of the corporate debtor Mayurpankh Properties Private Limited (in short ‘MPPL’) have been held as preferential, undervalued and fraudulent transactions under sections 43, 45 and 66 of the IBC and thereby they are not binding on the corporate debtor.

In brief, the Appellant Pray Projects Private Limited (in short ‘Pray Projects’) has stated that in 2014, it gave an unsecured loan amounting to Rs. 5 crores to Sunshine Housing Infra Pvt. Ltd. (in short ‘SHIPL’) on which interest was being paid by SHIPL till October, 2016, but thereafter it stopped paying interest to the Appellant. The Appellant Pray Projects has further stated that to reduce the burden of loan and interest that SHIPL was carrying, it offered in the year 2018 to arrange purchase of some area in the real estate project “Chambers” being developed by the corporate debtor MPPL and so SHIPL transferred the aforesaid principal sum of Rs. 5 crores to the Appellant Pray Projects for onward transfer to the corporate debtor as consideration for an Option Agreement (called “Option Agreement-I”). This agreement which was signed by the corporate debtor MPPL with Pray Projects, provided Pray Projects an option for purchase of the option area in the “Chambers” project of the corporate debtor. The Appellant Pray Projects has further stated that it paid as aforementioned a total of Rs. 5 crores in five tranches to the corporate debtor as consideration for the Options Agreement which was signed by them on 15.12.2018. This agreement gave an option to the Appellant Pray Projects to purchase the option area in the project within 90 days from the date of receipt of full occupation certificate of the project and the Appellant Pray Projects was given an irrevocable right to buy option area of 1315 sq.ft. @ Rs.45,627/-per sq.ft., but there was no obligation on Pray Projects to purchase the option area. The Appellant has also stated that vide letter dated 17.12.2018, it exercised its right to purchase the option area.

The Appellant Pray Projects has further stated that the corporate debtor was admitted into insolvency by the order of the Adjudicating Authority dated 18.12.2018, though the Appellant Pray Projects was not aware of the that proceedings relating to admission of the application for insolvency resolution of the corporate debtor. The Appellant Pray Projects has further stated that it submitted its claim of Rs. 5 crores in the CIRP of the corporate debtor on 9.1.2019 as an unsecured financial creditor and its status as unsecured financial creditor was accepted by the Resolution Professional alongwith admission of his claim.

With regard to the second appeal viz. CA(AT)(INS) No. 941 of 2022, the Appellant Fervent Securities Private Limited (in short ‘Fervent Securities’) has stated that it provided an advance of Rs. One crore to the corporate debtor and an Option Agreement dated 17.12.2018 (called ‘Option Agreement – II’) was signed between the Appellant Fervent Securities and the corporate debtor by which the Appellant was granted an irrevocable right, but not an obligation, to purchase an Option Area measuring 6500 sq.ft. at the rate of Rs.26,923 per sq. ft. in the “Chambers” project located at Andheri (West) in Mumbai. The Appellant Fervent Securities has stated that the sum of Rs. One crore was advanced to the corporate debtor and in consideration of the same, Option Agreement -II was executed with the corporate debtor. The Appellant Fervent Securities has also stated that it was not aware of the on-going proceedings relating to section 7 application against the corporate debtor and therefore the Options Agreement was signed by it as a purely commercial transaction at arm’s length.

Both the Appellants have stated that the corporate debtor was admitted into insolvency vide order of the Adjudicating Authority dated 18.12.2018 and the Respondent Rajender Kumar Girdhar was appointed as Interim Resolution Professional (IRP) for conducting the CIRP. They have further stated that the Respondent appointed Sharma Goel & Co. LLP as transaction auditor of the corporate debtor by a decision taken in the 3^rd meeting of the Committee of Creditors (in short ‘CoC’) held on 15.4.2019 and the transaction auditor submitted its report on 26.7.2019, but this Transaction Audit Report (in short ‘TAR’) was not shared with the Appellants even though allegations about transactions of the Appellants with the corporate debtor were included in the said TAR.

The Appellants have further stated that TAR states that the corporate debtor was used as a conduit for transfer of funds from one group company (a related party) to another group company (another related party of the corporate debtor) with the active connivance and participation of both the Appellants in transfer of funds. They have further stated that consequent to the receipt of TAR, a miscellaneous application MA 3155/2019 was filed by the Respondent and the Impugned Order was passed in the said miscellaneous application holding the transactions made by both the Appellants with the corporate debtor as contravening sections 66, 43 and 45 of the IBC, and as such those transactions have been held to be null and void, and consequently claims lodged by both the Appellants in the CIRP of the corporate debtor have been held to be not binding on the corporate debtor.

We heard the oral arguments of the Learned Senior Counsel and Learned Counsel for the respective Appellants and the Learned Counsel of the Respondent in the appeals and also perused the record.

The Learned Senior Counsel for the Appellant Pray Projects has argued that the Appellant was unaware of the imminent initiation of CIRP of the corporate debtor and it entered into separate Option Agreements with the corporate debtor as genuine commercial transactions relating to real estate property, which was done at an arm’s length by the Appellants. He has further submitted that the Respondent admitted the claims of Appellants as unsecured financial creditor on the basis of the claim forms submitted by the Appellants and the transfer of funds by the Appellants to the corporate debtor is evidenced by bank account statements.

In connection with the transactions made by Pray Projects, the Learned Senior Counsel has explained that in the year 2014, Pray Projects advanced a sum of Rs. 5 crores by way of loan to SHIPL and bank statement of Pray Projects clearly show that such payment was made by Pray Projects to SHIPL regarding which regular interest amount was being paid by SHIPL to Pray Projects from time to time till the year 2016. He has further explained that SHIPL felt the burden of principal amount of the loan and interest and so offered to Pray Projects an option to purchase some space in the “Chambers” real estate project being developed by MPPL/corporate debtor, which is a related party of SHIPL against adjustment of the said loan. Since this project of the corporate debtor was expected to be completed before the project undertaken by SHIPL, Pray Projects decided to go with the project of the corporate debtor and in this connection, it signed an Option Agreement-I dated 1512.2018 by which an area of 1325 sq.ft. was to be placed as option for purchase in the ‘Champers’ project with the Appellant. He has further submitted that the Appellant Pray Projects filed a claim of Rs. 5 crores, which was admitted by the Respondent/Resolution Professional after due verification and Pray Projects was also made part of the CoC as an unsecured financial creditor being unrelated party of the corporate debtor.

In relation to the transaction entered into by the Appellant Fervent Securities, the Learned Counsel for Appellant Fervent Securities has explained that the Appellant Fervent Securities advanced a sum of Rs. 1 crore to the corporate debtor on 17.12.2018 and another Option Agreement -II was signed between the Fervent Securities and the corporate debtor by which irrevocable right was granted to the Appellant Fervent Securities which did not carry an obligation to purchase the option area admeasuring 6500 sq.ft. @Rs.26923/- per sq.ft. It was also agreed that this loan amount shall be adjusted against the total option consideration of Rs.17.50 crores. He has also contended that without obtaining a proper valuation of the property in Option Agreement the Adjudicating Authority has decided that the transactions were undervalue which is not correct.

The Learned Senior Counsel for the Appellant Pray Projects has claimed that since the Option Agreement signed by the Appellant was done at an arm’s length and they were not aware of the imminent initiation of CIRP of the corporate debtor, the transactions were done in good faith and therefore, the Impugned Order passed by the Adjudicating Authority on the avoidance application MA 3155/2019 which extinguishes the claims regarding the amounts advanced by both the Appellants to the corporate debtor is not correct and should be set aside. He has added that the Appellant is not related party of the corporate debtor and their claims are valid claims and should be considered in the insolvency resolution of the corporate debtor.

The Learned Senior Counsel for Appellant Pray Projects has further argued that during the course of CIRP of the corporate debtor, a transaction audit was undertaken by the Resolution Professional for the period 1.4.2015 to 18.12.2018 and on the basis of the TAR an avoidance application being MA No. 3155/2019 under sections 43, 45 and 66 of the IBC was filed by the Respondent against both the Appellants and certain other parties on which the Impugned Order come to be passed by the Adjudicating Authority.

The part of the Impugned Order with which both the Appellants are aggrieved is as follows:-

We first look at the transactions between Pray Projects, SHIPL and the corporate debtor beginning with the loan claimed to be given by Pray Projects to SHIPL in the year 2014. The Appellant Pray Projects has filed bank account statement of its account No. 00000033568472338 maintained in State Bank of India, Ghatkopar (East Branch), Mumbai (attached at pp.53-54 of appeal paperbook, Vol. I in CA (AT)(Ins) No. 938 of 2022). The bank account statement shows that an amount of Rs.1,00,00056/- was remitted to SHIPL on 24.1.2014 and another amount of Rs.4,00,00,056 was remitted to SHIPL on 29.1.2014. There is no record or document submitted by the Appellant to show the purpose for which this amount was remitted by Pray Projects to SHIPL. We also note from the bank account statement submitted by Pray Projects that it gave 4 cheques viz. cheque no. 444061 dated 10.12.2018 for an amount of Rs. 1 crore, cheque no. 444062 dated 11.12.2018 for an amount of Rs. 1 crore, cheque no. 444063 dated 12.12.2018 for an amount of Rs. 1 crore, cheque no. 444064 dated 13.12.2018 for an amount of Rs. 1 crore, all in favour of Mayurpankh Properties Private Limited and a 5^th cheque no. 444065 dated 14.12.2018 for an amount of Rs. 1 crore in favour of Mayurpankh Private Limited. Thus, a total amount of Rs. 4 crores was transferred to MPPL between 10.12.2018 to 13.12.2018 and an amount of Rs. 1 crore was transferred to Mayurpankh Private Limited on 14.12.2018 (details are attached at pp.55-56 of appeal paperbook, Vol.I in CA 938 of 2022). Another bank account statement of Pray Projects is attached at pg. 57 of the appeal paperbook, Vol.I in CA 938 of 2022, which includes transactions between Pray Projects and SHIPL and transfer of funds from Pray Projects to the corporate debtor.

From the above-mentioned bank statements showing transactions of various amounts, it is clear that Pray Projects transferred an amount of a little over Rs. 5 crores to SHIPL in the year 2014, but since no document is submitted as to why such amount was transferred, the purpose for transfer of this amount is not clear. Further, SHIPL transferred a total of Rs. 5 crores in five different tranches starting from 11.12.2018 till 15.12.2018 in favour of Pray Projects. It is claimed this amount has been given to Pray Projects by SHIPL against the loan of Rs. 5 crores given by Pray Projects. Further Pray Projects transferred Rs. 5 crores to the corporate debtor between 10.12.2018 to 14.12.2018. This amount of Rs. 5 crores was transferred to SUIL and STPL between 11.12.2018 to 15.12.2018 as is evident from bank statement, and it is corroborated by the Transaction Audit Report.

The recitals and clauses of the Option Agreement-I, which are relevant, are as follows:-

The Option Agreement-II signed between the Fervent Securities and the corporate debtor MPPL is attached at pp.65-70 of the appeal CA 938/2022 Vol.I. The relevant parts in the recital and clauses in this Option Agreement are as follows:-

In the Transaction Audit Report (attached in appeal paperbook of CA 938/2022 Vol.II pp.191-294), the following has been recorded as summary of the three option agreements entered into by the corporate debtor, with S. Nos. 1 and 2 being the Option Agreement-I and Option Agreement-II which are pertinent to this judgment:-

The table extracted above shows that Pray Projects has given an advance to SHIPL totalling of Rs. 5 crores between10.12.2018 to 14.12.2018 and further an amount of Rs 3,33,60,000/- was transferred by the corporate debtor to Sunshine Urban Infrastructure Ltd (SUIL) in four transactions. Also, an amount of Rs.1,66,20,000/- was transferred to Sunshine Tracon Pvt. Ltd. (STPL) in three transactions. The bank statement submitted by the Pray Projects shows that an amount of Rs. 5 crores was transferred by SHIPL to Pray Projects between 11.12.2018 to 15.12.2018, and further PRAY PROJECTS transferred a total amount of Rs.5 crores to the corporate debtor which was transferred immediately thereafter to SUIL and STPL as explained above. These facts also come out of the various bank statements submitted by the Appellants.

The transactions between Pray Projects, SHIPL, Corporate Debtor MPPL, SUIL and STPL and the findings of the TAR can be depicted in the form of a flow chart as following :-

We now look at the transactions between the Fervent Securities and the corporate debtor in the light of Option Agreement-II entered between them.

The Appellant Fervent Securities has claimed that it transferred an amount of Rs. 1 crore to the corporate debtor as consideration for the option being provided to it through the Option Agreement-II. The summary of transactions from the TAR, which is extracted earlier in this judgment shows that an amount of Rs. 1 crore was provided by Fervent Securities to the corporate debtor on 17.12.2018 and an amount of Rs. 1 crore was immediately thereafter transferred by the corporate debtor to STPL on the same day i.e. 17.12.2018. These transactions are shown in Flow chart-II as following:-

Admittedly, SUIL and STPL are related parties of the corporate debtor since they all belong to the same group of companies and therefore the amounts received by the corporate debtor from Pray Projects i.e. Rs. 5 crores and from Fervent Securities i.e. Rs. 1 crore were transferred to the corporate debtor’s related parties between 10.12.2018 to 17.12.2018 as is evident from the summary of option agreements in the TAR which is extracted earlier in this judgment and Flow Charts I & II. It is thus clear that amounts paid by Pray Projects and Fervent Securities were not retained by the corporate debtor, but were transferred to two entities viz. SUIL and STPL which are companies in the same group as the corporate debtor. While the interest in the property ‘Chambers’ project was created in favour of Pray Projects and Fervent Securities through the two option agreements dated 15.12.2018 and 17.12.2018 respectively, the consideration amounts were not retained by the corporate debtor, but transferred on receipt to its related entities SUIL and STPL. Thus, these amounts did not remain part of the assets of the corporate debtor. The two Option Agreements thus created fiction of transfer of property in “Chambers” Project without any consideration being actually retained by the corporate debtor.

In order to examine whether the transactions undertaken through the two option agreements are indeed avoidance transactions, we note the following provisions in the IBC:-

The Flow Charts I and II depicting the transactions entered into between Pray Projects, Fervent Securities, SHIPL, corporate debtor MPPL, SUIL and STPL make clear the following:-

An analysis of the various transactions which are included in the bank account statements and TAR and which has been shown in the Flow Charts makes it abundantly clear that whatever amount was paid by Pray Projects and Fervent Securities as option advance were immediately transferred on receipt to the SUIL and STPL (which are related parties of the corporate debtor and also companies in the same group) and thus these amounts were not retained by the corporate debtor. It thus becomes clear that while interest in the property ‘Chambers’ project of the corporate debtor was created in favour of Pray Projects and Fervent Securities, the consideration against these Option Agreements was not retained by the corporate debtor and no amounts were added in the assets of the corporate debtor. Therefore, no amounts can be claimed from the corporate debtor in its CIRP by the Appellants Pray Projects and Fervent Securities.

Section 43(2)(a) prohibits creation of interest for the benefit of a creditor (Pray Projects and Fervent Securities in the present appeal) in relevant time on account of liabilities owed by the corporate debtor. The above stated preferential transactions are preference given to persons other than related parties, and therefore, these would be preferential transactions within the relevant time, which is one year preceding the insolvency commencement date viz. 18.12.2018. Therefore, these transactions will be clearly preferential transactions as defined under section 43(2)(a).

Further, we also note that the actual amounts received and then retained by the corporate debtor from Pray Projects and Fervent Securities as consideration against the two Option Agreements are actually ‘Nil’ since the amounts received of Rs. 5 crores and Rs. 1 crore respectively were transferred immediately thereafter to the corporate entities SUIL and STPL belonging to the same group of companies as the corporate debtor and the effective value received by the corporate debtor with respect to the two Option Agreements is ‘Nil’. Therefore, these transactions are also undervalued transactions in accordance with section 46(1) (i) of IBC. Moreover, these transactions were made within a period of one year preceding the insolvency commencement date. Therefore, the transactions made through the Option Agreement-I and Option Agreement-II are avoidable transactions in accordance with sections 45 and 46 of IBC.

It is further noted that the transaction in question in the appeals and signing of the two Option Agreements has been done within a period of one week just preceding the insolvency commencement date (i.e. 18.12.2018) starting from 10.12.2018. Notably, the Adjudicating Authority heard the arguments of the parties in the avoidance application MA 3155/2019 on 10.12.2018 and reserved for orders thus:

It is clear from the above order that the corporate debtor admitted the debt and default and thus the admission of section 7 application was almost certain. Such transactions which were entered into when the matter had been heard and reserved for order, and when the order would have, in all likelihood, resulted in initiation of CIRP, are not only suspect, but they are avoidance transactions.

Pray Projects and Fervent Securities have claimed that they were not aware of the insolvency related proceedings against the corporate debtor MPPL. It is a fact that the corporate debtor MPPL which entered into such agreements with Pray Projects and Fervent Securities was very much aware that the matter relating to admission of section 7 application against the corporate debtor had been reserved for orders on 10.12.2018 and the corporate debtor had admitted the debt and default. It makes the two Option Agreements related transactions suspect as avoidance transactions and this fact is further strengthened by findings in the TAR. It is necessary that the assets of corporate debtor should not be interfered with or reduced by way of avoidance transactions to the detriment of its actual creditors, and to put them at a disadvantage. Therefore, if the corporate debtor enters into such transactions even though the other parties may be entering into such transactions without being aware that such transactions could be avoidance transactions, the fact that such transactions are to the detriment of the legitimate interests of the creditors of corporate debtor cannot be denied. We are, therefore, convinced that the transactions as undertaken in relation to the two Option Agreements are avoidance transactions which infringe sections 43 and 45 of the IBC.

We also observe that there is no letter or communication of request from the corporate debtor addressed to either Pray Projects or Fervent Securities Private Ltd. to enter into Option Agreement. Further, there is no resolution by the Board of Directors of the corporate debtor or the Appellants for execution of the two Option Agreements. Moreover, the Option Agreements are under-stamped documents which are not duly registered. Such deficiency in the Option Agreements, particularly when they were executed after the section 7 application case had been reserved for order, raises grave doubt about the bonafide nature of the documents relating to Option Agreements and whether they were really executed at arm’s length. Therefore, we are of the view that such transactions which are also ‘circular’ in nature as is evident from the flow charts given in this judgment earlier, were meant to defraud the actual creditors of the corporate debtor by creating an interest in the assets of the corporate debtor in favour of such alleged creditors as the Appellants through ‘fictitious’ transactions, when even the consideration for such transactions did not remain in the corporate debtor’s account.

We also consider the arguments of the Learned Senior Counsel of Appellant Pray Projects that TAR was not in the knowledge of the Appellants, even though there were findings against them in the TAR. In this connection, we peruse e-mail dated 26.7.2019 and another e-mail dated 22.8.2019 (both submitted with additional affidavit by the Respondent vide Dy. No 40859 dated 7.11.2022) that the draft TAR and the final TAR respectively were shared with the Appellants Pray Projects and Fervent Securities on email id ‘prayprojects@gmail.com’ and e-mail ID ‘Vimal Savla vrs.deluxe@gmail.com’ respectively. Further, the minutes of the 7^th meeting of the CoC held on 28.8.2019 show that the TAR was considered as item 5 in the agenda and the Resolution Professional informed the CoC members that he was in the process of filing an application before the Adjudicating Authority for avoidance transactions identified under sections 43, 45 and 66 of the IBC, which information was noted by the CoC (pp.15-16 of the additional affidavit filed by the Respondent/Resolution Professional).

The Learned Senior Counsel for Appellant has referred to the judgment of this Tribunal in the matter of Regen Powertech Pvt. Limited vs. Wind Construction Pvt. Ltd. [CA (AT) (Ins) No. 349 of 2022], wherein the following is held:-

The above cited judgment is distinguished on the basis of the fact that in the present appeals, there is documentary material to support and strengthen the plea of the Resolution Professional that said option transactions were carried out in the relevant period by the corporate debtor and were therefore in contravention of sections 43 and 45 of the IBC. The bank statements, the Option Agreements provide substantial documentary proof of fact that the transfer of funds by the Appellants to the corporate debtor and their almost immediate transfer to SUIL and STPL which are companies of the same group as the corporate debtor is clearly indicative of the fact that the amounts in question were siphoned off to these entities by the corporate debtor, thereby reducing the asset base of the corporate debtor in an illegal manner.

We note that the ‘Chambers’ project was mortgaged to ICICI bank with the condition no third-party rights would be created in respect of any property in ’Chambers’ project by the corporate debtor, but there is no evidence of any NOC being obtained by the corporate debtor from the ICICI Bank before executing the option agreements with both the Appellants. We also note that Option Agreement-1 and Option Agreement-2 are insufficiently stand and not registered and therefore, they cannot even otherwise be relied upon for enforcement of any right of Appellants on that basis. These deficiencies and discrepancies go to show that these agreements were entered into by the corporate debtor in haste after the Adjudicating Authority had reserved orders of the section 7 application on 10.12.2018. Such action by the corporate debtor is not only suspicious, but also is clearly fraudulent in that they seek to put the actual creditors of the corporate debtor at clear disadvantage by keeping out certain assets from the overall asset base of the corporate debtor.

The Learned Senior Counsel for Appellants has cited the judgment of this Tribunal in the matter of Renuka Devi Rangaswamy vs. Regen Powertech Pvt. Ltd. (CA (AT) (INS.) No. 357 of 2022), wherein the following has been held:

In connection with the judgment in the matter of Renuka Devi Rangaswamy (supra), we note that it is the duty of the person making the allegation to prove to the ‘subjective satisfaction’ of this Tribunal that an individual is carrying on business with the corporate debtor and such an individual ought to have a dishonest intent to defraud the corporate debtor. In the present appeals, we find that the Adjudicating Authority had reserved the case regarding admission under section 7 for orders on 10.12.2018. It is important to note that the corporate debtor admitted debt and default before the Adjudicating Authority which is evident from the order sheet dated 10.12.2018. Therefore, it is abundantly clear that the corporate debtor having admitted the debt and default, was reasonably certain about the admission of the section 7 application against him which would lead to initiation of CIRP. It is also a fact that Pray Projects, one of the Appellants, had received an amount of approximately Rs. 5 crores from SHIPL in 2014 and SHIPL is a sister company of the corporate debtor. It is, therefore, reasonable to infer that PRAY PROJECTS had business dealing with SHIPL, a sister concern of the corporate debtor, both belonging to the same group of companies. To arrive at a decision regarding applicability of sections 43 and 45, the Adjudicating authority has to be subjectively satisfied, which he appears to have been on the basis of the TAR in the instant case.

On the basis of aforesaid discussion, it is amply clear that the Option Agreements I & II are preferential and undervalued transactions and, therefore, they are avoidance transactions as per sections 43 and 45 of IBC. Therefore, the two Option Agreements No. 1 and II are declared ‘null and void’ and any interest created in the property ‘Chambers’ project of the corporate debtor by virtue of these Option Agreements are also declared non est in law and ‘null and void’.

In the light of the detailed analysis in the aforementioned paragraphs, it is abundantly clear and established that the payment of Rs. 5 crores made by Pray Projects to the corporate debtor in December, 2018 did not remain with the corporate debtor, but were almost immediately transferred to its group entities SUIL and STPL, and Rs. One crore paid by Fervent Securities to the corporate debtor was also not retained by the corporate debtor, but was transferred to the group entity STPL where SUIL and STPL are related parties of the corporate debtor as the corporate debtor MPPL, SUIL and STPL belong to the same group of companies. Thus, these amounts were not part of the assets of the corporate debtor during the CIRP of the corporate debtor. Therefore, the two entities Pray Projects and Fervent Securities cannot claim any payment as a result of insolvency resolution of the corporate debtor.

In view of the above, we are of the view that the Impugned Order does not bear any infirmity and needs no intervention. Finding the two appeals that are considered in this judgment as being devoid of merit, we dismiss them, and dispose them of accordingly.

There is no order as to costs.