Raj Singhania vs Om Prakash Pandey & Ors.

Per Balraj Joshi, Member (Technical)

This Court convened through hybrid mode.

The present I.A. has been filed by the erstwhile Resolution Professional of Aeon Manufacturing Private Limited under sections 66 and 67 of the Insolvency and Bankruptcy Code (“Code”) seeking directions upon the Respondents who are the former directors of the Corporate Debtor, to make payments on account of several high value cash transactions entered with the Respondents on several dated in the year 2019 and also on account of the credit sales made to the Respondents between the months January and March 2015.

This Adjudicating Authority vide order dated 30 October 2019 admitted Aeon Manufacturing Private Limited (“Corporate Debtor”) under Corporate Insolvency Resolution Process (“CIRP”) on a Petition filed under section 7 of the Code by Bank of India, registered as C.P. (IB) No. 683/KB/2018. The Resolution Plan was approved by this Adjudicating Authority on 11 May 2021.

The learned Counsel submitted that even after the approval of the Resolution Plan, the instant application is maintainable and as such distinguishable from the judgment passed in the matter of Venus Recruiters Pvt. Ltd. Versus Union of India & Ors. dated 26 November 2020 passed by the Hon’ble Delhi High Court wherein the Hon’ble Delhi High Court has held that the Resolution Professional cannot continue after approval of the Resolution Plan by the Adjudicating Authority. It has further been held in the said matter that the NCLT has no jurisdiction to entertain and decide avoidance applications which is under the new management unless a provision is made in the final Resolution Plan.

Mr. Guha submitted that the above judgment of the Hon’ble Delhi High Court is distinguishable from the facts of the instant case. In the matter decided by the Hon’ble Delhi High Court, it is to be noted that that an avoidance application had been filed by the Resolution Professional therein much after the application for approval of the Resolution Plan was filed. In fact, in the said matter, the avoidance application was filed only two days prior to the date when this Adjudicating Authority reserved the application for approval of resolution plan for orders. However, in the instant case, not only had the instant application under Section 66 of the Code been filed long before the application for approval of the resolution plan, the matter had even been heard several times at the time when the application for approval of resolution plan was pending and thereafter approved by this Adjudicating Authority.

With regard to the purpose of funding the instant proceeding is concerned, it has been decided that the fees of the advocates relating to the instant case will be paid by Bank of India, the erstwhile sole member of the Committee of Creditors (“CoC”) who has been agreed upon to be the ultimate beneficiary of the payments that may be directed by the Tribunal to be made by the respondents in the instant application. The SRA, further, has nothing to do with the instant proceedings. Discussion on the said issue had also taken place in the 1st Monitoring Committee meeting on 28 May 2021, a copy of the same has been submitted with written notes.

The transactions comprise of certain high value cash transactions and credit sale transactions undertaken by the CD prior to the commencement of CIRP which are clearly wrongful/ fraudulent in nature coming under the purview of Section 66 of the Code and which merit passing of directions as prayed for in the application.

The Resolution Professional received few documents only on or about February, 2020 and several documents were not provided to by the suspended Board of Management of the Corporate Debtor. The Resolution Professional formed his preliminary opinion regarding the existence of certain objectionable transactions on 14 March 2020.

Thereafter, due to the Covid-19 pandemic and the lockdown that followed there was no progress in the CIRP of the Corporate Debtor.

The Transaction Auditor submitted its report the Resolution Professional on 31 December 2020. The Resolution Professional concurred with the findings of the Transaction Auditor that there were certain section 66 transactions that had been entered into by the suspended Board of Management of the Corporate Debtor and on the same day the Resolution Professional drew up an independent determination regarding the existence of undervalued transactions, which is evident from the minutes of the 13^th CoC meeting held on 04 January 2021. This I.A. was filed on 04 February 2021.

Moving on to the transactions, the learned Counsel submitted that the transactions can be divided into two parts i.e. being high value cash value transactions and credit sale transactions undertaken by the Corporate Debtor under the directorships of the respondents has been identified by the Resolution Professional as coming within the purview of section 66 of the Code.

The details of the transactions along with the reasons for the classification of the transactions as coming under Section 66 of the Code are mentioned herein below:

Transaction to the tune of Rs. 72, 42,200 (Rupees Seventy Two Lakh Forty Two Thousand Two Hundred Only) entered in cash

(Amount in Lakhs)

On 31 March 2015 and 31 March 2016, the Corporate Debtor had made unaccounted cash payments of Rs. 1,15,00,000 (Rupees One Crore Fifteen Lakh only) to one of it’s creditor Swastik Trade Agency without any disclosure made in the audited financial statements of the Corporate Debtor which is against the norms of Indian Accounting Standard.

Each of the above transactions have been entered into in cash and not disclosed in the financial reports of the CD.

Credit sales done to the tune of Rs. 38,16,73,000 (Rupees Thirty Eight Crores Sixteen Lakhs and Seventy Three Thousand Only) against which nothing has been realized or no steps have been taken to recover the dues. The credit sales entered into the books are considered to be fictitious and are shown in the books with an intent to defraud its creditors.

(Amount in Lakhs)

Credit sales of more than Rs. 38 Crores was made in a span of just three months between January 2015 and March 2015.

Vaibhavshali Engineering Private LImited has been striked off from the Registrar of Companies as on date of filing the application and Creative Commosales Private Limited.has not filed its financials with Registrar of Comapnies since 2018, which strengthens the stand that these sales were made to obscure and shell companies for the purpose of siphoning of funds in order to defeat the rights of the creditors.

Credit sales of as much as Rs 12,60,62,000 (Rupees Twelve Crore Sixty Lakh and Sixty Two Thousand Only) was made to Vaibhavshali Engineering Pvt. Ltd in the aforesaid period when the paid up equity share capital of Vaibhavshali Engineering Pvt. Ltd. was only Rs. 1,00,000 (Rupees One Lakh Only), evident from the MCA master data.

Further, the audited financial statements of the Corporate Debtor indicate that there has been sale of material timber but as per the Ministry of Corporate Affairs (MCA) data available for the two companies, the companies are shown to have purchased iron and steel (evident from Pg 71-74, 76,85 of the application being part of the transaction audit report). This results in material difference and raise reasonable suspicion regarding the nature of the transaction. The suspicion gets further catalysed when it was observed that, no Central Sales Tax (CST) has been paid in respect of the above sales made by the Corporate Debtor.

Further, the transaction auditors have not been able to obtain any further information nor any contact details been furnished by the respondents to cross verify such credit sales despite approving the transactions and making corresponding entries in the financial statements.

Not a single rupee has been recovered from the aforesaid transactions. The fact that not a single rupee has been recovered from any of the three entities coupled with the fact that the credit sales were made around the same time in the year 2015 under the directorships of Respondent Nos. 1, 2 and 3 is clear indication of the intention of the directors to defraud the creditors of the corporate debtor and as such they should be held liable to make such contributions to the assets of the corporate debtor.

It is stated that due to the reasons mentioned hereinabove, determination regarding the existence of the transactions being fraudulent in nature was made by the Resolution Professional which led to the Resolution professional to file the instant application.

The two sets of transactions mentioned hereinabove are unexplained and not disclosed in the annual report which is explanatory and evident from the ledgers and books of accounts annexed to the transaction audit report forming part of the application.

The transactions as undertaken, satisfy all requirements of section 66 of the Code and as such remedial measures to undo the fraud played upon the creditors and other stakeholders of the Corporate Debtor by the erstwhile directors is needed to be taken to compensate for the loss suffered by the creditors, resolution applicants and other stakeholders in accordance with the provisions of the Code.

In so far as timelines go, it is an admitted fact that the RP has acted beyond the timelines provided under the Code read with the relevant Regulations. Although the RP tried his best to ensure compliance with timelines under the Code, the exigencies of the case on account of non- cooperation by the suspended board coupled with the Covid-19 pandemic morefully described hereinabove led to the RP exceeding the timelines provided under Regulation 35. It is submitted that the Hon’ble Tribunal may condone non- compliance with the timelines prescribed depending upon the facts and circumstances of the case. Reliance in this regard is placed upon the judgment passed by the Hon’ble Supreme court passed in Kailash v. Nanhku & Ors ((2005) 4 SCC 480) wherein the Supreme Court went on hold that “Extension of time may be allowed if it is needed to be given for circumstances which are exceptional, occasioned by reasons beyond the control of the defendant and grave injustice would be occasioned if the time was not extended”.

While on this, it must be stated that it has been held time and again by the Apex Court that timelines in a statute fall within the domain of procedural law. The timelines have further been considered to be handmaid of justice which cannot overpower substantive rights. Reliance in this regard is placed on the well-known judgment passed by the Hon’ble Apex Court in Smt. Rani Kusum v. Smt. Kanchan Dev ((2005) 6 SCC 705). The Hon’ble NCLAT in Aditya Kumar Tibrewal vs Om Prakash Pandey & Ors (2022 SCC OnLine NCLAT 142) dated 6th April has further held that timelines provided under Regulation 35A for the RP are only directory and not mandatory.

The learned Counsel thus that the respondents under whose directorships and control these transactions described hereinabove have been undertaken be brought to book so as to ensure that that the perpetrators of fraud are not allowed to get away scot-free by unjustly enriching themselves at the cost of the creditors and other stakeholders

The learned Counsel submitted that the I.A. is time barred under regulation 35A of the CIRP Regulations.

However, in the supplementary affidavit filed by the Applicant, the Applicant has sought for condonation of delay to file the application under regulation 35A of the CIRP Regulations.

The learned Counsel submitted that the Resolution Professional failed to form an independent opinion or make a determination which are required under the provision of section 66 and 67 of the Code.

The I.A. was affirmed on 03.02.2021 and was filed when the Corporate Debtor was in CIRP, after approval of the Resolution Plan by this Adjudicating Authority, the Corporate Debtor is no longer a Corporate Debtor and is under a new management, hence the I.A cannot survive beyond the conclusion of the CIRP.

The Applicant has contended that high value cash payments has been made in respect of transactions with Sri Balaji Logs Products Private Limited, Maa Anadamayee Timber, Rahul Plywood Centre and Aditya Enterprises, however, the said entities were not made parties to the said I.A.

The learned Counsel has denied that the Corporate Debtor made any unaccounted cash payment of Rs.1,15,00,000/- or any other sum to its creditors, Plastic Trade Agency or that no disclosure has been made in the audited financial statements of the Corporate Debtor.

It is denied that the transactions are in excess of the amount described under section 40A (3) of the Income Tax Act, 1961.

Further, the transactions executed or entered into with Creative Commosale Private Limited, Shitala Enterprises and Vaibhavshali Engineering Private Limited between the period from 15.01.2015 and March 2015, the said transactions are now time barred. The Companies became inactive or struck off from the register of the Registrar of Companies recently, Creative Commosale Private Limited is still an active as is evident from the master data. The learned Counsel submitted that the Resolution Professional should have taken steps for recovery from Creative Commosale Private Limited.

With respect to the credit sales, all the credit sales were made in for only three months in 2015 and the Corporate Debtor stopped all further transactions with the said entities after no payment was received. The entities have not been added as Respondents in the I.A..

The learned Counsel denied all the allegations raised by the Applicant and that all the transactions were all executed in good faith and in the usual course of business and there was no malafide or ulterior motive to execute such transactions.

Heard the learned Counsel appearing on behalf of the Applicant and the Respondent No. 1 and perused the record.

The Corporate Debtor was admitted into CIRP on 30 October 2019. The Respondent has raised several defenses, but before going into the defenses, let us consider whether this petition is maintainable after the approval of the Resolution Plan.

The learned Counsel appearing on behalf of the Applicant has submitted that in the first meeting of the steering committee of the Corporate Debtor which was held on 28 May 2021 it was resolved that the present I.A. would be carried on by the Resolution Professional till the disposal of the said I.A. and that the expenses shall be borne by the Secured Financial Creditor. The Successful Resolution Applicant would have nothing to do with the present I.A. The steering committee have resolved to continue the I.A. and have assigned the duty to the former Resolution Professional to represent the Secured Financial Creditor, therefore this I.A. is maintainable as the Applicant is acting as the representative of the secured Financial Creditor and not in its capacity of Resolution Professional.

Having dealt with the maintainability of the I.A. let us move on to the merits of the I.A. The Hon’ble Supreme Court laid down the detailed approach that the Resolution Professional is expected to take in the matter of avoidance transactions in paragraph 28.1 in Anuj Jain vs. Axis Bank Limited and Ors. MANU/SC/0228/2020,

Although the above steps are given for preferential transactions, the same method is to be applied to all avoidable transactions as well. The Applicant in it’s supplementary affidavit has submitted that only the tally data was provided to the Applicant by the suspended Board of Directors and after scrutinizing the said data, he formed an opinion and thereafter appointed the transaction auditor for examination of avoidable transactions. The Applicant has submitted that he has taken assistance from the transaction audit report to determine the nature of transactions.

On perusal of the minutes of the 13^th CoC meeting held of 04 January 2021, in Item No. 04 at point D, on bare reading it is seen that the Resolution Professional has only relied on the Transactions Auditor’s report and has not compared the report with the documents of the Corporate Debtor. The note is extracted herein “RP informed that as per the report there are certain transactions prior to the period of 2 years from the date of commencement of Insolvency Resolution Process which seems to be carried out with an intention to defraud the creditors”

Let us first take into account the transactions the Applicant has classified as High value transactions which have been entered in the year 2019 with Sri Balaji Logs Products Pvt Ltd., Maa Anadamayee Timber, Rahul Plywood Centre and Aditya Enterprises. In the minutes of the 13^th CoC meeting as well as the letter to the IBBI, the Resolution Professional has mentioned that the transactions have been entered prior to two years from the date of commencement of CIRP, the question that arises is “why did the Resolution Professional not determine and analyse these transactions beforehand?”.

Further for the transactions with respect to the credit sales, although the documents of the other parties have been annexed to the I.A., the documents, such as bank statements, financial statements etc. of the Corporate Debtor, which would have enabled us to determine whether such transactions have been actually entered into, have unfortunately not been filed by the Resolution Professional.

The Resolution Professional has time and again reiterated that he has made determination about the transactions but he has failed to file any document other than the transaction report to evidence that he had made such determination.

Further, the assertion of the Resolution Professional that the few of the credit sales have been undergone with companies having lesser equity share capital and has stated that such gap in the credit sale and the paid up equity share capital raises reasonable “suspicion” cannot be a proper ground for determining that the said transactions were fraudulent.

The Hon’ble Supreme Court has provided so many steps and filtration processes so that the avoidable transactions would be bonafide. Mere assumptions and suspicions cannot be considered to determine avoidable transactions.

Under the aforesaid circumstances, we are not inclined towards granting prayers in I.A. (IB) 207/KB/2021 and the said I.A. is hereby rejected. The main Company Petition numbered C.P. (IB) No. 683/KB/2018 shall stand disposed of in view of the fact that there are no pending I.A.s.

The Registry is directed to send email copies of the order forthwith to all the parties and their learned Counsel for information and for taking necessary steps.

Certified Copy of this order may be issued if applied for, upon compliance of all requisite formalities.