Randhir Singh Tomar vs Sunil Kumar Aggarwal

Dr. Alok Srivastava. Member (Technical)]

This appeal is filed under section 61 of the Insolvency and Bankruptcy Code, 2016 (in short ‘IBC’) by the Appellant, who is aggrieved by the order dated 8.6.2022 (hereinafter called the, Impugned Order’) of the Adjudicating Authority (National Company Law Tribunal, New Delhi) in I.A. No. 5170 of 2021 in CP (IB) No.136/ND/2019.

The Appellant has stated and argued in the appeal that the Corporate Debtor YS Marchandise International Pvt. Ltd. (the Appellant is its ex-director), was engaged in the business of selling goods as an aggregator between brands and e-commerce/online market places and teleshopping channels. He has stated that the corporate debtor was required to keep a large inventory of goods for supply once orders were received on the e-marketplace or teleshopping channels, but due to market conditions certain primary customers/teleshopping channels terminated their business relationship with the corporate debtor, leaving it with a large inventory of goods which had to be dispose of. He has further stated that a new company, Y2Y Fashions Private Limited, was started by ex-directors of the corporate debtor, which started its own teleshopping platform and the corporate debtor YS Marchandise International Pvt. Ltd started doing teleshopping, digital and offline marketing of goods through this new company.

The Appellant has further stated that in order to carry on its business, Y2Y Fashions Private Limited entered into a T-Commerce Vendor Agreement on 17.3.2018 with the corporate debtor, whereby the corporate debtor started to supply goods and also provide services such as hosting and technology services, logistics services, courier expenses and packing service etc. to the new company Y2Y Fashions Private Limited on payment of certain commission and charges. He has further stated that the purported ‘commission’ included charges for various activities as aforementioned as well as a margin for sale of return as is clearly stated in the T-Commerce Vendor Agreement. The Appellant has explained that the new company Y2Y Fashions Private Limited was incorporated to help the corporate debtor to sell its huge inventory stock as its former premises had been “sealed” as a result of Hon’ble Supreme Court’s order and many items in stock such as furniture/partitions of work spaces/storage shelves were created according to the specifications of the old warehouse, which if not sold to the new company, would have been sold in open market as junk causing huge loss to the corporate debtor.

The Appellant has claimed that section 10 application for the insolvency resolution of the corporate debtor was admitted by the order dated 6.6.2019 passed by the Adjudicating Authority, and Corporate Insolvency Resolution Process (in short ‘CIRP’) of the corporate debtor is in progress. He has added that during the CIRP, a forensic and transaction audit of the corporate debtor was conducted by the Resolution Professional and in view of certain observations in the Forensic and Transaction Audit Reports, an IA No. 1601/2019 was filed by the Resolution Professional for certain avoidance transactions, which was later withdrawn with liberty granted to the Resolution Professional to file a fresh application under section 66 of IBC, whereafter IA No. 5170/2021 was filed by the Resolution Professional under section 66 of IBC on which the Impugned Order came to be passed whereby the ex-directors of the corporate debtor were directed to deposit Rs.83.97 lakhs into the account of the corporate debtor from the date of the Impugned Order.

We heard the arguments of both the parties and perused the record.

The Learned Counsel for Appellant has submitted that the Adjudicating Authority has relied solely on bald and baseless observations in the Forensic and Transaction Audit Reports to arrive at the conclusion in the Impugned Order without giving due consideration to the reasons pleaded by the Appellant regarding the bonafide nature of the transactions which were carried out in the normal course of business. She has argued that the ‘sealing’ of the corporate debtor’s warehouse after the order of Hon’ble Supreme Court order in the beginning of the year 2018 and cancellation of agreement with some teleshopping channels, the corporate debtor had no option but to take the stock stored in the old warehouse which was worth almost Rs. 4 crores. She has further submitted that the corporate debtor, therefore, shifted the said stock in a DTDC warehouse in Gurgaon and since the said assets were about two to three years old, much of which was custom-made to meet the corporate debtor’s requirements, the only other way by which the stock could have been disposed of was to sell most of it at scrap value which would have caused huge loss to the corporate debtor.

The Learned Counsel for Appellant has further submitted that in view of the constraints the corporate debtor entered into T-Commerce Vendor agreement with Y2Y Fashions Private Ltd. on 17.3.2018, whereby the corporate debtor undertook to bear the expenses for an initial period of five years or in case of losses to Y2Y Fashions Private Limited, the whole of the fixed expenses in relation to running of Y2Y Fashions Private Limited and the cost in relation to developing and running of product and brand on actual basis in the form of reimbursement of expenses/additional commission in accordance with law. She has contended that there is a justified explanation about the higher ‘commission’ amount that has been paid by the corporate debtor from Y2Y Fashions Private Limited as the ‘commission’ amount includes charges for services such as hosting of website and technological backup, packing, logistics and payment etc. She has also submitted that the commission for selling goods on portals like that of Y2Y Fashions, is in general practice, somewhat higher than the standard retail commission paid to offline sale agents, and therefore, the commission charged by Y2Y Fashions is as per market practice and Y2Y Fashions was paying similar commission to other clients.

The Learned Counsel for Appellant has explained that what has been termed as ‘commission’ is actually a total amount that is inclusive of service fees paid for hosting website and technology, customer support, logistics services, packing and other related services to ensure customer satisfaction and therefore, the finding in the Transaction Audit Report with respect to the commission/sale expenses is flawed and ought to have been ignored by the Adjudicating Authority after considering the reasons for the somewhat higher charges termed as ‘commission’. She has further argued that disposal of tangible assets by sale by the corporate debtor to Y2Y Fashions cannot, therefore, be called fraudulent transaction with intention to defraud the creditors, but they are transactions carried out in the normal course of business. She has finally contended that the reliance placed by the Adjudicating Authority on Transaction Audit Report is completely misplaced and the Impugned Order, therefore, suffers from a serious error, ought to be set aside.

The  Learned  Counsel  for  the  Liquidator/Respondent  has argued that the present appeal has been filed by the Appellant to delay the dissolution process of the corporate debtor and it should be noted that it has been more than three years since the CIRP was initiated on 6.6.2019. He has further submitted that the Resolution Professional, in compliance of its duties under section 25(2)(j) of the IBC appointed a Transaction Auditor and another Forensic Auditor to identify any preferential, undervalued, extortionate, fraudulent transaction and/or any transaction done with the intention to defraud creditors, and both the Auditors in terms of their mandate carried out detailed examination and analysis of transactions and furnished their reports. He has argued that the findings in the transaction in the Forensic Audit Report are based on the books of accounts of the corporate debtor, audited financial statements, bank statements, loan agreements, sales and purchase registers, stock and fixed assets registers and tax returns and, therefore, reflect the actual and correct basis of the transactions in question.

The Learned Counsel for Respondent has further explained that the corporate debtor had sold goods amounting to Rs.53.38 lakhs to Y2Y Fashions whereas only a cost of Rs. 20.65 lakhs was incurred on behalf of Y2Y Fashions. Besides this, a net payment of Rs. 3.54 lakhs was paid to Y2Y Fashions and a sum of Rs. 3.26 was adjusted against the balance other party, and thus, a total amount receivable was Rs.80.83 lakhs from Y2Y Fashions. He has further argued that there was no recovery of the amount of Rs.80.83 lakhs from Y2Y Fashions as is coming out from its ledger accounts, and this payment was found squared off through recording of sales expenses amounting to Rs. 83.40 lakhs in the account of Y2Y Fashions. He has contended that no satisfactory explanation was provided regarding sales of good, commission recorded and expenses incurred in relation to the corporate debtor’s related entity Y2Y Fashions and thus, the Impugned Order, whereby an amount of Rs. 83.97 lakhs has been directed to be deposited in account of the corporate debtor, is absolutely correct in facts and circumstances of the case.

We note that the T-Commerce Vendor Agreement was entered between the corporate debtor and a company called Y2Y Fashions Private Limited on 17.3.2018 (copy attached at pgs.252-260 of the appeal paperbook, Vol.II) by which the company Y2Y Fashions Private Ltd. Offered its online marketing platform to the Vendor Company Y.S, Marchandise International (the corporate debtor) to sell its products through the said platform. It is also noted in the T-Commerce Vendor Agreement Mr. Randhir Singh Tomar/ Appellant represents Y2Y Fashions Pvt. Ltd. and also Y.S. Merchandise International Pvt. Ltd. i.e. both the signing parties. The arrangement between the two companies was that the company Y2Y Fashions Pvt. Ltd. shall offer to the vendor Y.S. Merchandise International Pvt. Ltd. its services through “OneIndiaTV” Infrastructure for facilitating sales to the Vendor’s products, and the services shall include hosting and technology, customer support, logistics services, payment services and all the other related services to ensure customer satisfaction on behalf of the Vendor and for this arrangement, the Vendor company was required  to  pay  service  charges  as  specifically  mentioned  and decided in the mutually agreed cost sheet and the corporate debtor was  authorised  to  collect  payments  on  behalf  of  the  Vendor’s company Y.S. Merchandise International Pvt. Ltd. in respect of orders received through “OneIndiaTV” Infrastructure.

The relevant portion of the T-Commerce Vendor Agreement regarding  the  “Arrangement”  and  “Consideration  and  Payment Terms” are reproduced below for ready reference :-

“2. Arrangement

2.1 The Company shall offer to the Vender its services through “OneIndiaTV” Infrastructure for facilitating sale of the Vendor’s product which shall include hosting and technology, customer support, logistics services, payment services and all the other related services to ensure customer satisfaction on behalf of the Vendor. For this arrangement, the Vender shall pay service charges as specifically mentioned and decided in Cost Sheet Mutually agreed and Signed by Both Parties to the agreement

Xxx xxxx xxxx xxxx

Consideration and Payment Terms

3.1 The Company shall collect the Payment on behalf of the Vender in respect of the Orders received through “OneIndiaTV” Infrastructure. To consideration of the services rendered under these presents, the Company, shall charge the Services charges to the Vendor in respect of delivered order (s) at the rates specified and mutually decided by the Company and the vendor for such product Combos Separately which will be signed by both the parties to the Agreement as a Cost Sheet.

The said Cost Sheet can be amended to modify at any rate for Service Charge in respect of any product Combo. Any amendment to such Cost Sheet will be express and written such amended Cost Sheet is to be treated as part and parcel of the agreement.”

We further note the submission of the Appellant that in view of the “sealing” of the corporate debtor’s warehouse in pursuance of  Hon’ble  Supreme  Court’s  order  and  the  cancellation  of  its arrangement with HomeShop18 and ShopCJ, the corporate debtor was left with huge inventory of goods which had to be sold and for this purpose, the promoters of the corporate debtor incorporated a new company, namely Y2Y Fashions Pvt. Ltd., which started its own teleshopping platform under the brand name “OneIndiaTV”, which made videos and booked slot on TV channels like many other DTH service providers. We also note the Appellant’s contention that the commission/charges recovered from the corporate debtor actually related a number of services such as operational cost, hosting website and technology, customer support, logistics services, packing and other related services to ensure customer satisfaction which were all included in one term ‘commission’. This contention of the Appellant is supported by clause 2.1 of the T-Commerce Vendor Agreement, which is reproduced above, and therefore clearly appears to be done as part of normal business arrangement between Y2Y Fashions and the corporate debtor.

The Adjudicating Authority has dealt with the issue of the excess payment made by way of commission to Y2Y Fashions in para 15 of the Impugned Order, wherein the following is observed:-

“15. On perusal of the Transaction Audit Report and the Forensic Audit Report referred to supra, so far as the Transections referred to in the applications are concerned, we observe that the Auditor’s opinion is that these Transactions and the agreement for increasing the commission on 17th March, 2018, were made with the related party. That it is also mentioned in the Forensic Audit Report that the amount of commission to Y2Y Fashions Pvt. Ltd. has been provided for Rs.7075927.50 but as per the commission invoices provided to the auditor, the amount comes to Rs.7501557 for the financial year 2018-19. We further observe that in the financial year 2016-17, the percentage of commission was 5% in 2017-18 it was 20%, and in 2018-19 it was 32%, which shows that the percentage of commission was increasing.”

The Impugned Order notes that a total amount of Rs.83.97 lakhs has been found to be misappropriated or diverted by the corporate debtor with the intention to defraud the creditors. The Impugned Order observes in para 19 regarding the extra commission amount paid to Y2Y Fashions Pvt. Ltd. as follows:-

“19. In terms of the provision, now we consider the submissions of the Parties, and it is seen from the averments made in the application and reply, that the Respondent No. 3 is a related party with the Corporate Debtor. The Directors of the corporate debtor and Respondent No. 3 are the common persons and the commission has been increased and the assets of the company has also been disposed of causing loss of Rs. 13.92 lakhs just before the filing of an application u/s 10 of the IBC and initiation of the CIRP, causing diversion of huge amount.”

The Transaction Audit Report observes and infers the following regarding the amount receivable of Rs.80.83 lakhs:-

• “The Corporate Debtor has sold goods amounting to Rs. 53.38 lakhs to Y2Y Fashions and Rs.20.65 Lakhs were incurred on behalf of Y2Y fashions. Besides this, a net payment of Rs. 3.54 lakhs was paid to Y2Y and a sum of Rs.3.26 lakhs was adjusted against the balance of other party. Thus, total amount r4eceivable was Rs.80.83 lakhs from Y2Y.

xx xx xx

• We sought the evidences/explanation in support of the above transactions but no satisfactory information/explanation was provided to us regarding sale of goods, commission recorded and expenses incurred non behalf of its related entity.”

The Transaction Audit Report has further observed that these transactions are preferential and avoidable transactions covered under section 43 of IBC.

We note that the Appellant has claimed that in view of the sealing of the corporate debtor’s warehouse and cancellation of T- Commerce arrangement with HomeTown18 and Shop CJ, promoters and directors of the corporate debtor decided to float a new company Y2Y Fashions Pvt. Ltd. and the agreement between the two companies Y2Y Fashions Pvt. Ltd. and the corporate debtor took place on purely commercial consideration. We also note his contention that this explanation was provided to the Transaction Auditor, who without considering the basis and nature of the transaction, merely looked at the fact that both the corporate debtor and the new company Y2Y Fashions Pvt. Ltd. have the same set of directors and promoters, and decided that the said transactions were infringement of section 43 of IBC.

We  find  substance  in  this  claim  when  we  peruse  the percentage of commission, which rose from 5% in the Financial Year (FY) 2016-17 to 20% in the FY 2017-18 and further to 32% in the FY 2018-19 with the fact that the T-Commerce Vendor Agreement between the two companies was entered on 17.3.2018, and also the fact that the term ‘commission’ included many services being provided by the Y2Y Fashions Company in accordance with clause 2.1 of the T-commerce Vendor Agreement. Thus, an increase in commission percentage of 32% in the FY 2018-19 is appropriately explained by the Appellant as being related to ‘commission’ representing many services which were provided by the new company Y2Y Fashions.

We  also  note  that  the  “sealing”  of  the  corporate  debtor’s warehouse in early 2018 and also the cancellation of its teleshopping arrangement with channels such HomeShop18 and ShopCJ were driving factors that were instrumental in the decision of the promoters/ex-directors of the corporate debtor to set up a new company Y2Y Fashions International Limited which would do website hosting, and provide a number of services as covered in the T-commerce Vendor Agreement. We are convinced by the argument of the Appellant that this was done in the normal course of business to let the corporate debtor function in the changed business environment. Such an arrangement, even though with related party, cannot be termed as preferential transactions done to defraud the creditors of the corporate debtor.

We therefore find that the Impugned Order does not consider the effect of the T-Commerce Vendor Agreement between the corporate debtor Y.S. Marchandise International Pvt. Ltd. and Y2Y Fashions Pvt. Ltd. and services being provided by the vendor Y2Y Fashions Pvt. Ltd. and in a bald manner considers the quantum of commission to be very high and infer that such high percentage of commission provided to a related party (Y2Y fashions) was meant to defraud the creditors of the corporate debtor. Such an inference is not supported by the facts of the case.

In the light of the above, we are of the clear view that the Adjudicating Authority has committed an error in arriving at the inference that the amount of Rs.83.97 lakhs was transferred by the corporate debtor to Y2Y Fashions Pvt. Ltd., a related party, and is, therefore, a diversion by the corporate debtor and Y2Y Fashions Pvt. Ltd. with an intention to defraud the creditors of the corporate debtor by the ex-directors of the corporate debtor.

We, therefore, set aside the Impugned Order and direct that the ex-directors of the corporate debtor and Y2Y Fashions Pvt. Ltd. shall not be liable to make contribution to the extent of Rs.83.97 lakhs in the account of the corporate debtor. Since the said transactions have not been found to be avoidance transactions which infringe section 66 of the IBC, we direct that no criminal prosecution under section 69 of the IBC is required to be instituted against the ex-directors of the corporate debtor and Y2Y Fashions Pvt. Ltd. in relation to such transactions. The appeal is disposed of accordingly with the afore -mentioned directions.

In the facts of the case there is no order as to costs.