Velayudham Jayavel vs Harkirat Singh Bedi & Ors.

O R D E R

a)

“Declare that the transaction of payment of Rs. 7,23,61,260/- (Rupees Seven crores Twenty-Three Lakhs Sixty One Thousand Two Hundred and Sixty only) to the Respondent No.3 by the Corporate Debtor constitutes a preferential Transaction violating Section 43 of the IBC;

b)

Direct IDEB Grand Reality Pvt.Ltd. and/or Respondents 1 and 2 to transfer an amount of Rs.7,23,61,260/- (Rupees Seven crores Twenty-Three Lakhs Sixty One Thousand Two Hundred and Sixty only) to the Applicant; and

c)

Pass such other Orders and further orders, as this Hon’ble Tribunal may deem fit and appropriate and thus render justice.”

Undisputed Facts

Equity Shares:

"In our opinion, the Company has not established its internal financial control over finance reporting on criteria based on or considering the essential components of internal control stated in the Guidance Note issued by the Institute of Chartered Accountants of India. This disclaimer issued by the independent auditor shows that the numbers as has been stated in the financial statements of the Corporate Debtor at the time they were being managed by the respondents 1 and 2 are not necessarily accurate.

8.

It is submitted that the actions of the respondents 1 and 2 in transferring their entire shareholding in respondent 3 for a very low consideration and, shortly thereafter transferring significant amounts from the Corporate Debtor to respondent 3 amounts to a circular transaction. The said circular transaction has ostensibly been made to escape the scrutiny of a related party transaction whereas the actual aim of transferring the amounts has been to siphon off the assets of the Corporate Debtor to the detriment of its creditors.

a)

It is submitted that the CIRP and liquidation of the Corporate Debtor was initiated by this Hon’ble Tribunal vide order dated 29.03.2019 and 08.11.2019, respectively. Subsequently, the Applicant with the aid of professional advisors had identified a payment of Rs 7,23,61,260 by the Corporate Debtor to Respondent No. 3 (“Preference Transaction”) as a preference payment under Section 43 of the Code. The Preference Transaction was undertaken through 11 payments made between 24.01.2018 to 13.04.2018 by the Corporate Debtor to Respondent No. 3. (Annexure A @ Page 23 of the Application). It is pertinent to note that the Respondents have not disputed the 11 payments made by the Corporate Debtor to Respondent No. 3.

b)

It is submitted that Section 43 of the Code is a deeming provision. If a transaction falls within the preference period and leads to a creditor enjoying a higher beneficial position under the waterfall mechanism provided under Section 53 of the Code, then orders under Section 44 of the Code are required to be passed by the Hon’ble Tribunal.

c)

Section 43(4)(i) of the Code provides that a preference shall be deemed to be given at a relevant time, if it is given in relation to a related party during the period of two years preceding the insolvency commencement date. The relevant preference period for a related party of the Corporate Debtor is 28.03.2017 to 28.03.2019. Similarly, Section 43(4)(ii) of the Code provides that a preference shall be deemed to be given at a relevant time, if it is given in relation to an un-related party if it occurs during the period of one year preceding the insolvency commencement date. The relevant preference period for an un-related party of the Corporate Debtor is 28.03.2018 to 28.03.2019.

d)

It is submitted that Respondent No. 3 was a related party to the Corporate Debtor as per Section 3(24)(d) of the Code, as the directors of the Corporate Debtors (i.e., Respondent No. 1 and Respondent No. 2) were shareholders of Respondent No. 3(“Director’s Shareholding”). It is submitted that Respondent No. 1 & 2 have not denied the existence of Director’s Shareholding. Further, Respondent No. 1 & 2 have contended that Director’s Shareholding was transferred as of 31.03.2018 pursuant to a share transfer agreement dated 09.02.2018. It is pertinent to note that the consideration for the transfer of Director’s Shareholding is only Rs 1,00,000.

e)

A part of the Preference Transaction is covered within the period of two years (28.03.2017 to 28.03.2019), when Respondent No. 3 was a related party of the Corporate Debtor due to Director’s Shareholding. Further, as Respondent No. 3 became an un-related party (as of 31.03.2018) due to transfer of Director’s Shareholding, a part of the Preference Transaction is covered within the preference period of 1 year (i.e. 28.03.2018 to 28.03.2019). A table depicting the transaction amount along with relevant dates and preference period is reproduced below for reference.

S.No.	Date of Transaction	Transaction Amount (in Rs)	Relevant Period
1.	24-01-2018	1,00,000	Preference Period for Respondent No. 3 as a Related Party
2.	24-01-2018	1,00,000
3.	28-02-2018	20,00,000
4.	22-03-2018	50,00,000
5.	22-03-2018	50,21,760
6.	27-03-2018	100,00,000
7.	28-03-2018	100,00,000
8.	09-04-2018	100,00,000	Preference Period for Respondent No. 3 as an un-related Party
9.	12-04-2018	100,00,000
10.	12-04-2018	100,00,000
11.	13-04-2018	101,39,500
	Total	7,23,61,260

f)

It is submitted that the Respondents have claimed that the payment of Rs 7,23,61,260 by the Corporate Debtor to Respondent No. 3 was pursuant to Settlement Deed dated 25.08.2011 (See Annexure R-2, Pg 20 of Objections of Respondent No. 1 & 2). They have also claimed that Respondent No 3 had discharged the debt of the Corporate Debtor towards third parties for the purchase of Steel TMT as per the Settlement Deed dated 25.08.2011. Accordingly, the Corporate Debtor owed an amount of Rs 7,23,61,260 crore to Respondent No. 3.

g)

The nature of debt of the Respondent No. 3 towards the Corporate Debtor is in lieu of supply of TMT bars under the Settlement Deed dated 25.08.2011. shall constitute operational debt. Under the waterfall mechanism as per Section 53 of the Code, the debt of Respondent No. 3 would be categorized for distribution only after payment to financial creditors. In this regard, it is pertinent to note that the Applicant has received claims to the tune of approx. Rs 1732 crores from the financial creditors of the Corporate Debtor. The proceeds from the sale of the assets under the liquidation estate is insufficient to meet the claims of the financial creditors of the Corporate Debtor.

h)

It is submitted that the discharge of debt by the Corporate Debtor to Respondent No. 3 has led to Respondent No. 3 enjoying a higher beneficial position under Section 53 of the Code. Accordingly, it is submitted that the Corporate Debtor shall be deemed to have given a preference to Respondent No. 3 as per Section 43(2) of the Code.

i)

It is submitted that the Respondent’s argument that the payment by the Corporate Debtor to Respondent No. 3 is not covered by Section 43 is without merit. At the outset, it is pertinent to note that Corporate Debtor’s payment to Respondent No. 3 occurred 6.5 years after Respondent No. 3 discharged the debt of the Corporate Debtor pursuant to the Settlement Deed. Further, the counsel for Respondent No. 1 & 2 during arguments has also stated that the funds utilized to re-pay Respondent No. 3 by the Corporate Debtor were sourced through the daughter of Respondent No. 1 & 2 i.e., Ms. Bani Bedi.

j)

It is submitted that Respondent No. 1 & 2 in their objections have made no reference to the source of funds utilized by the Corporate Debtor to discharge the debt to Respondent No. 3. Further, it is submitted that the source of funds utilized by the Corporate Debtor to discharge a debt has no bearing on the ambit of Section 43 of the Code, which makes amply clear than any transaction that meets the requirements of Section 43 shall be deemed to constitute a preference transaction.

(i)

It is submitted that the important aspects leading to the instant Application being filed under Section 43 of the IBC, 2016 are as hereunder:

(a)

Petition filed on 12.12.2018

(b)

Petition admitted on 29.03.2019

(c)

Under Regulation 35-A of the Insolvency Resolution Process for Corporate Persons Regulations, the Resolution Professional should have formed an opinion regarding preferential transaction under section 43 of the code within 75 days from the insolvency commencement and should have made a determination on or before 115^th day of the insolvency commencement date.

(d)

If the Resolution Professional had made such a determination, he ought to have made an application to the Adjudicating Authority for appropriate relief on or before 135^th day of the insolvency commencement date, under intimation to the Board as per Regulation 35-A (3) of the Insolvency Resolution Process for Corporate Persons Regulations, 2016 i.e., not later than October 1^st 2019. However, the Application is filed on 22.01.2020, which is way past the period prescribed under the aforesaid regulation. There is no application under section 5 of the Limitation Act filed.

(e)

The Auditor’s Report appended to the Application is prepared for the period of 1^st April 2017 to 29^th March 2019. This is not preceded by any determination under 35 A(1) or (2) of the Regulations.

(f)

That in the Auditor’s Report, there is disclaimer, and the disclaimer is extracted here under:

“7.

This Report is based exclusively on the facts and circumstances described during the engagement of the team for conducting Transaction Audit and is given based on the representations, express or implied, and based on our interpretation of law, which may differ to other person. Existence of any other factual or historical background not provided to us might require a conclusion different from the one expressed herein.”

(g)

There is no independent application of mind by the Resolution Professional arrived at on the claim as to if there is a preferential transaction. The Auditors report cannot be relied on.

(h)

That as per the judgment of the Supreme Court in Anuj Jain vs. Axis Bank Limited and Others (2020) 8 SCC 401, the meaning of Ordinary course of business or financial affairs is explained and the responsibility of the Resolution Professional has to come to a conclusion as to if there is a preferential transaction. Further, the earlier submission regarding the settlement and meeting of obligation by IDEB Grand Reality Pvt. Ltd. was reiterated; for the contention that the transaction was in the ordinary course of business.

(ii). It is submitted that in CS (OS) No. 895/2011 in a dispute between the Corporate Debtor and a third-Party being Yogesh Sharma & Others vs. M/s. IDEB Projects Pvt. Ltd. and Ors., the Corporate Debtor was saddled with a claim of Rs. 9,73,04,553, against an admitted amount of Rs.8,64,29,311/- as per the Audited Balance Sheet of the Company as on 31.03.2011. As against this, an amount of Rs.7,23,61,260/- only was determined as payable to the third party by way of settlement, thus effecting saving of Rs.1,37,29,311/- to the corporate debtor. As a result, IDEB Grand Reality Pvt. Ltd substituted Yogesh Sharma and others as the creditor.

(iii). Further, there was an outstanding debt of M/s. IDEB Projects (P) Ltd. to M/s IDEB Grand Reality Private Limited of Rs.12,64,82,913.87 which was settled for a sum of Rs.7,23,00,000/- and therefore, a saving was made by the corporate debtor IDEB Projects Pvt Ltd, of a sum of Rs.5,27,96,285.87/-.

(iv). It is submitted that in order to meet the dues of the IDEB Grand Reality Pvt. Ltd. and in order to reimburse the sums paid on behalf of the Corporate Debtor, the daughter of the Promoter being Ms Bani Kaur Bedi and others advanced a sum of Rs.7,27,61,260/- as stated in para 17 of the Statement of Objections. (Para 3(8) above).

(v). It is further submitted that only on account of the daughter of the Promoter being Mrs. Bani Bedi and the sister concerns having advanced a sum of Rs.7,27,61,260/-, the Corporate Debtor repaid the money to the IDEB Grand Reality Pvt Ltd. and accordingly in the books of the Corporate Debtor the name of IDEB Grand Reality (P) Ltd was replaced with that of Ms Bani Kaur Bedi & others to the extent of Rs.7,27,61,260/- as Creditors.

(vi). It is stated that as per law declared by the Supreme Court and as per Section 43 (3) (a), these transactions were made in the ordinary course of the business or financial affairs, and there is no collusion between IDEB Grand Reality Pvt Ltd and this Respondent in order to make the payment as stated supra. Thus, this Respondent, by reaching out to IDEB Grand Reality and making sure the settlement with the 3^rd party Yogesh Sharma & Others in CS (OS) No. 895/2011is honoured as per Settlement Deed dated 25/08/2011, has paid the company a sum of Rs.7,27,61,260/-. It is submitted that on the one hand the application is belated and on the other hand the transaction of the Respondent is a bonafide transaction.

The company has paid huge amounts to clear the credit balance of one of its subsidiary company i.e. IDEB Grand Reality Pvt Ltd during the period January 2018 to April 2018. The details of transactions is as follows:

“we are of the considered opinion that CIRP Regulations 35-A is not mandatory and the requirement for approaching the Adjudicating Authority for appropriate relief on or before 135^th day of the ICD is only directory. Moreover, since Regulation 35-A must be read along with the statutory construct of IBC which by itself does not prescribe any time period for determination of opinion. Hence merely on account of delay in determination of opinion cannot by itself become a ground for non-maintainability of the petition.”