Vijay P. Lulla vs Mr. Sumitendra Das & Ors.

Per: Prabhat Kumar, Member (Technical)

This Application bearing IA No. 5197/2023 is filed by Mr. Vijay P. Lulla, the Resolution Professional of Perpetual Capital & Servicing Private Limited (“Applicant”) in the Coprorate Insolvency Resolution Process (“CIRP”) of Perpetual Capital & Servicing Private Limited (“Corporate Debtor”) under Section 66 of the Insolvency and Bankruptcy Code, 2016 (“Code”) r/w Regulation 35A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 (“CIRP Regulations”) seeking the following reliefs :

The Tribunal had passed an Order dated 12.08.2022, initiating the Corporate Insolvency Resolution Process (“CIRP”) of the Corporate Debtor u/s 7 of the Code. Mr. Suresh Baburao Shingte was appointed as the Interim Resolution Professional (“IRP”). However, Mr. Suresh Baburao Shingte could not take up the assignment, therefore, the Financial Creditor filed an Application for appointing Mr. Vijay P. Lulla as IRP and this Tribunal vide Order dated 07.11.2022, appointed Mr. Vijay P. Lulla as the IRP. Thereafter, the IRP proceeded with the public announcement and other ancillary requirements under the Code. At the 1^st CoC meeting held on 08.12.2022, it was resolved to continue with Mr. Vijay Pitamber Lulla as the Resolution Professional ("RP").

The Applicant issued a letter dated 19.11.2022 & 23.11.2022 to the suspended Directors i.e., Respondent Nos. 1 & 2 herein, the aforesaid Order passed by this Tribunal declaring moratorium, requesting them to hand over entire assets, books of accounts, financial statements and other records of the Corporate Debtor. However, the letters were returned unaccepted due to incomplete addresses. The Applicant also sent an email to the addresses available.

The erstwhile management did not respond to the multiple emails sent by the RP, and therefore an Interlocutory Application under Section 19(2) of the Code bearing IA No. 249/2023 was filed on 30.12.2022. On 23.01.2023, the Advocate appearing for the erstwhile management assured and submitted before the Tribunal that the erstwhile management is willing to handover the documents in their possession. In view of this submission, the RP withdrew the Application with the liberty to refile a fresh Application, if the erstwhile management does not cooperate.

Accordingly, the erstwhile management sent some records but they were found to be insufficient. Further, it emerged that the accounts of the Corporate Debtor had not been made since 2016. Subsequently, the erstwhile management and their Advocate also stopped responding to the emails sent by the RP.

The RP submits that erstwhile management filed an appeal with the Hon'ble National Company Law Appellate Tribunal (“NCLAT”) challenging the Admission Order of this Tribunal dated 12.08.2022. The Applicant submits that the erstwhile management is only trying to delay and obstruct the CIRP of the Corporate Debtor and harassing the Resolution Professional.

Due to the non-co-operation from the erstwhile management, the Resolution Professional filed another Interlocutory Application bearing IA No. 1668/2023 u/s. 19(2) of the Code. The said Application is pending, and the erstwhile management has not been appearing before this Tribunal.

At the 5^th CoC meeting held on 03.05.2023, it was resolved to conduct Forensic Audit of the Corporate Debtor for the period between 01.04.2014 and 31.03.2019 and to appoint M/s. Shambu Gupta & Co., Chartered Accountants as Forensic Auditor.

The RP attempted to construct the accounts of the Corporate Debtor with the information available to determine Preferential, Undervalued, Extortionate or Fraudulent transaction and get a Transaction-Based Audit/Forensic Audit conducted in order to take a decision to fulfil the requirements of Regulation 35A of the CIRP Regulations.

The Forensic Auditor raised certain queries to the erstwhile management but they failed to provide any information or response. The RP also requested the erstwhile management vide e-mail to share the relevant data to satisfy the queries of the Forensic Auditor, but to no avail. Consequently, based on the limited information available, the Forensic Auditor concluded and submitted his Forensic Audit Report (“FAR”) dated 21.08.2023 to the RP. The FAR was shared with the erstwhile management and the Financial Creditor vide email dated 21.08.2023 for their inputs, however no inputs were received from the erstwhile management.

At the 9^th CoC meeting held on 28.08.2023, the Resolution Professional discussed the findings of the FAR with the COC and the following Fraudulent Transactions were alleged to have been undertaken by the Corporate Debtor as per Section 66 (1) of the Code –

 Empeil Fortitus Private Limited - Holding Company  Jemma and Consultants & Advisors Pvt. Ltd.

 Vesco Consultants & Advisors Pvt. Ltd.

 Lionforge Intertrade Private Limited - Subsidiary Company  Land Energy & Resources Limited  Land Industrial & Infrastructure Limited  Land Exworks Factorie Limited - Subsidiary Company b) Jemma Consultants & Advisors Pvt. Ltd. & Vesco Consultants & Advisors Pvt. Ltd. held shares in the Corporate Debtor worth Rs.1,62,00,000 and Rs. 38,00,000/- amounting to 81% and 19% of the Corporate Debtor respectively from the FY 2013-14.

It is the Applicant’s case that the erstwhile management has carried out the business of the Corporate Debtor in a fraudulent manner to defraud its creditors.

Heard learned Counsel and perused the material available on record.

The Applicant has impugned the following transactions under Section 66 of the Code as fraudulent transactions :

The Bench is of the view that in order to hold a transaction as fraudulent under Section 66 of the Code, the intention to defraud or fraudulent purpose has to be ascertained. The impugned transactions have been assessed accordingly-

It can be seen from the Sanction Letter dated 30.12.2015 that the shares of the Corporate Debtor were pledged with the Financial Creditor as an Additional Security for availing a Credit Facility. The Sanction Letter also clearly states that there cannot be any transfer of shares of the Corporate Debtor without the permission of the Financial Creditor.

In view of these facts, we are of the view that the shares could not have been transferred by Jemma Consultants & Advisors Pvt. Ltd. and Vesco Consultants & Advisors Pvt. Ltd. to Empell Fortitus Private Limited and Elfington Fincorp without the satisfaction of charge. However, it is also important to note that this transfer of shares has caused no detriment to the Corporate Debtor and hence, no contribution can be called for. Further this transaction is between erstwhile shareholder, who pledged its shares for raising credit by the Corporate Debtor and transferor shareholder to the prejudice of financial creditors, which may have caused detriment to the security held by it. This may be transaction of fraudulent nature, but it has no bearing on the affairs of the Corporate Debtor. Hence, no order u/s 66 can be passed in relation to this transaction directing the Respondents to make contribution to Corporate Debtor. However, the financial creditor shall be at liberty to take any appropriate action against the erring parties in this relation.

We have observed that the Applicant has relied on the Balance Sheets of the Corporate Debtor and its subsidiary to contend that the loan availed by the Corporate Debtor has been invested in its subsidiary, which has been utilized for making loans/advances or investment by such subsidiary, the details of which are not known. Though the application has stated investment in the preference shares of the subsidiary, however, on perusal of the financial statement of Lionforge Intratrade Pvt Ltd., we find that the amount of Rs. 228.75 crore was invested in Optionally Convertible Preference Shares (OCPS).

In order to ascertain whether this transaction is fraudulent, it becomes necessary to look into the conduct of the Directors of the Corporate Debtor. The Applicant has filed applications twice u/s 19(2) of the Code against the suspended Directors on account of their non-cooperation. The suspended Directors have also failed to file a reply herein and have not even appeared before this Bench to make any submissions. Owing to these facts, the Liquidator has been unable to ascertain the end use of these funds and hence has formulated his opinion based on the available documents, which does not reveal the end use of these amounts to enable him to recover it for the benefit of Corporate Debtor.

In the absence of details of loans/advances or investments of subsidiary company the correct utilization of these loans is not ascertainable and the Suspended Board has also failed to give any information in this relation. Their conscious unwillingness to reveal the information pertaining to assets of subsidiary company clearly establishes that the amounts borrowed have been siphoned off by using subsidiary company as a conduit. Accordingly, the investment in preference shares of subsidiary company clearly tantamount to fraudulent conduct of affairs of the business of the Corporate Debtor and squarely falls within the scope of section 66 of the Code. Accordingly, we direct the Respondent No. 1 & 2, the suspended board of directors to make contributions to the corporate debtor within 30 days to make good the loss caused to the Corporate Debtor by such diversion of money.

Nonetheless, M/s. Lionforge Intertrade Private Limited, Respondent No. 3 shall be liable to convert the OCPS issued to the Corporate Debtor within 30 days and the Resolution Professional shall be authorized to attach the loans/advance and investments made by it from the amounts received from the Corporate Debtor. Needless to say, the Board of directors of the subsidiary company shall disclose the details of loans and advances/investments within 30 days.

The Applicant has alleged that the Corporate Debtor has written off the amount of ZCCDs issued to Jemma Consultants & Advisors Pvt. Ltd. and issued new ZCCDs to its shareholder viz. Empell Fortitus Private Limited, which has resulted in a decrease of Rs. 443 Crores in the net worth of the Corporate Debtor.

The Applicant has also alleged that there has been a reduction in the Reserves and Surplus Account from Rs. 631.42 Crores to Rs. 188.32 Crores, thereby raising suspicion of fraudulent intent.

We are of the view that write off is merely an Accounting entry and such write off liability on account of ZCCD discharges the Corporate Debtor from its obligation to pay for it. Accordingly, the write off higher value of ZCCD against issue of ZCCD does not entail any enhancement in the obligation of the Corporate Debtor. On the contrary, it discharges the Corporate Debtor to some extent. The reduction in the reserve & surplus account is arising on account of such write off, as these ZCCD were grouped under the ”Reserve & Surplus” in the financial statements. However, we are unable to understand as to how ZCCD can form part of Reserve & Surplus Account. Hence, these transactions of the Corporate Debtor do not fit squarely within the ambit of Section 66 of the Code. Therefore, these transactions cannot be declared as fraudulent.

It is clarified that the Applicant is at liberty to seek remedy and take appropriate action under applicable laws and before the appropriate forum. The rights of the Applicant shall not be prejudiced on the grounds of dismissal of certain prayers in the present Application.

Accordingly, IA No. 5197/2023 is partly allowed with directions as stated above.