NCLT Kolkata (30.06.2022) In Kshitiz Chhawchharia Vs. Madhumalati Merchandise Private Limited & Ors. [IA. (IBC) 346/KB/2019 in CP(IB) No. 349/KB/2017] held that;
6.7. ``According to regulation 35A(1) of the CIRP Regulations, the Resolution Professional shall form an opinion whether the corporate debtor has been subjected to any transaction covered under sections 43, 45, 50 or 66 on or before the seventy-fifth day of the insolvency commencement date. According to the regulation 35A(2), on or before the one hundred and fifteenth day of the insolvency commencement date, the Resolution Professional is also required to make a determination to that effect.
6.8. Further, Regulation 35A(3) of the CIRP Regulations provides that upon making such determination under regulation 35A(2), the Resolution Professional shall apply to the Adjudicating Authority for the appropriate relief on or before the one hundred and thirty-fifth day of the insolvency commencement date. In this case, the one hundred and thirty fifth day is on 23 May 2018. The instant application being IA. (IBC) 346/KB/2019 has been filed on 20 March 2019, thus making it clear that the Applicant has not complied with the provisions of regulation 35A within the timeline provided therein.
6.9. . ., we do not see any “determination” within the meaning of regulation 35A of the CIRP Regulations. Therefore, we will not act as court of first instance to determine the nature of the transactions mentioned hereinabove.
6.1 In light of the above facts and circumstances, the adjudicating Authority is satisfied that the instant application is not maintainable and the same is therefore rejected.
Excerpts of the Order;
1. This Court convened through hybrid mode.
2. The Interlocutory Application No. 346 of 2019 has been filed by the Applicant Mr. Kshitiz Chhawchharia, the Resolution Professional of Ramswarup Industries Private Limited, under section 43(1) read with section 44(1) of the Insolvency and Bankruptcy Code, 2016 (Code), seeking the following reliefs:
a. That this Hon’ble Tribunal may be pleased to exercise its powers under the Insolvency and bankruptcy code, 2016 for initiating such further investigation as may be deemed necessary in light of the observations made in the Transaction Audit Report and therefore based on the evidence available classify those transactions as preferential;
b. That this Hon’ble Tribunal may be pleased to direct Respondent No. 1 to return all such sums to the Corporate Debtor in view of the same being a preferential transaction;
c. That this Hon’ble Tribunal may be pleased to direct Respondent No. 2 to return all such sums to the Corporate Debtor in view of the same being a preferential transaction;
d. That this Hon’ble Tribunal may be pleased to direct Respondent No. 3 to return all such sums to the Corporate Debtor in view of the same being a preferential transaction;
e. That this Hon’ble Tribunal may be pleased to direct Respondent No. 4 to return all such sums to the Corporate Debtor in view of the same being a preferential transaction;
f. That this Hon’ble Tribunal may be pleased to direct Respondent No. 5 to return all such sums to the Corporate Debtor in view of the same being a preferential transaction;
g. That this Hon’ble Tribunal may be pleased to direct Respondent No. 6 to return all such sums to the Corporate Debtor in view of the same being a preferential transaction;
h. That pending the hearing of the present application, this Hon’ble Tribunal may be pleased to direct Respondent No. 1-6 to furnish such security as this Tribunal may deem sufficient in the fats of the present case;
i. Ad interim orders in terms of prayer clause (h).
3. Submissions on behalf of the Applicant:
3.1 That case of the applicant is that pursuant to the meeting dated June 15, 2018 of the Committee of Creditors ("COC") of the Corporate Debtor, the COC approved the appointment of 'SKP Business Consulting LLP' ("Transaction Auditor") for the purpose of carrying out a transactionaudit of the transactions of the Corporate Debtor for the FY 2014-2015, 2015-2016, 2016-2017 and for the period April 2017 to January 2018.
3.2 The Transaction Auditor accordingly prepared a transaction audit dated 8 March 2019. The findings of the transaction audit report have prima facie indicated the existence of preferential transactions between the Corporate Debtor and Respondent Nos. 1-6, as more particularly stated hereunder:
3.3 The aforesaid findings are based upon a review of the bank book ledger pertaining to the Bank of Maharashtra (2 accounts), State Bank of Bikaner, Jaipur (5 accounts) and Andhra Bank (1 account) and upon mapping the same with the bank statements for the period immediately preceding two years from the Insolvency Commencement date i.e 07
January 2016 to 08 January 2018.
3.4 As per the Transaction Audit Report prepared by the Transaction Auditor, it is stated that the representatives/officers of the Corporate Debtor have alleged that the transactions between Respondent Nos. 1-5 were on account of loans taken and repaid. However, the representatives of the Transaction Auditor were not provided with any contract/documentation to support the said explanation put forth by the officers of the Corporate Debtor.
3.5 With respect to the transactions with Respondent No.6, the findings of the Transaction Audit Report show that the nature of the transaction was not clear from the review of the bank book ledger of the Corporate Debtor. Further, though the Corporate Debtor claims that the transactions with Respondent No.6 were on account of loan re-payment, the Corporate Debtor did not provide any documentation to demonstrate the purpose of the said transactions, as confirmed by the findings of the Transaction Audit Report.
3.6 Under the provisions of the Code, the transactions between the Corporate Debtor and Respondent Nos. 1-6 are deemed to be preferential transactions in view of the same being related party transactions. It is seen that these transactions constitute a transfer of property to the Corporate Debtor for the benefit of other creditors which has the effect of putting such creditors in a more beneficial position than what it would have been in the event of distribution of assets being made in accordance of Section 53 of the Code.
3.7 The facts of the case fall squarely within the ambit of Section 43 of the Code. The transactions under question have been carried out with the intention to adversely affect the creditors of the Corporate Debtor. None of the transactions highlighted in the present application seem to have been carried out in the ordinary course of business of the Corporate Debtor or for that matter carried out on an arm's length basis.
4 Submissions on behalf of the Respondents:
4.1 The Respondents have submitted that the instant application does not disclose any cause of action under the provisions of the Code. The Applicant herein has failed to consider vital parameters while classifying the transactions mentioned in the application as preferential transactions.
4.2 Section 188 of the Companies Act, 2013 deals with the types of transactions which are regarded as related party transactions. Section 188 specifically applies to any transaction between a company and its related party relating to:
a) Sale, purchases or supply of any goods or materials;
b) Selling or otherwise disposing of , or buying, property of any kind;
c) Leasing of property of any kind;
d) Availing or rendering of any services;
e) Appointment of any agent for purchases or sale of goods, materials, services or property;
f) Such related party’s appointment to any office or place of profit in the company its subsidiary company or associate company and;
g) Underwriting the subscription of any securities or derivatives thereof, of the company.
4.3 It has been submitted that no such transaction took place between the respondents and the Corporate Debtor. The Applicant has catagorised the receipt and payment of interest free loans and advances made between the respondents and Corporate Debtor as preferential transactions.
4.4 It has been submitted that the phrase “ordinary course of business” is not defined under the Companies Act 2013 or rules made thereunder. Ordinary course of business will cover the usual transactions, customs and practices of a business and of a company. In its guidance to auditors, the ICAI has included the following few examples of transactions that are considered outside the entity’s normal (ordinary) course of business:
i. Complex equity transactions such as corporate restructuring or acquisitions;
ii. Transactions with offshore entities in jurisdictions with weak corporate laws. The leasing of premises or rendering of management services by the entity to another party if no consideration is exchanged;
iii. Sales transactions with unusually large discounts or returns;
iv. Transactions with circular arrangements, for example, sales with A commitment to repurchase;
v. Transactions under contracts whose terms are changed before expiry.
4.5 It has been further submitted that the assessment of whether a transaction is in ordinary course of business is very subjective and can vary on caseto- case basis, and consideration needs to be given to nature of business and objects of the entity. The purpose of making such assessment is to determine whether the transaction is usual or customary to the company and/ or its line of business and a variety of factors like size and volume of transactions, arms-length, frequency, purpose, etc, have to be considered to make this assessment.
4.6 The Applicant has failed to consider that the arm’s length assessment is a subjective exercise and requires judgment after considering various parameters. The Applicant has not even considered the section-wise observations of the special transaction audit report with bona fide intent.
4.7 In the present case, pursuant to admission of CIRP, all the personnel engaged in the Corporate Debtor as well as suspended board of directors have duly extended all the help to the Applicant and are acting in accordance with the provisions of the Code. On the other hand, the Applicant is acting in contravention to the provisions of the Code.
4.8 It has been submitted that there were no common shareholders between Respondent no.6 and Corporate Debtor till 18th April, 2017. Hence the said fact is not reflected in the Annual Report of the Corporate Debtor for the year ended 31st March 2017. The shares in the Respondent No. 6 have been acquired by Mr. Aashish Jhunjhunwala in the year 18th April, 2017.
4.9 It has been denied that the findings of transaction audit report prima facie indicated the existence of preferential transaction or that the findings with respect to preferential transaction are based upon a review of the Bank Book Ledger and upon mapping the same with the bank statements for the period immediately preceding two years from the insolvency
Commencement date as alleged or at all.
4.10 The finding of the details of the transactions which took place between the respondents are not based upon the period of two years preceding the insolvency commencement date, instead the Applicant has considered the said review for a period of four years i.e. for the period Financial Years 2014 to 2018.
4.11 Further, the loans in question are the loans taken and repaid before the year 2010 -2011 and the same has been done in the way loans used to be taken and repaid in the ordinary course of business. There is a proper disclosure of the said transactions in the Annual Accounts of the Corporate Debtor as these transactions were there before the year 2010 and such transactions were in ordinary course of business.
4.12 It has been submitted that no agreement made with related parties as the said transactions were non-interest bearing and such transactions were there before 2010. It is important to note that all the six respondents have provided interest free loan for several years for smooth functioning of the Corporate Debtor and not taken any loan and interest for the loan provided to the Corporate Debtor.
4.13 It has been submitted that an email dated 04 February 2019 was sent to the Applicant by Mr. Aashish Jhunjhunwala on behalf of the respondents, thereby explaining the details of the said transactions in a year wise manner. The said fact has been completely suppressed by the Applicant. Further, Form C has been submitted to the Corporate Debtor by Respondent Nos.1, 2,3,5,6. The same has been received by the Applicant. Accordingly, claims of Respondent Nos. 1,5and 6 have been admitted.
4.14 Only 5 to 6 employees were working in the Corporate Debtor and the other employees thereof were transferred to the group companies. The entire salary paid to the employees of Respondent No. 4 had been debited to the account of Respondent No. 2. Hence, there has been no payment to Respondent No. 4 by the Corporate Debtor. The Applicant has suppressed this fact and has taken the payment of ₹12,00,000/- (Rupees Twelve Lakh Only) to the Respondent No. 4 incorrectly. Further, these group companies have hardly any other business except providing loans to the Corporate Debtor.
4.15 The transactions post 18 April 2017 till date of admission of CIRP of the Corporate Debtor i.e. 08 January 2018 are as follows:
a) Loans/Advance by Corporate Debtor- ₹38,00,000/- (Rupees Thirty- Eight Lakh Only);
b) Repayment made to the Corporate Debtor- ₹28,00,000/- (Rupees Twenty- Eight Lakh Only)
4.16 It has been denied that Corporate Debtor's transactions with respondent no. 6 constitute transfer of property of the Corporate Debtor for the benefit of said respondents over other creditors. ‘Transfer of property’ as defined in the Code means transfer of any property and includes a transfer of any interest in the proper ty and creat ion of charge upon such property as described in the section 3 (35) of the Code. In the present case, only interest free loans and advances were taken and given between the Corporate Debtor and respondents.
4.17 Further, Respondent no. 2 is not withdrawing any salary from the Corporate Debtor since 2012. No funds have been transferred to the respondent no.2. On the contrary Respondent no.2 has infused fund of ₹1.29,00,000/- (Rupees One Crore Twenty-Nine Lakh Only) in the last four years and the said fact is clearly reflected in the Books of Account of the Corporate Debtor.
4.18 It has further been stated that the net amount of all the six respondents is ₹1,17,00,000/- (Rupees One Crore Seventeen Lakh Only). If the figure of Respondent No. 6 is taken for the period from 18 April 2017 to 08 January 2018, the net amount will by ₹43,40,000/- (Rupees Forty-Three Lakh Forty Thousand Only).
5 Rejoinder on behalf of the Applicant:
5.1 Mr. Aashish Jhunjhunwala has submitted a claim against the Corporate debtor, of which, an amount of ₹29,56,01,279/- is the principal amount. ₹13,52,69,140/- out of the said principal amount is in relation to loans claimed to be provided to the Corporate Debtor by Mr. Aashish Jhunjhunwala, and ₹16,03,32,139/- is in relation to the invocation of the shares of Mr. Aashish Jhunjhunwala pledged for the loans provided to the Corporate Debtor.
5.2 It has been submitted that even after repeated requests, Mr. Aashish Jhunjhunwala has not submitted the necessary documentation or information as required under the Code that would fully substantiate his claim amount. The Resolution Professional has on multiple occasions, vide emails dated 20 February 2019, 27 February 2019, 1 March 2019, 2 March 2019, 4 March 2019 and 13 March 2019 had requested Mr. Aashish Jhunjhunwala to provide the documents required to substantiate his claim. The necessary documents and information however, were still not provided by Mr. Aashish Jhunjhunwala. As such the Resolution Professional was unable to verify the said claims and accordingly rejected them.
5.3 Further, with respect to the amount claimed in relation to the shares being invoked, apart from not submitting documents sought, Mr. Aashish Jhunjhunwala had also failed to establish why such a claim would be that of a financial creditor.
5.4 Regulation 8(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) lays down the documents on the basis of which the existence of debt due to the financial creditor can be proved.
5.5 Mr. Aashish Jhunjhunwala must at least provide the document evidencing a contract for the loans backed by financial statements, record evidencing that such amount was actually drawn by the Corporate Debtor, and evidence demonstrating that funds have not been paid back to Mr. Aashish Jhunjhunwala.
5.6 On being requested by the Resolution Professional, vide emails, to provide additional supporting documents with respect to his claim, Mr. Aashish Jhunjhunwala had provided certain bank statements and an excel document indicating outflows and inflows with respect to the Corporate Debtor. However, on reviewing the annual report, balance sheet, ledger and all the other information received, the Resolution Professional found no conclusive proof of claims of Mr. Aashish Jhunjhunwala.
5.7 It is further submitted that at the 25th Meeting of the Committee of Creditors, the Resolution Professional had informed Mr. Aashish Jhunjhunwala that his claim had not been admitted. To this, Mr. Aashish Jhunjhunwala responded by stating that he had received a mail indicating otherwise. On looking into the matter, the Resolution Professional came across the email dated 07 March 2019 which had been erroneously sent by a team member of the Resolution professional. The said fact was subsequently communicated to Mr. Aashish Jhunjhunwala vide email dated 30 June 2019. Vide the said email, he was once again informed that his claim had not been admitted.
5.8 The said fact was also evident from the list of creditors that had been continuously updated on the website of the Corporate Debtor and had also been provided at each CoC meeting.
5.9 Further, it is the duty of the Resolution Professional under regulation 13(1) of the CIRP Regulations to verify the claims of all creditors before the same is admitted and under regulation 10 of the CIRP Regulations, the Resolution Professional may call for evidence or clarification for substantiating the said claims.
6. Analysis and Findings:
6.1 Heard the Ld. Counsel on behalf of the Applicant and the Ld. Counsel on behalf of the Respondents and perused the records.
6.2 It is to be noted that the Corporate Debtor was admitted into CIRP vide order dated 08 January 2018 in Company Petition (IB) 349/KB/2017. Subsequently, a resolution plan also been approved by this Adjudicating Authority vide order dated 04 September 2019.
6.3 In this regard, we would rely on the decision of Hon’ble High Court of Delhi in the matter of Venus Recruiters Private Limited vs. Union of India & Ors.1 wherein it was held that the role of the resolution Professional cannot continue beyond an order under section 31 of IBC as 1 2020 SCC OnLine del 1479, decided on 26 November 2020 the CIRP comes to an end once the Resolution Plan has been approved. [Para 77]
6.4 It has further been held in Venus Recruiters (Supra) that the RP cannotcontinue to act on behalf of the Company under the title of ‘Former RP’. That would be violative of the legislative intention and the statutory prescription. [Para 81]
6.5 It has been further opined that if an avoidance application for preferential transactions is permitted to be adjudicated beyond the period after the Resolution Plan is approved, in effect, the NCLT would be stepping into the shoes of the new management to decide what is good or bad for the Company. Once the Plan is approved and the new management takes over, it is completely up to the new management to decide whether to continue a transaction or agreement or not. Thus, if the CoC or the RP are of the view that there are any transactions which are objectionable in nature, the order in respect thereof would have to be passed prior to the approval of the Resolution Plan. [Para 91]
6.6 As such, in the event of the approval of the resolution plan by this Adjudicating Authority, the role of the Resolution Professional in the instant matter stands extinguished from the date of said approval i.e 04 September 2019.
6.7 According to regulation 35A(1) of the CIRP Regulations, the Resolution Professional shall form an opinion whether the corporate debtor has been subjected to any transaction covered under sections 43, 45, 50 or 66 on or before the seventy-fifth day of the insolvency commencement date. According to the regulation 35A(2), on or before the one hundred and fifteenth day of the insolvency commencement date, the Resolution Professional is also required to make a determination to that effect.
6.8 Further, Regulation 35A(3) of the CIRP Regulations provides that upon making such determination under regulation 35A(2), the Resolution Professional shall apply to the Adjudicating Authority for the appropriate relief on or before the one hundred and thirty-fifth day of the insolvency commencement date. In this case, the one hundred and thirtyfifth day is on 23 May 2018. The instant application being IA. (IBC) 346/KB/2019 has been filed on 20 March 2019, thus making it clear that the Applicant has not complied with the provisions of regulation 35A within the timeline provided therein.
6.9 Even if we go by the decision of the Hon’ble NCLAT in Aditya Kumar Tibrewal RP Vs. Om Prakash Pandey, Suspended Director 2 that the timeframe is directory, we do not see any “determination” within the meaning of regulation 35A of the CIRP Regulations. Therefore, we will not act as court of first instance to determine the nature of the transactions
mentioned hereinabove.
6.1 In light of the above facts and circumstances, the adjudicating Authority is satisfied that the instant application is not maintainable and the same is therefore rejected.
6.2 IA I.A. (IB) No. 346/KB/2019 is accordingly dismissed.
6.3 The registry is directed to send e-mail copies of the order forthwith to all the parties and their Ld. Counsel for information and for taking necessary steps.
6.4 A certified copy of this order may be issued, if applied for, upon compliance with all requisite formalities.
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