Mr. Jayesh Shanghrajka. Vs. Divine Investments & Ors. - Here, it is the applicant on whom the onus lies to prove that the respondents had an intention to defraud the creditors. This is the general principal of evidence that the person alleging has to prove the thing alleged.

NCLT Mumbai (23.03.2021) In Mr. Jayesh Shanghrajka. Vs. Divine Investments & Ors.  [M.A. NO. 1893 OF 2019] held that; 

• Here, it is the applicant on whom the onus lies to prove that the respondents had an intention to defraud the creditors. This is the general principal of evidence that the person alleging has to prove the thing alleged.

• Basing on the above, we believe that the applicant is not able to establish successfully that the respondents are guilty under Section 66 of the Code. According to the principal of burden of proof it is the applicant who has to establish that the said transactions are fraudulent ones which he is not able to establish.

Excerpts of the Order;    

# 1. This is an application filed by Mr. Jayesh Sanghrajka (hereinafter called as the “applicant”), the Resolution Professional (RP) of Ariisto Developers Pvt. Ltd. (hereinafter called as the “Corporate Debtor”) under Section 66 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the Code”). The Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor was initiated by an order of this Tribunal dated 20.11.2018 and the applicant was appointed as the RP during the 1st meeting of the Committee of Creditors (CoC) held on 24.12.2018 and confirmed by an order of this Bench dated 23.01.2019.

# 2. This application has been filed by the applicant against 8 respondents alleging that they have entered into preferential transactions. The applicant is seeking the following prayers by this application: a. Issue directions or order to recover the said amount of Rs.118,58,69,004/- (Rupees One Hundred and Eighteen Crores Fifty Eight Lakhs Sixty Nine Thousand Four only) mentioned in para 6.ii of the instant application from the Respondents/Related Parties receivable as on 20.11.2018 and means to do so;

• b. Direct the CoC to pay for the cost of legal remedies for recovery aforesaid dues, if any, to be persuaded by the Resolution Professional;

• c. Directions in terms of Section 66 to be given to Respondents or such number of them as the Hon’ble Bench may determine, to make contributions to the Corporate Insolvency Resolution Process of the Corporate Debtor; 

• d. Immediate directions be given to the respondents or beneficiaries to the transaction to disclose and file Affidavit of Declaration of their assets, produce all necessary documents as and when required by the Resolution Professional and refrain them from creating any third party rights in their assets both moveable and immoveable without prior approval from this Hon’ble Court or any other such competent authority as this Hon’ble Court may deem fit;

• e. The respondents be directed to produce details of the ventures signed with other companies and third party rights created (if any) in the assets of the related party; and

• f. Any such other directions, orders, Interim Relief as the Hon’ble Bench may deem fit in the interest of justice, equity and good conscience.

 

# 3. The counsel appearing for the RP submitted that the RP had verified the books of accounts and the audited balance sheets of the Corporate Debtor during the CIRP. He stated that after going through the audited balance sheets for the year ended on 31.03.2018 and provisional accounts as on 20.11.2018 and as per the trial balance as on 20.11.2018 and Audited Financials as on 31.03.2018 of the Corporate Debtor, he found that an amount receivable of more than Rs. 10 Lakhs from the Respondents (Related Parties of the Corporate Debtor) which is as follows:

He stated that the amounts as on 20.11.2018 are derived from the trial balance as on that date provided to the RP from the Books of accounts of the Corporate Debtor, which is unaudited. He further stated that as on date of the commencement of CIRP of the Corporate Debtor i.e. on 20.11.2018, Rs.118,58,69,004/- is receivable from the related parties (respondents) of the Corporate Debtor.

# 4. Upon investigation of the said accounts and queries by the CoC in respect of aforesaid related party transactions, it was decided by the RP to appoint Forensic Auditor to find out if the Corporate Debtor is subjected to any transactions which may be regarded as defrauding creditors or fraudulent transactions. To find out about these transactions, the applicant appointed M/s Haribhakti Business Services LLP (firm of Chartered Accountants, Mumbai) to carry out forensic audit of the Corporate Debtor. He stated that on perusal of the Forensic Audit Report, the Books of Accounts and Audited Financial statements, the transactions with the respondents herein gave him a reasonably strong hints of Vulnerable Transactions or other transactions that may be either regarded as breach of applicable law, or deleterious of the interests of creditors or stakeholders, or otherwise, transactions not designed to be in good faith. Clarification regarding such transactions has been sought from the suspended directors of the corporate debtor through legal demand notices but no satisfactory response was received.

 

# 5. The applicant further submitted that the corporate debtor has given loan/advances to its related parties over a period of time without any consideration or economic gain. He further submitted that during the course of the CIRP, neither the applicant nor the Forensic Auditor have found any contract/agreement in respect of aforesaid related party transactions. Also, in the reply sent by the related parties vide letter dated 27.04.2019 also indicated that either there is no documentation or respondents are trying to supress the same.

 

# 6. He stated that from the record, it appears that the above transactions were entered into solely to benefit the related parties/respondents of the corporate debtor, which is evident from the fact that these loans and advances were given without any consideration or benefit to the corporate debtor, in spite of the fact that the corporate debtor continuing to default in obligation to make payment to its financial creditors, operational creditors and others. Also, while the corporate debtor was borrowing money from various entities, banks, NBFC, Individuals, etc. at high rate of interests, almost upto 30% p.a., the related parties/respondents were enjoying money of the corporate debtor without any interest/consideration/obligation.

 

# 7. He further mentioned about the public notices dated 29.03.2019 which were issued by Dhaval Vussonji and Associates, for their clients Shapoorji Pallonji Development Managers Pvt. Ltd. and Ashvi Developers Pvt. Ltd. who were wiling to create a third party right in their properties as per the public notice dated 29.03.2018. The counsel for the applicant mentioned that the applicant through his advocates Krupa R. Paresh had raised an objection by way of letter dated 10.04.2019 which was posted on the same day thereby raising an objection for the same.

 

# 8. The directors of the corporate debtor were fully aware that they were in twilight zone and insolvency was imminent yet there was no effort from the part of the directors of the corporate debtor to recover money from the related parties/respondents till the commencement of the CIRP i.e. 20.11.2018. He stated that it was the applicant who being duty bound to preserve and protect the assets of the corporate debtor, called upon the related parties to make payment of the outstanding dues as on 20.11.2018 by sending legal demand notices through his lawyer, however the related parties have not made any repayment.

 

# 9. The respondents on the contrary have vehemently denied and disputed all the claims/averments/allegations that have been alleged/stated by the applicant as the same is without any proof and therefore is baseless. The respondents herein pray for the dismissal of this application on the ground that the application is belated and the applicant was required to file it within a period of 135 days from the date of commencement of insolvency, which in this case is 20.11.2018, according to the provisions of Regulation 35A(3) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter referred to as “CIRP Regulations”). However, the present application was filed on 21.05.2019 which is post the cut-off date.

 

# 10. The respondents herein have also challenged the maintainability of the captioned application on the ground that it does not meet the criteria as set out in Sections 43 and 66 of the Code. The counsel for the respondents submitted that they have no intention to defraud the creditors. He also submitted that the applicant has neither specified the nature of transactions nor the involvement of the respondents in the said transactions. Therefore, in absence of such averments, the transactions cannot be considered as fraudulent and therefore, does not attract Sections 43 and 66 of the Code. Thus, the respondent has prayed for dismissal of this application.

 

# 11. He further submitted that the auditor preparing a forensic audit report is required to classify the transactions which fall under Section 66 of the Code and highlight details pertaining to the said transactions along with reasons for arriving at the conclusion for treating it as a fraudulent transaction. He submitted that on perusal of the Audit Report, it is evident that the auditor has neither categorized any transaction as a fraudulent one nor is there any reference to the word ‘fraud’ in the entire report and therefore, the said transactions are not fraudulent and do not attract the provisions of Section 66 of the Code.

 

# 12. In regard to the Respondent Nos. 1 & 2, the counsel stated that nothing is due and payable on their part because of the following reasons: 

• a. The corporate debtor borrowed a sum of Rs.150 Crores from HDFC Limited;

• b. Out of the said loan, a sum of Rs. 53.86 Crores was paid to the Respondent No. 01;

• c. The Respondent No. 01 transferred the said amount to Ariisto Realtors Private Limited (ARPL) which ARPL in turn transferred it to Atithi Buildings Commodities Private Limited (ABCPL); and

• d. ABCPL paid the said amount to HDFC PMS.

The respondents have also annexed a certificate from the chartered account evidencing that an amount of INR 53.86 crores was paid to HDFC PMS is annexed and marked it as Exhibit A.

# 13. In respect of Respondent No. 03, it has been stated that during the time of the forest issue surrounding the Mulund Project, Respondent No. 03 obtained funding from HDFC PMS for developing the projects belonging to the group and also investment in newly sourced projects. He stated that the Corporate Debtor got a sum of Rs.85 Crores from Respondent No. 03 which was partly utilized to discharge its debts inter alia owed to the banks. Also, he stated that as the assets of the Corporate Debtor become capable of being monetized, the Corporate Debtor reciprocated the assistance given by Respondent No. 03 earlier by arranging for finance on Corporate Debtor’s books which was utilized by Respondent No. 03 to discharge its financial obligation to HDFC PMS. He stated that this fact was known to all the secured creditors and nobody has taken any objection which shows that the inter se transaction between the group companies were done in a bona fide manner. The respondent has also annexed a certificate from the chartered accountant evidencing that Respondent No. 03 had utilized the fund to discharge the obligation to HDFC PMS which is annexed and marked as Exhibit B. he stated that this proves that the ultimate beneficiary of a sum of Rs.115 crore and Rs.150 Crores are HDFC entities and not the Respondents.

 

# 14. He therefore, stated that the amounts shown to be payable by Respondent No. 03 have to be adjusted against the compensation which is due and payable by the Corporate Debtor in favour of Respondent No. 03 and therefore, the entry reflected in the books of accounts of the Corporate Debtor has to be viewed and construed by taking into consideration what has been stated and not literally.

 

# 15. Regarding Respondents No. 4, 5 and 7, the counsel stated that the corporate debtor was initially formed as a firm and as on the date of conversion of the firm into a corporate entity, the total withdrawal aggregated to approximately INR 35 crore, which was carried forward in the books of the corporate entity in the nature of loans to directors. These amounts were repaid by them which is as follows: 

• a. A sum aggregating to amount INR 20 crores were paid to the corporate debtor; and

• b. A sum aggregating to about INR 12.84 crores were brought in the corporate debtor through other entities of the partners.

  

He submitted that he money received from banks and customers was already invested in the Mulund Project which was later stalled due to the forest issue, the only source remaining with the firm was to call upon the group companies/firms to lend/invest to/in the firm.

# 16. He further submitted that from the funds of the Partners a bank guarantee of INR 4,15,27,200/- was caused to be issued in favour of Slum Rehabilitation Authority which is valid and subsisting till date and this bank guarantee is enduring to the benefit of the corporate debtor. The respondent has annexed a copy of letter dated 07.04.2016 for extension of bank guarantee as well as has annexed a deposit confirmation for the bank guarantee and marked it as Exhibit C.

 

# 17. He further submitted that as per the provisions of Companies Act, every director is entitled to remuneration and Respondents 4 and 5 did not claim any such remuneration taking the financial condition of the corporate debtor into account. He submitted that therefore, the amounts as shown outstanding are justifiably adjustable towards the contribution made.

 

# 18. Further, regarding Respondents 6 and 8, the counsel has submitted that in order to meet the exigencies of the group companies, various amounts were borrowed inter se between the group companies from time to time. He referred to the amount lent by ARCL to the corporate debtor which comes to the tune of Rs.1,55,00,000/- and similarly the corporate debtor had lent a sum of Rs.1,02,56,900/- to Respondent No. 6 and Rs.43,32,806/- to Respondent No. 08. He submitted that Respondent 6 & 8 had lent monies to ARPL. He submitted that in view of this inter se transaction, the liability of ARPL which it owes to Respondent No. 6 & 8 was adjusted by treating Rs.1.55 crores which the corporate debtor owed to ARPL as satisfied against the monies lent by the corporate debtor to Respondent Nos. 6 & 8. He submitted that these adjustments were recorded in the accounts maintained by Respondent Nos. 6 & 8 and ARPL and similar entries were to be recorded in the books of accounts of the corporate debtor to be finalized for the financial year 2015-19 but before the same could be done, the CIRP was initiated against the corporate debtor. The counsel submitted that thus, the entry reflected in the books of accounts of the corporate debtor has to be viewed and construed by taking into consideration all these submissions and not literally.

 

FINDINGS

# 19. We have heard all the parties in detail and perused and taken all the documents submitted by them. The applicant has made various allegations against the respondents and prayed to declare that the transactions between the corporate debtor and the respondents are fraudulent and the respondents are guilty under Section 66 of the Insolvency and Bankruptcy Code, 2016 and has tried to make good his case. The respondents have denied all the allegations and submitted documents that the amounts were adjusted and nothing is pending from the respondents’ side to pay back to the corporate debtor.

 

# 20. Here, we would like to refer to Section 66 of the Code which is reproduced hereinbelow for ready reference:

(1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any person who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.

(2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if-

(a) before the insolvency commencement date, such director or partner know or ought to have known that there was no reasonable prospect of avoiding the commencement of corporate insolvency resolution process in respect of such corporate debtor, and

(b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor.

(3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under subsection (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per Section 10A. 

Explanation- For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same 

 

functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor.

From the above, it is clear that the main ingredient of the section is that there needs to be an intent to defraud the creditor. Here, it is the applicant on whom the onus lies to prove that the respondents had an intention to defraud the creditors. This is the general principal of evidence that the person alleging has to prove the thing alleged. But we believe that the applicant herein has failed to establish the fraudulent intention of the respondents. On the contrary, the respondents have successfully demonstrated that the transactions as alleged by the applicant are neither fraudulent nor intentional and rather they have tried their best to revive the corporate debtor and have adjusted the amounts in paying back the amount to other creditors. We have gone through all the certificates from the chartered accountant submitted by the respondent which make it clear that the said amounts are adjusted by the respondents and nothing is due and payable on their part.

# 21. Further, even the auditor in its report has not categorized any transaction as fraudulent under Section 66 of the Code. Not only this, but also the applicant has not even furnished the Forensic Audit Report for the perusal of this Bench which he should have done during filing of this application itself. He has blatantly mentioned that the forensic audit report gave him a reasonably strong hints of Vulnerable Transactions or other transactions that may be either regarded as breach of applicable law, or deleterious of the interests of creditors or stakeholders, or otherwise, transactions not designed to be in good faith. This Bench, basing merely on hints cannot declare the said transactions to be fraudulent ones.

 

# 22. Basing on the above, we believe that the applicant is not able to establish successfully that the respondents are guilty under Section 66 of the Code. According to the principal of burden of proof it is the applicant who has to establish that the said transactions are fraudulent ones which he is not able to establish. Also, the applicant has literally construed the documents and balance sheet and thus has lacked in research that the funds are being adjusted by the respondents, who on the other hand has produced certificates from a chartered accountant to prove that nothing is due and payable on their part. Therefore, there is no merit in this application and hence we have to dismiss it.

 

With these directions and observations, M.A. 1893/2019 is hereby dismissed with no costs.

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