NCLT Chennai (2022.06.27) in Srikanth Dwarakanath, Liquidator of Surana Power Ltd. Vs. Dineshchand Surana, Managing Director of Surana Power Ltd. and Ors.. [MA/244/2019 in CP/646/IB/2017] held that;
It may be true that certain decisions taken by the erstwhile management of the Corporate Debtor have not worked out as intended and have resulted in loss to the Corporate Debtor. However, merely because the Corporate Debtor has suffered loss, the commercial transactions cannot be termed as fraudulent or malafide. Commercial business decisions cannot be saddled with malice or criminality merely because they eventually turn out to be unsuccessful.
Even the Forensic Audit Report prepared by M/s. Kirtane & Pandit does not conclusively hold any transaction of the Corporate Debtor to be fraudulent. In fact, the said Forensic Audit Report runs with a disclaimer
Tribunal holds that the said Forensic Audit Report dated 12.12.2018 prepared by M/s. Kirtane & Pandit LLP cannot be treated as a reliable piece of evidence to conclude that any of the transactions of the Corporate Debtor was done in a fraudulent manner or with a malafide intention to defraud the creditors.
Admittedly, the present application has been filed only on the basis of the said Forensic Audit Report without any independent application of mind. This Tribunal does not find any event of siphoning off or diversion of funds in any manner in the transactions of the Corporate Debtor and hence the present application deserves to be dismissed.
Excerpts of the Order;
# 1. The present application has been filed by the Liquidator of the Corporate Debtor viz., M/s. Surana Power Limited under Section 66 of the IBC, 2016 seeking an order directing the respondents to pay a sum of Rs. 172.31 Crores to the Corporate Debtor.
# 2. Brief Facts Of The Case
2.1. The Learned Counsel for the Liquidator submitted that Corporate Insolvency Resolution Process (CIRP) was initiated as against the Corporate Debtor under Section 9 of the IBC, 2016 by this Tribunal vide its order dated 19.02.2018 and eventually the applicant herein was appointed as the liquidator by order of this Tribunal dated 28.01.2019. It was submitted that during CIRP, a forensic audit was conducted in respect of the affairs of the Corporate Debtor through M/s. Kirtane & Pandit, Chartered Accountants and the Forensic Audit Report was submitted to the Applicant herein on 12.12.2018.
2.2. It was submitted that on the basis of the Audit Report, several transactions of the Corporate Debtor were found to be fraudulent and that accordingly, the present application has been filed seeking to issue appropriate directions under Section 66 of the IBC, 2016, which is extracted hereunder;
Section 66 Fraudulent trading or wrongful trading.-
(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 persons 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 knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a 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 sub-section (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."
2.3. The Learned Counsel for the Liquidator has highlighted various transactions of the Corporate Debtor, which according to the above-mentioned Forensic Audit Report are fraudulent. The said allegations have been refuted by the Learned Senior Counsel appearing for the 1st respondent, who is the erstwhile Managing Director of the Corporate Debtor contending that the entire allegations are bereft of any supporting materials and are based on assumptions. Further, The Learned Counsel appearing for the other respondents have also denied the allegations contending that there is no specific allegation as against them and that they are not necessary parties to the application.
2.4. In the present case to determine if any direction is required to be issued under Section 66 of the IBC, 2016, each of the transactions of the Corporate Debtor that have been alleged by the Liquidator to be fraudulent and the reply of the respondents to such allegations are considered and the same are dealt With hereunder in ad seriatim.
# 3. Asset Transfer Agreement with Surana Industries Limited:
3.1. The first and foremost allegation put forth by the Liquidator pertains to an Asset Transfer Agreement dated 13.11.2009, whereby the Corporate Debtor had purchased a 35MW Power Plant from its holding Company, M/s. Surana Industries Limited fora consideration of Rs. 236.52 crore. It was contended by the Learned Counsel for the Liquidator that on the basis of information available in public domain, the Forensic Auditors have opined that the average cost of the said Power Plant would only be Rs. 175 crore and that the Auditors have prima facie opined that there is a possibility of over valuation of the asset. It was further contended that by over-valuing the asset, the Corporate Debtor had availed a loan of Rs. 163.75 crore from UCO Bank, which sum was disbursed to the transferor, Surana Industries Limited on 30th and 31st of March 2010.
3.2. However, it is a fact which is borne on record that neither the Liquidator nor the Forensic Auditors have conducted any independent valuation of the 35 MW Power Plant, which is the subject matter of the Asset Transfer Agreement. The Forensic Audit Report merely states that there is a possibility of overstated consideration. Even the figure of Rs. 175 crore put forth by the Auditors is only said to be the average cost derived out of information available in public domain and there is no material to support the valuation estimated at Rs. 175 crore. On the other hand, it was submitted that as per the detailed Valuation Report of Axis Bank dated September 2009, the value of the 35 MW Power Plant at the relevant point of time has been ascertained to be Rs. 228.15 crore, which disproves the estimated valuation of Rs. 175 crore stated by the Auditors.
3.3. The Learned Senior Counsel appearing for the 1st respondent has pointed out that the sale consideration fixed in the Asset Transfer Agreement was not only for the 35 MW Power Plant but also included other components such as Main Receiving Sub-Station, expenses incurred in procuring operational licenses and statutory clearances and a minimal profit margin. It is seen that the said additional components have not been considered by the Auditors and the Liquidator while arriving at the estimated value of Rs. 175 crores. Thus, the apprehension expressed by the Auditors and the Liquidator that there is a possibility of over-valuation of assets is without basis and is accordingly rejected.
3.4. In any event, although the Asset Transfer Agreement fixes the consideration at Rs. 236.52 Crores, only a sum of Rs. 168.75 Crores has been paid by the Corporate Debtor to the transferor namely, Surana Industries Limited. It is evident from the Asset Transfer Agreement that the remaining consideration has been paid by allotment of equity shares. In other words, the remaining consideration has been treated as an investment by the transferor in favour of the Corporate Debtor. In effect, only a sum of Rs. 168.75 Crores has been paid by the Corporate Debtor under the Asset Transfer Agreement, which is lesser than the average cost/estimate stated by the Auditors. Therefore, it cannot be stated that the Power Plant was transferred at an over-stated consideration and nothing fraudulent could be seen in the said transaction.
3.4. That apart, the Forensic Audit Report at internal page 13 of 48, clearly records that UCO Bank, the bank who has funded the Corporate Debtor for this transaction, had obtained a certificate for capital cost of 35 MW power plant and MRSS which was in UCO bank's records. It is also recorded that the said certificate has been submitted to the forensic auditor, Kirtane & Pandit, vide email dated 15.11.2018. Although the Forensic Audit Report at the very same page records that the said certificate is annexed with the report, the same has not been filed by the Liquidator with this Tribunal.
Further, despite the Corporate Debtor calling upon the Liquidator, vide its letter dated 13.09.2019, to furnish a copy of the said certificate, the Liquidator for the reasons best known to it, has not produced the same. For this reason, as well, this allegation is bound to be rejected.
3.5. The Ld. Counsel for the Liquidator further contended that Schedule-2 of the Asset Transfer Agreement dated 13.11.2009 has set out the liabilities of the Corporate Debtor as on 31.03.2010, which is not possible. However, upon perusal of Schedule-2 of the said Agreement, it is seen that the same disclose only the liabilities of the transferor namely, Surana Industries Limited; does not mention anything about the liabilities of the Corporate Debtor as stated by the Ld. Counsel for the Liquidator. It is also seen from Clause 5.5 of the said Agreement that the Long Stop Date for performance of the contract was fixed as 31.03.2010 and from Clause 4 of the Agreement that the transferor was required to get consent letters from its lenders/creditors before effecting the transfer in favour of the Corporate Debtor. Thus, disclosure of the anticipated liabilities of the transferor as on 31.03.2010 in Schedule-2 of the Agreement can only be construed to be in the best interest of the Corporate Debtor and cannot be termed as fraudulent.
3.6. The Ld. Counsel for the Liquidator further contended that out of the loan amount of Rs. 90 Crores and Rs. 78.75 Crores disbursed by UCO Bank in favour of the transferor, Sierana Industries Limited on 30.03.2010 and 31.03.2010 respectively, a sum of Rs. 70 Crores was paid by Surana Industries Limited to the Corporate Debtor on 31.03.2010 under the Asset Transfer Agreement.
3.7. Admittedly, as per the terms of the Agreement, only a sum of Rs. 168.75 Crores was paid by the Corporate Debtor to Surana Industries Limited and the remaining consideration was settled by allotment of equity shares. In such case, it is not clear as to why the transferor would pay any money in favour of the Corporate Debtor. It has been clarified by the Learned Senior Counsel appearing for the 1st respondent that the said sum of Rs. 70 Crores was paid by Surana Industries Limited to the Corporate Debtor towards equity contribution for a 2 x 210 MW Power Plant that was proposed to be constructed by the Corporate Debtor and that the said payment has got nothing to do with the Asset Transfer Agreement dated 13.11.2009. Further, even the Forensic Audit Report, based on which the present application is said to have been filed, merely states that a sum of Rs. 70 Crores was paid to the Corporate Debtor and does not state that the same was paid under the Asset Transfer Agreement. In any event, the Corporate Debtor has only gained out of the said transaction and the entire allegation in this regard is totally misconceived and unsustainable and accordingly stands rejected.
# 4. Project Contracts and EPC Contracts:
4.1. The Learned Counsel for the Liquidator further submitted that the Corporate Debtor had awarded contracts for boiler, turbine and generator to the 8th respondent herein, Bharat Heavy Electricals Limited (BHEL), for which two contracts were entered into with BHEL, aggregating to about Rs. 98,435 Lakhs. The Learned Counsel for the Liquidator further pointed out an entry posted to the account of BHEL through Punjab National Bank Current Account on 16.03.2012 amounting to Rs. 2250 Lakhs as payment. It was further contended that no such payment was done and that the said entry is a fictitious one made with malafide intentions.
4.2. The Ld. Senior Counsel for the 1st respondent submitted that the Corporate Debtor had proposed to construct a 2x210 MW Power Plant, wherein BHEL was appointed as a Contractor; that the said project was funded by a consortium of banks with IDBI Bank Limited as the lead bank; that the entire cash flow was managed through a Trust and Retention Account handled by the lead banker, IDBI Bank Limited; that since payments were not released from the Trust and Retention Account to BHEL from November, 2011 till February, 2012, BHEL had sent an e-mail to the Corporate Debtor on 01.02.2012 stating that failure to pay a sum of Rs. 29 Crores would suspend/slow down the project; that in order to keep the project alive, on 16.03.2012 the Corporate Debtor had issued a postdated cheque dated 31.03.2012 drawn on Punjab National Bank for a sum of Rs. 22.50 Crores in favour of BHEL as security, which is the impugned entry; that the said cheque was never presented by BHEL for encashment; that the said entry dated 16.03.2012 was duly reversed by way of an entry dated 08.10.2014, immediately after the cheque was returned by BHEL.
4.3. It is admitted that no payment was made on 16.03.2012 by the Corporate Debtor in favour of BHEL and the relevant entry dated 16.03.2012 has also been subsequently reversed. The facts leading to the entry dated 16.03.2012 and the subsequent reversal of the same has also not been disputed by the Liquidator. It is not the case that any amount was diverted or misappropriated using the entry dated 16.03.2012. Thus, when there is no actual transfer of funds, the allegation to the effect that the entry dated 16.03.2012 is fraudulent and malafide cannot be sustained.
4.4. The Ld. Counsel for the Liquidator further submitted that the Corporate Debtor had awarded balance of plant packages to six "Engineering Procurement and Construction" (EPC) Contractors, out of which, four EPC Contractors, who are arrayed as respondents 9 to 12 herein, viz., (i) Vinayaga Infra (I) Ltd., (ii) RR Tools Pvt. Ltd., (iii) BK Powers and Machinery Pvt. Ltd. and (iv) BLS Power Solution Ltd. have common Directors; that Vinayaga Infra (I) Ltd. (9th respondent) and BLS Power Solution Ltd. (12th respondent) have the same registered office address and the same official e-mail address; that Vinayaga Infra (I) Ltd. (9th respondent) and BLS Power Solution Ltd. (12th respondent) have shareholding of 5.67% and 7.19% respectively in Surana Industries Limited.
4.5. On the other hand, the Learned Senior Counsel for the 1st respondent submitted that the proposed 2x210 MW Power Plant was funded by consortium of ten banks lead by IDDI Bank Ltd., based on the Detailed Project Report prepared by M/s. M.N. Dastur & Company (P) Ltd. and an independent appraisal done by IDBI Bank Limited; that suppliers/contractors and vendors executing the project are reputed and renowned in the country; that the main equipment supplier is BHEL and the balance of plant Packages, as well as offsite facilities were being executed by various reputed Indian Suppliers and Contractors such as Alstom, Paharpur, McNally Bharat, ABB, Macawber, Gannon Dunkerley & Co Ltd., Kirloskar etc. who are specialized in the respective fields with long years of experience and proven track record; that the Owner's Engineer for the project is Tata Consulting Engineers Ltd. (TCE), Bangalore; that in order to effectively monitor the individual packages, it was decided judiciously to compartmentalize the packages under six groups and accordingly 6 EPC Contractors were identified for acting as nodal agencies for project monitoring, interface coordination, etc.; that the consortium of banks through its lead bank, IDBI Bank Ltd. had appointed well renowned M/s. Mott MacDonald as "Lenders Independent Engineer" (LIE) to monitor the progress/status of the project and had appointed M/s. Amarchand Mangal Das as the Legal Counsel; that the entire project was monitored by the Consortium of Bankers through the LIE, Management Committee, Board of Directors (with Nominee Director from IDBI) and Tata Consulting Engineers. Only based on the reports submitted by LIE viz., M/s. Mott MacDonald, the disbursement of funds were made by IDBI Bank Limited on behalf of the consortium through a Trust and Retention Account handled by IDBI Bank Limited and the project expenditures were also released from the TRA through Debit Notes approved by the IDBI Bank Limited after due verification of status of the project; that all the transactions of the project were capex booked and the same are disclosed in the Annual Reports; that the EPC Contractors were appointed only after being approved by the Board of Directors, which comprised of the Nominee Director from the lead banker, IDBI Bank Limited and that there is no malafide involved in awarding the EPC Contracts.
4.6. The factors pointed out by the Learned Counsel for the Liquidator such as the EPC Contractors having common directors, same office address, same e-mail address, shareholding in Surana Industries Ltd., etc. do not attribute any malafide on the part of the erstwhile management in awarding the EPC Contracts, especially when the lead banker, IDBI Bank Limited was part of the Board of Directors of the Corporate Debtor. Further, the circumstances highlighted by the Learned Counsel for the Liquidator do not even render the EPC Contractors related parties within the meaning of the IBC, 2016. Thus, when the lenders themselves were part of the process of awarding the EPC Contracts and the disbursal of funds to the EPC Contractors were also made only by the lead banker, IDBI Bank Limited through Trust and Retention Account, it cannot be stated that the process was fraudulent or motivated by malafides.
4.7. Further, in the present case, the Liquidator has not been able to point out a single correspondence wherein the appointment of these 6 EPC contractors was objected to by any of the consortium banks at the relevant point of time. In absence of any correspondence to the contrary, it clearly appears to us that the said 6 EPC contractors were appointed after consulting and with the consent of the consortium of banks and the Board of Directors of the Corporate Debtor which also included a nominee director from the lead Bank, IDBI Bank; this is apparently the accepted trade practice in EPC Contracts in mega projects
4.8. The Learned Counsel for the Liquidator further submitted that the EPC Contractors appointed by the Corporate Debtor would procure goods from Surana Industries Limited at Chennai and would thereafter deliver them at the Raichur premises of Surana Industries Limited and that payment for such goods was made by the Corporate Debtor. The Learned Counsel further submitted that the value of such goods amounted to Rs. 281.95 Lakhs and in effect there has been movement of funds from the Corporate Debtor to Surana Industries Limited, without receiving any goods. It is also stated that the EPC Contractors had loaded their profit margins towards the said supplies.
4.9. The said allegation is strongly denied by the Learned Senior Counsel appearing for the 1st Respondent by placing reliance upon the relevant documents filed by the Liquidator along with the present application. The Learned Senior Counsel submitted that the site of the proposed 2x210 MW Power Plant was situated adjoining the premises of Surana Industries Limited at Raichur and since the Corporate Debtor did not own a weigh bridge, the weigh bridge available in the adjacent premises belonging to Surana Industries Limited was being used to ascertain the total quantity of the goods delivered. It is further submitted that the weighment slips generated at the premises of Surana Industries Limited at Raichur were being falsely portrayed and the goods were in fact delivered only at the premises of the Corporate Debtor. It is further submitted that the construction activities, including delivery of materials were monitored by the Lenders" Independent Engineers, M/s. Mott MacDonald and the EPC Contractors who were paid through the Trust and Retention Account handled by IDBI Bank Limited after verification of invoices and approval by the Lenders" Independent Engineers and senior officials of IDBI Bank Limited.
4.10. It is evident from the documents furnished by the Liquidator along with the present application, including the goods delivery note, delivery challan, invoices, etc. that the goods were supplied only to the Corporate Debtor. Merely because the weighment slip bears the name of Surana Industries Limited, it cannot be stated that the goods were off-loaded or delivered at the premises of Surana Industries Limited. If goods are not delivered, then payments would not have been released from the Trust and Retention Account maintained by the lead banker, IDBI Bank Limited. Therefore, we are persuaded to accept the reasonable and logical explanation that since the Corporate Debtor did not own a weigh bridge, the weigh bridge available in the adjacent premises belonging to Surana Industries Limited was used to ascertain the total quantity of the goods delivered. Thus, the allegation that payments were made to the EPC Contractors without delivery of goods to the Corporate Debtor is devoid of merits and liable to be rejected.
4.11. The Learned Counsel for the Liquidator further submitted that although the Corporate Debtor had entered into an EPC Contract with one R.K. Electricals, the supplemental agreements in relation to the same were entered with the 12th respondent namely, BLS Power Solutions Limited, without any trial for change in the original EPC Contractor. It is further stated that R.K. Electricals could not be traced as a Company and a sum of Rs. 4,000 Lakhs payable to R.K. Electricals was paid to BLS Power Solutions Ltd.
4.12. In response to the said allegation, the Learned Senior Counsel for the 1st respondent submitted that R.K. Electricals was a proprietorship concern owned by one, Mr. Sahadev Ram Choudhry; that after the EPC Contract being awarded to R.K. Electricals, the said entity was purchased by the 12th respondent by way of a Sale Deed dated 15.12.2010 and that consequently, the payments payable to R.K. Electricals were released in favour of the 12th respondent. The said submissions stand duly corroborated by the counter affidavit filed by the 12th respondent.
4.13. The apprehension expressed by the Learned Counsel for the Liquidator regarding change in EPC Contractor without any trial for change, stands clarified by the Sale Deed entered into between R.K. Electricals and the 12th respondent. Apparently, R.K. Electricals is not a Company but a proprietorship concern and as such there is no force in the contention that R.K. Electricals could not be traced as a Company. In any event, neither the Auditors nor the Liquidators have alleged any diversion of funds through change in EPC Contractor. Therefore, the above act cannot be categorized as fraudulent or malicious.
4.14. The Ld. Counsel for the Liquidator further submitted that there is no explanation as to why the Contracts were awarded at a delayed stage despite issuance of Letters of Intent (LOI), when the project was scheduled to be completed by January 2013 (Unit 1) and April 2013 (Unit 2). In response to the same, the Learned Senior Counsel for the 1st respondent submitted that LOI was issued on 12.04.2010 with a view to facilitate commencement of the project without any delay and accordingly the works had commenced immediately; that detailed contracts were thereafter prepared for each EPC Contractor separately with detailed conditions as stipulated by Owner's Engineer, M/s. Tata Consulting Engineers, which caused a time gap of about six months between issuance of LOI and signing of the Contract; that although the EPC Contracts were signed on 13.12.2010, the effective date of the contracts was fixed as the date of LOI and thus the project was not affected in any manner owing to the time gap between the issuance of LOI and signing of the Contract.
4.15. The entire allegation rests on the lack of explanation for the time gap of about six months between issuance of LOI and signing of the Contract. The said delay of about six months has now been duly explained and the same is reasonable and held to be satisfactory. Further, upon verification of the records, although the EPC Contracts were signed on 13.12.2010, the effective date of the said contracts, as mentioned in the said contracts, was fixed as that of the date of the LOI. Thus, no harm is caused to the progress of the project because of the delay in signing the Contract and accordingly the allegations in that regard are rejected.
4.16. The Learned Counsel for the Liquidator further submitted that the Corporate Debtor had advanced a loan to the 12th respondent, BLS Power Solution Limited for a sum of about Rs. 313.17 Lakh, for which there is no document/agreement, and no interest was charged on such loans. The Learned Counsel further pointed out the conclusion of the Forensic Auditor that it appears that the Corporate Debtor has diverted the funds which were borrowed from the lenders.
4.17. On the other hand, the Ld. Senior Counsel for the 1st respondent refuted the allegations stating that the payment of Rs. 313.17 Lakhs by the Corporate Debtor to the 12th respondent was not a loan transaction and that the question of a loan agreement or charging of interest does not arise. The Learned Senior Counsel further submitted that the 12th respondent used to purchase coal from the Corporate Debtor and pointed out the relevant Ledger extracts to show that the 12th respondent had a credit of about Rs. 16.54 Crores with the Corporate Debtor at the commencement of the financial year 2013-2014 and the 12th respondent was also holding Inter-Corporate Deposits with the Corporate Debtor to the tune of Rs. 6.67 Crores. It is the submission of the Learned Senior Counsel that the payment of Rs. 313.17 Lakhs was made by the Corporate Debtor to the 12th respondent from and out of the surplus amount and the Inter Corporate Deposits held by the Corporate Debtor and thus it is false to state that there has been diversion of funds.
4.18. It is evident from the Ledger Extracts that the payments made to the 12th respondent were drawn from and cut of the surplus amount and the Inter Corporate Deposits held by the Corporate Debtor and thus the question of loan agreement or charging of interest does not arise. The above facts have also been duly corroborated by the counter affidavit filed by the 12th respondent. Further, when the funds borrowed from the bankers were disbursed only through the Trust and Retention Account handled by IDBI Bank Limited directly in favour of the EPC Contractors concerned, the Corporate Debtor could not have provided any loan from such funds and thus the conclusion of the Auditors that there appears to be diversion of funds which were borrowed from the lenders cannot be accepted.
4.19. The Learned Counsel for the Liquidator further submitted that during the years 2013-2014 and 2014-2015, the Corporate Debtor had entered into 2060 transactions of coal trading, out of which 1881 transactions were entered into with the 9th respondent (Vinayaga Infra (I) Ltd.) and the 12th respondent (BLS Power Solutions Ltd.) herein and that the transactions with the 12th respondent does not appear to be genuine trade transaction since as per the data available in public domain, the 12th respondent is involved in manufacturing of special purpose machineries.
4.20. However, the Learned Senior Counsel for the 1st respondent denied the said allegation by placing reliance on the Memorandum of Association of the 9th respondent (Vinayaga Infra (I) Ltd.) and the 12th respondent (BLS Power Solutions Ltd.) to show that both the said entities were involved in coal trading as well. It is further confirmed from the counter affidavit filed by the 12th respondent that there were genuine coal trading transactions between the Corporate Debtor and the 12th respondent. The above allegation is based on the assumption that the 12th respondent is not involved in coal trading and such assumption has been derived based on a public domain search. Upon perusal of the records, it is evident that 12th respondent is involved in coal trading and there is no basis for doubting the genuineness of the transactions between this Corporate Debtor and the 12th respondent.
4.21. The Ld. Counsel for the Liquidator further submitted that the Corporate Debtor had entered into Settlement Contracts dated 15.12.2014 with the EPC Contractors, namely the 9th to 12th respondents herein and that the Auditors have observed that (i) none of the settlement contracts appraise/evaluate the actual work done and (ii) none of the settlement contracts quantify the total amount paid towards the work done/advances paid which has been considered full and final towards release of all obligations of the Corporate Debtors under the EPC Contracts. The Learned Counsel further submitted that the sub-contractors were not made parties to the settlement contracts, as a result of which, many sub-contractors have lodged their claims with the Liquidator.
4.22. On the other hand, the Learned Senior Counsel for the 1st respondent submitted that all the details with respect to the actual progress of the work at site were available in the Construction Monitoring Report of the Lenders Independent Engineer, M/s. Mott McDonald and the same were considered at the time of entering into the settlement contracts. It is further submitted that the Corporate Debtor had received specific consent letters from the EPC Contractors recording the amount paid and the balance outstanding dues as applicable for each sub-contractor and agreeing to pay the balance/differential amount in the unlikely event of a dispute or disagreement on the account balances transferred or refusal by the sub-contractors to confirm or agree the amount of advances paid to them or the amount payable to them. It is further submitted that when all the EPC Contracts were entered into only between the Corporate Debtor and the respective EPC Contractors and the subcontractors are not parties to the EPC Contracts, there was no necessity to include the sub-contractors are parties to the Settlement Contracts. It is further submitted that the Corporate Debtor was intending to retain the sub-contractors for carrying out the project works by engaging them directly without the intervention of the EPC Contractors. The Learned Senior Counsel further submitted that all the payments made to EPC Contractors are reflected in the books of accounts and Audited Balance Sheet and that there is no fraudulent transaction as alleged by the Liquidator.
4.23. Considering the submissions and upon verification of the records, more particularly the Settlement Contracts, Report submitted by the Lenders Independent Engineer, M/s. Mott McDonald and the consent letters issued by the EPC Contractors, it is evident that the Settlement Contracts have been entered into only as a cost-cutting exercise by dealing with the sub-contractors directly without the intervention of the EPC Contractors and no fraudulent motive can be attributed to the same. The entire allegation regarding lack of required details in the Settlement Contracts is also watered down by the separate Consent Letters issued by the EPC Contractors. It is required to be noted that when the Corporate Debtors had intended to retain the services of the subcontractors there is no necessity to make them party to the settlement contracts entered with the EPC Contractors. Further, entering into the Settlement Contracts for the purpose of cost cutting appears to be a pure commercial decision of the erstwhile management of the Corporate Debtor, which cannot be termed as a fraudulent transaction. Even if it appears to the Auditors or the Liquidator that it was not a right decision, the said decision cannot be termed as fraudulent or mala fide especially, when the said decision was taken after the recommendation of the lender banks, as is evident from the Note 13 (ii) of the Annual Report of the Corporate debtor for the year 2014-15. Thus, no fraudulent conduct can be seen in the process of entering into the Settlement Contracts with the EPC Contractors and as such the allegations in that regard deserve to be rejected.
5. Liability of Surana Corporation Limited:
5.1. The Learned Counsel for the Liquidator submitted that during October 2013, one Surana Corporation Limited had purchased 30,000 MTs of Indonesian Coal from one GIMPEX Pvt. Limited for a value of about Rs. 910.34 Lakhs. It is further submitted that the said liability was thereafter transferred by the said Surana Corporation Limited to the Corporate Debtor without transfer of the assets and that the same was accepted by the Corporate Debtor.
5.2. In response to the above allegation, the Learned Senior Counsel for the 1st respondent submitted that trading in coal was one of the business activities of the Corporate Debtor and an offer was made by Surana Corporation Ltd. regarding availability of 30000 MTs of Indonesian coal, which they had purchased from M/s. Gimpex Pvt. Ltd.; that the Corporate Debtor had accepted the above offer considering the reasonableness of the coal price in order to utilize the same as part of their coal trading business end to use them in the 35MW Power Plant; that accordingly an Agreement dated 08.04.2014 was entered into between Surana Corporation Ltd. and the Corporate Debtor; that the above arrangement was intimated by Surana Corporation Ltd. to the said GIMPEX Limited vide Letter dated 16.04.2014; that the said transaction was approved by the Board of Directors in its 39th Meeting dated 20.09.2014 and 40th Meeting dated 08.11.2014, which included a Nominee Director from IDBI Bank Ltd.; that the Corporate Debtor had taken possession of the coal consignment after customs clearance and that the documents pertaining to the same are available with the Liquidator, who has not produced the same despite a written request vide Letter dated 13.09.2019.
5.3. Upon consideration of the submissions made and perusal of the available records, it is evident that the purchase of 30000 MTs of Indonesian Coal from GIMPEX Pvt. Ltd. by the Corporate Debtor was regular transaction of trading in coal and there is no basis. to conclude that the goods were not delivered. The above transaction has been approved by the Board of Directors of the Corporate Debtor which comprised of the Nominee Director from IDBI Bank Limited. The CIRP in respect of the Corporate Debto was initiated by this Tribunal only based upon the application filed by the said GIMPEX Pvt. Ltd., in CP/646(IB)/CB/2017, citing the above-mentioned transaction entered with the Corporate Debtor. If the coal was not delivered, the question of "debt" would not arise and the Company Petition as against the Corporate Debtor would not have been allowed by way of an order dated 19.02.2018. Further, no material has been placed by the Liquidator to suggest that the claim of GIMPEX Pvt. Ltd. was rejected or the coal was actually delivered to Surana Corporation Limited. Additionally, the Liquidator has not responded to the written request of the 1st respondent to furnish copies of the relevant documents. In the above circumstances, it is concluded that the above allegation is without basis and the same is accordingly rejected.
6. Liabilities of Sub-Contractors:
6.1. The Learned Counsel for the Liquidator submitted that the Settlement Contracts dated 15.12.2014 entered into by the Corporate Debtor with the respondent Nos. 9 to 12 do not disclose the quantum of advance paid to the Contractors and quantum of advance utilized by them. The said allegation has already been dealt with hereinabove and has been rejected in view of the Report submitted by the Lenders Independent Engineer, M/s. Mott McDonald and the consent letters issued by the Contractors, which discloses the relevant payment details. The Ld. Counsel for the Liquidator further submitted that the unutilized advance amount has been written off by the Corporate Debtor, consequently, indulging in fraudulent trading.
6.2. However, the Ld. Senior Counsel for the 1st respondent submitted that after detailed deliberations in the Joint Lenders Meetings, it was decided to cancel the EPC Contracts with a view to engage the sub-contractors directly, as a cost cutting measure; that pursuant to cancellation of FPC Contracts, the Corporate Debtor faced the risks of claim for liquidated damages and counter claims by the Contractors; that in order to avoid litigation expenses and the claim of liquidated damages to the tune of about Rs. 250 Crore, the Corporate Debtor had entered into the Settlement Contracts by forgoing a sum of Rs. 86.24 Crore; that the Corporate Debtor was entitled for Retention Money and Mobilization Advance, which would be settled only when the project is completed and as such the decision had to be made to ensure smooth completion of the project and; and that the said decision was duly disclosed in the Audited Balance Sheet for the year 2014-2015.
6.3. Upon considering the rival submissions and the relevant documents on record, it is seen that the decision to cancel the EPC Contracts has been made pursuant to the Joint Lenders Meeting held on 11.08.2014 and the decision to write off Rs. 86.24 crores has been made only to avoid a bigger liability in the nature of counter claims and liquidated damages claimed by the EPC Contractors. It is evident from the EPC Contracts, that the contractors are entitled for liquidated damages in case of premature termination of contracts. It is further seen from the counter affidavits filed by the EPC Contractors that huge claims have been avoided by the Corporate Debtor through execution of the Settlement Contracts. The same is duly corroborated by the Independent Auditor's Report of Deloitte Haskins & Sells LLP. Thus, it is concluded that the decision to write off the amounts paid to the Contractors was a conscious and prudent business decision made to minimize the potential loss to the Corporate Debtor and the same cannot be termed as fraudulent or malafide.
7. Difference in quantities of coal:
7.1. The Learned Counsel for the Liquidator submitted that there are differences in the quantities of coal which was booked and the quantities of coal which was actually received by the Corporate Debtor. It is further submitted that the Corporate Debtor had made payments without making adjustments for short receipt of coal, thereby resulting in excessive payments to the suppliers for an approximate value of Rs. 65.21 Lakhs between February 2012 and March, 2014.
7.2. However, the Learned Senior Counsel for the 1st respondent refuted the said allegation by placing reliance on the Debit Notes to show that the short supplies were duly adjusted by the Corporate Debtor in the subsequent transactions entered into with the suppliers. The said Debit Notes have not been disputed and as such the allegation that excess payments were made by the Corporate Debtor falls to the ground. The allegation of excess payment has been made on the basis of some sample transactions without considering the running trade account with each supplier. The allegation has been levelled without proper consideration of the entire facts and circumstances and accordingly, the above allegation is also rejected.
8. Investment in a Singapore Entity
8.1. The Learned Counsel for the Liquidator submitted that in the Financial Year 2009- 2010, Surana Industries Limited had invested about Rs. 5339 Lakhs in the Corporate Debtor, which amount was in turn invested in a Singapore entity called Surana Mines and Minerals Ltd.; that in the Financial Year 2010-2011, the Corporate Debtor had sold back the said investment in Surana Mines and Minerals Ltd. to Surana Industries Limited for Rs. 5599 Lakhs and a capital gain of about Rs. 306 Lakhs was booked by the Corporate Debtor; that the amount receivable by the Corporate Debtor towards the sale transaction was adjusted against amount already received from Surana Industries Limited; that the valuation report based on which the said transaction was effected was not made available for review and that it is not known as to why the investment was sold back to Surana Industries Limited within a short period of time.
8.2. The Learned Senior Counsel for the 1st respondent had responded to the above allegations stating that the Corporate Debtor had invested a sum of Rs. 52.93 crores in Surana Mines and Minerals Ltd., which is a 100% subsidiary of the Corporate Debtor; that it was decided to make Surana Mines and Minerals Ltd., a direct subsidiary of the Surana Industries, which is the holding company of the Corporate Debtor in order to facilitate progress of the proposed 2x210 MW Power Plant project of the Corporate Debtor and to increase the intrinsic value of Surana Industries Limited; that as admitted in the application itself, the outstanding dues payable by the Corporate Debtor to Surana Industries Ltd. were duly adjusted by sale of the shares of Surana Mines and Minerals Ltd. held by the Corporate Debtor in favour of Surana Industries Ltd. and the differential amount of Rs. 306 Lakhs was booked as capital gain; that the value of Surana Mines and Minerals was based on a virgin coal mine and exact value of the same cannot be determined, but a valuation report for the same was obtained to ascertain the approximate value, based on which the transaction was done; that the 1st respondent is not readily in possession of the said valuation report owing to the CIRP/liquidation and that despite a written request made on 13.09.2019, the liquidator had neither furnished a copy of the said valuation report nor responded to the same.
8.3. Under the present facts and circumstances, this Tribunal is unable to comprehend as to how the above transaction could be termed as fraudulent or malafide when admittedly the Corporate Debtor has derived a profit of Rs. 3.06 Crores out of the said transaction within a short span of time. There is no material placed on record to suggest that the value of the shares of Surana Mines and Minerals Ltd. were higher than the sale price fixed by the Corporate Debtor. It cannot be said that the differential value was diverted or siphoned off since the transaction is between the Corporate Debtor and its holding Company. Further, the request of the 1st respondent to furnish a copy of the valuation report has also been not responded to. In the above circumstances, it is concluded that the above allegation regarding sale of shares of Surana Mines and Minerals Limited is bereft of logic and misconceived and is accordingly rejected.
9. The Learned Senior Counsel for the 1st respondent submitted that the proposed 2x210 MW Power Plant project of the Corporate Debtor was delayed because of sudden withdrawal of some of the lenders viz., L&T Infrastructure Finance, LIC of India and PNB from the consortium; that withdrawal of the lenders and delay in disbursement of funds drastically affected the progress of the project and in turn increased the project cost overrun; that the cost overrun was ascertained by IDBI Bank Ltd., but the incremental addition was not sanctioned by some of lenders in the consortium; that the Corporate Debtor had therefore approached IIFC, London to seek financial assistance and also approached other investors viz., Black stone ventures, USI Group holdings, etc. to complete the project; that IDBI Bank Ltd., as the lead bank of the consortium had conducted a Forensic Audit for the period from April, 2010 to December, 2012 through M/s. T.R. Chaddha; that following an extensive Forensic Audit, the consortium was satisfied with the conduct of the Corporate Debtor's business and loan disbursements were also made till February, 2015; that the project got stalled in June 2013 with 58% physical progress; that even after the project got stalled, funds were released from the Trust and Retention Account Account and were appropriated towards "Interest During Construction" in an arbitrary manner; that the project was monitored by Cabinet Committee on Investment (CCI) - Project Management Group (PMG), Government of India (Project SI. No. : 740/Project ID: CS3500153); that following commencement of CIRP, a forensic audit was conducted through M/s. Kirtane & Pandit, who had neither sought any clarification from the 1st respondent nor considered the report of the earlier Audit conducted by M/s. T.R. Chaddha & Co. and the valuation reports and that M/s. Kirtane & Pandit had submitted their Audit report with incomplete information, without properly considering the materials on record and arrived at conclusions based on assumptions.
10. We have perused and considered the voluminous documents filed by the Applicant/Liquidator and the 1st Respondent and we find force in the submissions made. by the Learned Senior Counsel appearing for the 1st Respondent. It is evident that the business of the Corporate Debtor has been done with checks and balances at each level. It is also not in dispute that the proposed 2x210 MW Power Plant Project was funded by a consortium of banks with IDBI Bank Limited as the lead bank; that the entire cash flow was managed through a Trust and Retention Account handled by the lead banker, IDBI Bank Limited; that the entire project was monitored by the Consortium of Bankers through the Lenders Independent Engineer (LIE), Management Committee, Board of Directors (with Nominee Director from IDBI) and Tata Consulting Engineers; that only based on the reports submitted by LIE viz., M/s. Mott MacDonald, the disbursement of funds were made by IDBI Bank Limited on behalf of the consortium through a Trust and Retention Account handled by IDBI Bank Limited directly in favour of the concerned EPC contractor; that the project expenditures were also released from the Trust and Retention Account through Debit Notes approved by the IDBI Bank Limited after due verification of status of the project. Even the earlier Forensic Audit Report prepared by M/s. T.R. Chaddha & Co. has not found any malicious or fraudulent transaction and the consortium has also disbursed loan amounts accepting the Audit Report of M/s. T.R. Chaddha & Co.
11. It may be true that certain decisions taken by the erstwhile management of the Corporate Debtor have not worked out as intended and have resulted in loss to the Corporate Debtor. However, merely because the Corporate Debtor has suffered loss, the commercial transactions cannot be termed as fraudulent or malafide. Commercial business decisions cannot be saddled with malice or criminality merely because they eventually turn out to be unsuccessful.
12. Even the Forensic Audit Report prepared by M/s. Kirtane & Pandit does not conclusively hold any transaction of the Corporate Debtor to be fraudulent. In fact, the said Forensic Audit Report runs with a disclaimer as follows:
Our review of the documents, financials and records does not constitute an audit in accordance with Auditing Standards; we have relied on source information obtained from public domain and documents, records, data etc. as provided to us by SPL Lenders.
We have relied on information which was available in the public domain based on our desktop and/or limited external research. We have not independently validated any of the information that was obtained and have relied on this on an "as is" basis. Any change in this information may have an impact analysis and consequently observations/ opinions/ possibilities/ conclusions as expressed in this Report.
We would like to state that this review exercise has been conducted under significant information constraints and as per the agreed upon procedures with the Resolution Professional as mentioned in assignment letter Most of the information which had been reviewed has been relied upon as provided by the company save as may be specifically incorporated otherwise. Hence the Report should be read in this context.
The scope of our work has been limited both in terms of the areas of the business and operations which we have reviewed and the extent to which we have reviewed them. There may be matters, other than those noted in this Report, which might be relevant in the context of the objective and may have impact on the observations reported in this report."
13. In view of the above, this Tribunal holds that the said Forensic Audit Report dated 12.12.2018 prepared by M/s. Kirtane & Pandit LLP cannot be treated as a reliable piece of evidence to conclude that any of the transactions of the Corporate Debtor was done in a fraudulent manner or with a malafide intention to defraud the creditors. Admittedly, the present application has been filed only on the basis of the said Forensic Audit Report without any independent application of mind. This Tribunal does not find any event of siphoning off or diversion of funds in any manner in the transactions of the Corporate Debtor and hence the present application deserves to be dismissed.
14. Accordingly, MA/244/2019 stands dismissed. Parties to bear their own costs.
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