TMI Blog2020 (7) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... there must be a need for the borrowing of such money and the money must be advanced against consideration for the time value of money. The Petitioners' claim, debt and default relate to FY. 2012-13 onwards. The Code came into effect in 2016 and this Petition was filed on 25-10-2017. As per our findings above, the financial debt does not exist, as per the provisions of the Code and is also not borne out of the Financial Statements of the Corporate Debtor. Defaults 3 years prior to the Demand Notice are therefore barred by limitation. In fact part of the alleged debt was barred by limitation even prior to the commencement of the Code, and it is well settled that the IBC cannot be used for reviving a time barred debt. The Petitioner has approached this forum only for recovery. He has not made out any case that the Corporate Debtor is insolvent and unable to repay its debts because of which CIRP should be initiated against it. We find that the Company is seeing an upswing in its business. Earlier Canara Bank had issued a SARFAESI Notice to the Company in July 2016 but has now proceeded to extend loans to it showing confidence in the Company's solvency. It is engaged in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with Mr. G.V. Sudhindra who was appointed as Vice President (Operations). They approached various departments like the PWD, BBMP etc. for introducing the new technology for road maintenance. The brief sequence of events with regard to loans etc. given to the Corporate Debtor, as mentioned in the petition, is as under. (3) The BBMP agreed to adopt this new technology and awarded a contract for a value of ₹ 17,37,82,500/- which was issued on different dates. Further this contract was divided into 6 packages, namely A to F. They persuaded Karnataka Bank Ltd. (KBL) to finance the first equipment which was costing approx. ₹ 2,70,00,000/-. On 21-9-2012 Karnataka Bank Ltd. Overseas Branch, St. Marks Road, Bangalore, sanctioned a term loan of ₹ 2,00,00,000/-. On 26-9-2013 Canara Bank sanctioned Operating Cash Credit of ₹ 50 Lakh and Bank Guarantee limit of ₹ 2,50,00,000/-. (4) It is stated that under pressure to make pressing payments, Financial Creditor 1, namely, Mr. M.G. Mohan Kumar raised an amount ₹ 20,54,000/- from Bajaj Finserve Ltd. in his personal name and transferred the same to the Corporate Debtor. This amount was repayable in 36 inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 2 again advanced a sum of ₹ 1,00,00,000/-to Vanijya Advisory Services Private Limited at the rate of 21% p.a. compounded and payable on monthly basis, which in turn was transferred to the Corporate Debtor. Thus the total unpaid loans came to ₹ 45,00,000/- plus ₹ 1,00,00,000/- i.e. ₹ 1,45,00,000/-. Further, the interest payable on this amount was @ 21% p.a. An interest of ₹ 2,15,000/- has been paid on 23-9-2014 and 25-9-2014. An amount of ₹ 21,500/- towards income tax at source has been deducted. The balance amount has fallen due from Jan, 2015. Therefore, the total outstanding amount, including principal and interest amounts to ₹ 2,33,81,250/- (₹ 1,45,00,000/- plus interest of ₹ 88,81,250/-). Reference has been made to the Cash Vouchers reflecting the payments made along with cheques issued by the Financial Creditor No. 2 in favour of the Corporate Debtor. (7) It is stated that Mrs. Bhanu Prabha, the Promoter Director of the Corporate Debtor started handling the Operations from March 2015 and got the cheque signing authority on 22nd April, 2015. The Financial Creditor 1 started performing an advisory role and liasoning w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is further the case of the Financial Creditors that there has been a default in payment of such aforesaid debt by the Corporate Debtor and in view of the same the instant petition ought to be admitted. (11) It is further stated that the Corporate Debtor has raised a frivolous contention that the Financial Creditor No. 1 has placed irrelevant facts and unconnected documents before this Tribunal. Pursuant to the Order dated 1-3-2019 passed by the Ld. LVI Addl. Chief Metropolitan Magistrate, the Financial Creditor No. 1 has been acquitted from C.C. 10144/2017. Further, findings of fact recorded by the Criminal Courts in India have no bearing on the findings in civil cases. Regarding the Company Petition Bearing No. 215/2015 filed by one A.V. Balasubramaniam, pending before the High Court of Kamataka, seeking winding up of the Corporate Debtor it is stated that firstly, the Petitioner in the aforesaid Company Petition is not one of the Financial Creditors to the instant Petition, and further, it is settled law that independent proceedings may lie before a High Court and this Tribunal and there is no bar on this Tribunal to entertain Insolvency Resolution Process. 3. The Respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at: Records and documentation of the Company had not been maintained properly, payments were made in cash, Bills/Vouchers/lnvoices and Receipts were missing, raw materials stock/inventory register was not maintained during the period between 12 May 2012 and 31 December 2014; Standard accounting policies had not been adhered to, sales/revenue invoices are not recognized and accounted for on a monthly basis, but were recognized and accounted on a yearly basis at the yearend; there was huge working capital mismanagement incurring of additional interest on term loans; there had been severe misuse of powers and statutory non-compliances; Unsecured loans had appeared to have been availed from various individuals, HUF and Corporate entities in the form of cash and cheques in direct contravention of the Companies Act, 2013; and there had been misappropriation of funds from the Company by the Petitioner No. 1 whereby the Company had lost a minimum of INR 3,76,18,983/- (i.e., over ₹ 3.7 crores) on account of various fraudulent actions undertaken by the Petitioner No. 1 and his accomplices. The full extent of fraud and misappropriation is yet to be determined. It is evident that the Pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , since complaint is based upon the audit report, furnished by the auditors and there are serious allegations of cheating and misappropriation, the police need the accused for interrogation in this case. The advocate for Petitioners have vehemently canvassed his arguments that, the petitioner no. 1 is reputed chartered accountant, who has promoted several famous company like Air Deccan etc. However, merely because a person is reputed and promoted several companies, it cannot be a ground to allow this petition. On a careful perusal of the complaint, objections of learned PP and report of 10, I am of the opinion that, there are serious allegations of misappropriation and cheating to the tune of several crores of rupees. If the accused are enlarged on bail, they are likely to abscond and hamper the investigation. I am of the opinion that, Petitioners are not entitled to bail. (6) In addition, since the Petitioner No. 1 was a chartered accountant, the Board of Directors of the Company passed a Board Resolution on 09th June 2017 resolving to file a complaint with the ICAI, in view of the financial irregularities caused by Mr. Mohan Kumar. The same was filed on against the Petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier Legal Notices issued by them to the Company and Ms. Hebbar, such as of 10 April 2017, issued under section 271(2)(A)of the Companies Act 1956 demanding repayment of debts allegedly owed by the Company to them. The Company has replied to these demand notices separately, and has clearly highlighted the absurdity of the claims made by the Petitioners. (9) The Respondent submits that as per the provisions of section 7 of the IBC there must be an existence of a financial debt and there must be a default of the financial debt; and The financial creditor making an application must: Furnish the record of the default recorded with the information utility or such other record or evidence of default as may be specified, and Furnish any other information as may be specified by the IBBI. Further, the definition of Financial Debt' at section 5(8) of the Code clearly postulates that any money advanced must be for consideration i.e., there must be a need for the borrowing of such money and the money must be advanced against consideration for the time value of money. Admittedly, not one of the alleged debts is under a written contract with clear defined terms. If any of these conditio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocuments. They also do not add up to the claim sought to be raised by the Petitioner No. 1. As per Part IV of the petition and the Working Sheet I produced by the Petitioners the unpaid amount of ₹ 18,77,538/- with interest @ 18% (compounded monthly) adds up to ₹ 23,09,854/-. Similarly, as per Working Sheet No. II and the averments in Part IV of the instant applications, the amount ₹ 9,85,000/- with interest (at 18%, compounded monthly) comes to ₹ 15,16,881/-. Therefore, the total sum claimed by the Petitioner No. 1, as per his own working sheets is INR 38,26,735/- (i.e. INR 23,09,854 + INR 15,16,881) and not ₹ 40,03,197/- as claimed. (12) Petitioner No. 1 has claimed that he raised a sum of INR 20,54,000/-from Bajaj Finserve Ltd. and transferred it to the Company. No board resolutions, shareholder resolutions or disclosures have been produced with respect to this alleged loan. Also, since this alleged sum was given out of funds acquired by the Petitioner No. 1 by borrowing/accepting a loan from another entity, it would amount to a Deposit under rule 2(c)(viii) of the Companies (Acceptance of Deposits) Rules, 2014. As per section 73(2) of the Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2017 for alleged offences under sections 406, 402, 465, 468, 477A and 120(B) of the IPC for misappropriation of Company funds to the tune of INR 3,76,18,983. Hence a letter issued by him cannot be relied upon as evidence of creation of a financial debt owed by the Company. Similarly, the Statement of Account at Annexure D, being a statement of account between Petitioner No. 1 and Bajaj Finserve does not in any manner show the Company being bound by any legally enforceable debt, and no valid supporting documents showing the assignment of this loan to the Company has been produced by the Petitioners. Further, documents at Annexures C and D refer to a sum of INR 19,43,840/- whereas the claims made in the Petition state a loan of INR 20,54,000/-. The Petitioner has in the Petition claimed an interest of 18% compounded monthly whereas Annexure C records that the interest payable is 16% per annum. Thus the claims made by the Petitioners are completely false and fabricated. These discrepancies are clear cut evidence of the mala fide intent of the Petitioners and the falsity of the alleged debt. (14) With regard to the Petitioner No. 1's claim he repaid liabilities of ₹ 9,85,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the website of the Ministry of Corporate Affairs, does not disclose any such loan by the Petitioner No. 2 to any unrelated entity as per section 186 of the Companies Act, 2013. (16) It is also submitted that Form MGT-8 {Report prepared by Company Secretary) for the year 2014-15 that was attached to Form MGT-7 of the Petitioner No. 2 contains no disclosures of any loans made under section 186 of the Companies Act, 2013 in that fiscal year. The Board Report of the Petitioner No. 2 for the Financial Year 2014-15 also contains no mention of any inter-corporate loans advanced by the Petitioner No. 2 in that fiscal year. While the report does mention that certain loans advanced have been attached at Annexure C - the Annexure C is missing from the Board Report uploaded on the website of the Ministry of Corporate Affairs. The only documents produced by the Petitioner to prove the existence of the alleged debt of INR 2,33,81,250 are: A letter from the Petitioner No. 1 and Venkatarathnam Adhikari Naidu (erstwhile Director) to the Petitioner No. 2 dated 30 December 2014 attached at Annexure L to the said petition; Bank/Cash Vouchers for a total of INR 45,00,000 allegedly issued to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s likely to have embezzled these funds. The existence of a financial debt is thus disproved by the documents at Annexure N. The documents produced at Annexure O suffers from the same defects as the letter produced at Annexure L. The letters at Annexure O by the Petitioner No. 1 are without any valid authorization by the Company. There are no reasons mentioned as to why the loan was being taken and no supporting documents provided by the Petitioners to show that it was undertaken on behalf of the Company in a legal manner. (19) The document at Annexure P is an internal ledger statement of the Petitioner No. 2. The fact that the Ledger account has not been maintained accurately is obvious from the first entry that does not even relate to the Company but is an entry on a loan to Vanijya. And cannot be a debt binding the Company. The said 'loans' in the ledger statement find absolutely no mention in the filings of the Company made before the Ministry of Corporate Affairs. The said document is nothing but a sham document. Further, the ledger statement produced at Annexure P bears no attestation of either an internal accountant or third party, neutral financial professional. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... INR 8,50,000/- owed to Petitioner No. 2. Section 5(8) of the Code defines a financial debt . Monies paid to a company for any allotment/subscription of shares does not qualify as a financial debt . As such, it is not open for the Petitioner Nos. 2 and 3 to approach this Hon'ble Tribunal under section 7. Reference has been made to sections 62 and 63 of the Companies Act, 2013 to say that as no special Resolution was passed by the Board nor any approval taken for allotment of further shares of the Company. Since the Financial Creditors 3 4 were not existing shareholders, they could have been allotted Preferential Shares, which required a special resolution, which has to be filed with the Registrar of Companies in Form MGT-14. The Petitioners have failed to produce any such resolution. (23) The only documents relied upon by the Petitioners to attempt to prove these transactions are e-mails/letters between Petitioner No. 3 and land a table at Annexure X which appears to be a summary of the claims prepared by the Petitioners and not any independent document evidencing any transaction. These e-mails are not even copied to other directors or shareholders of the Company. None a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proof for the existence of the debt has been provided by the Applicants. The audited Balance sheet as at 31-3-2016 which is available in public domain on the MCA site, shows the corporate loan of ₹ 1.45 crore from Brindavan Beverages Private Limited. (2) In para 6, this is not the correct position of law. As per Explanation to section 7(1), the default to even other Creditors who are not applicants is also treated as default. (3) In para 8, I BC 2016 has overriding effect on the Companies Act, 2013, therefore, the Petition u/s. 433 of the 1956 would be infructuous. (4) It is stated that the funds provided by Ms. Hebbar in India over a period of approximately 2 years was only ₹ 38 lakh. In this fund, the Applicant No. 1 had to set-up the Company and meet local capital expenditure, initial establishment and start-up expenses, Business Development including introduction of the new concept to the Government and local bodies and also the working capital. Several meetings were held with the PWD, Task Force for Quality Assurance in Public Works etc. The first contract obtained was from BBMP for ₹ 17.40 Cr. Therefore the Applicant 1, in the interest of developin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... XI) Other Observations there is a comment that advance for capital equipment was made much in advance and there is huge time gap between the making of the advance and the arrival of the equipment. In this context, it should be noted that, the advance was made by Ms. Bhanu directly to the Vendor from her foreign account and the Petitioner 1 is not involved in this. Customs clearance was delayed as the benefit of exemption notification was not given due to which the customs duty of approx. ₹ 80 lakhs was levied. Therefore, the Petitioner 1 had to initiate appeal to the Commissioner (Appeals) and get the benefit of the notification. Therefore, the investigation report is drawn-up in haste and not reflecting the proper position. Further, the magnitude of ₹ 3,76,18,893/- is not justifiable at all when we examine the accounts for the Fy₹ 2014-15 and 2015-16. It should also be noted that, there is no domestic enquiry or opportunity of being heard given to the Petitioner or other employees named in the report and therefore, principles of natural justice is ignored in the conclusions arrived in the report. Another, important point to be noted is, the date of signing of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onanza Investments Ltd. (12) In paras 39 to 47, the requirement of I BC 2016 is satisfied and the application is maintainable. Further, necessary approvals to borrow the money, etc., has been done as and when required. Applicants strongly feel that the Corporate Debtor has tampered with the evidences in favour of the Applicants as the Corporate Debtor was in management of the Company since April 2015. Three more directors namely Mr. Ventarathnam Adhikari Naidu, Mr. Indrajit Yadav and Ms. Ramadevi were made to quit the Company and at present Ms. Bhanu and Mr. Kiran Srinivasa Murthy who is related to Ms. Bhanu are the only Directors. Therefore, it is a strong case for appointment of an IRP without losing time. The Corporate Debtor instead of settling the legitimate dues of the Creditors is indulging in extravagant spending which is not warranted for the nature, size and type of business. To give instance, the audited accounts for 31-3-2016 shows that there is an addition to the fixed assets to the tune of ₹ 1,24,08,532/- and a Vehicle loan from HDFC Bank of ₹ 62,65,853/-. Applicant understand that this is a Jaguar car brought at a cost of approx. 1 Cr. Further, on 5-12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 996 SC 1388 Kishan Singh v. Gurpal Singh [2010] 8 SCC 775 Govind Rubber Ltd. v. Louis Dreyfus Commodities Asia (P.) Ltd. [2015] 13 SCC 477 Royal Britihs Bank v. Turqunand [1956] 119 ER. 886 Ram Baram Singh v. Mufassli Bank Ltd. AIR 1925 All. 206 T.R. Pratt Ltd. v. E.D. Sasoon Co. Ltd. [O.C.J. Appeal No. 36 of 1934, dated 18-9-1935] S. Premalatha v. Mysore Minerals Ltd. [1993] 78 Com. Cas. 96 (Ker.) Iba Health (I)(P.) Ltd. v. Info-Drive Systems Sdn. Bhd. [2010] 8 taxmann.com 1/104 SCL 367 (SC). 5. Heard Shri Archishman Chaudhury, learned Counsel for the Applicants and Shri M.M. Swamy, learned Counsel for the Respondent. We have carefully perused the pleadings of the parties and the extant provisions of Code and Rule made thereunder. The cases cited by the Petitioners have also been considered but the same are of little help as they pertain to the period prior to the enactment of the Code. 6. At the very outset we may mention that these are proceedings are under section 7 of the Code, and we would not be concerned here with the details of the Company's internal matters, disputes, accusations and counters to the same, or cases pending in other courts as mentioned at great ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eagre cash flow, on account of non-receipt of payments by BBMP and non-infusion of required funds by the promoters, he had to use his own contacts with other Companies, banks, individuals etc. to raise funds for the company (as we shall discuss later) to keep it going and for getting new contracts. On the other hand the Promoter Director has stated that on return to India she found that the Petitioner No. 1 had indulged in embezzlement, had failed to repay loans and maintain company books and had defaulted on several statutory requirements. He had also not held board meetings or maintained the minutes, and not one of the financial decisions were taken with board or shareholder approval and none of the transactions were recorded and approved via resolutions. He saddled the Company with several unnecessary liabilities and had deliberately not maintained any records of his financial mis-dealings. She therefore revoked the cheque signing authority of the Petitioner No. 1, and she also ordered a forensic audit by an Independent Auditor, V Raghavan Co., Chartered Accountants. The detailed report has been placed on record, and summary of the findings is mentioned supra in the Corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave any objection to the same. Apart from the accounting deficiencies, the alleged acts of misappropriation etc., as agitated before other forums, and referred to above, were also considered, as in CP Nos. 116 and 117 of 2017. 11. Debt, as defined under the Code in section 3(11) means a liability or obligation in respect of a claim which is due from any person, and includes a financial debt or an operational debt. Such a debt would arise from a claim, as defined in section 3(6), i.e. from a right to payment in the hands of the Creditor. Such a right could arise from the terms and conditions agreed to by the concerned opposite parties, in the shape of a Contract or an Agreement or Board Resolution, if any, so that the same could be enforced in the case of default. Section 3(12) of the Code defines as non-payment of a debt when the whole or part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor. 12. The definition of 'Financial Debt' in section 5(8) of the Code clearly postulates that any money advanced must be for a consideration i.e., there must be a need for the borrowing of such money and the money m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the related income is earned.' 2. In other cases too, the concept of time value of money has been examined. Most notably, in Uttam Galva, the NCLT clarified that 'business always runs keeping in mind the time value for money... transaction will be operational if payment is to goods or services, transaction is financial if money is lent in contemplation of returns in the form of interest.' Thus, merely because an operational creditor claims interest for a delayed payment does not mean the claim becomes a claim for financial debt. The intent of the parties, viz. advancing of money for financial returns, or supply of goods and services may be looked at in ascertaining if a debt is financial or not . These decisions shall also be kept in view while examining whether the debts claimed to be existing as argued by the Petitioners can be treated as Financial debt and the Petitioners as Financial creditors 14. Let us now examine each of the debts referred to by the Financial Creditors who have jointly filed this petition. Admittedly, not one of the alleged debts is under a written contract with clearly defined terms and conditions. 15. With regard to the Debt of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditor and the Corporate Debtor or Board approval or Board Resolution to that effect clearly laying down the terms and conditions of such a debt, if any, as also held in the cases cited supra. Further, in the background of accusations of misappropriation etc. levelled against the Financial Creditor No 1, which have also been dealt with in CP (IB) No. 116/BB/2017, it is difficult to rely upon oral agreements or communications made by him or his associates for raising funds without any reference to decisions taken in the Board or Resolutions passed to that effect. In fact it was considered in that CP that it was actually the Financial Creditor No. 1 who owed amounts to the Corporate Debtor, as per the Independent Auditor's Report. 16. Similarly the direct payment of ₹ 9,85,000/- stated to have been made by the Financial Creditor No. 1 suffers from the same shortcomings and does not appear to exist as per the available records. There is no evidence as to its existence, and in any case cannot be treated as a financial debt, for the same reasons as mentioned above. There is no basis to say that the same was given as a consideration for the time value of money, there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made directly or indirectly through Vanijya. 18. The Financial Creditor has mentioned that the Balance Sheet for the YE 31-3-2015 of the Corporate Debtor shows the existence of the debt at Note 5. We have perused the same. It is seen from the Balance Sheet for the YE 31-3-2015 that at Note 5 Long Term Borrowings are mentioned. Borrowings of ₹ 1,20,25,063 from Karnataka Bank and ₹ 2,40,00,000 from Canara Bank are mentioned therein. Unsecured Loans are mentioned at ₹ 1,47,00,000. However, while in the Foot Notes 1 and 2, details of the Bank Loans are given, there is no mention of the breakup of Unsecured Loans of ₹ 1,47,00,000. Thus, the Financial Creditor No. 1 contention that out this ₹ 1,45,00,000 pertains to BBPL is not verifiable as the same is not supported by any further evidence. Whereas other loans taken seem to be incorporated in the Balance Sheet, such as from The Karnataka Bank and the Canara Bank. 19. As regards the debt of ₹ 7,09,238/- claimed as owed to Petitioner No. 3, at Ann. U is a letter dated 8-4-2015 requesting return of amounts given for equity allotment by Mr. HN Naik, addressed to Mr. MG Mohan Kumar, referring to his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of any such exercise conducted by the Corporate Debtor and the dues if any, to be appropriately dealt with. 23. We may also mention that as far as these proceedings are concerned, the Petitioners' claim, debt and default relate to FY. 2012-13 onwards. The Code came into effect in 2016 and this Petition was filed on 25-10-2017. As per our findings above, the financial debt does not exist, as per the provisions of the Code and is also not borne out of the Financial Statements of the Corporate Debtor. Defaults 3 years prior to the Demand Notice are therefore barred by limitation. In fact part of the alleged debt was barred by limitation even prior to the commencement of the Code, and it is well settled that the IBC cannot be used for reviving a time barred debt. 24. Lastly, these proceedings are not recovery proceedings. However, we find that the Petitioner has approached this forum only for recovery. He has not made out any case that the Corporate Debtor is insolvent and unable to repay its debts because of which CIRP should be initiated against it. We find that the Company is seeing an upswing in its business. Earlier Canara Bank had issued a SARFAESI Notice to the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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