TMI Blog2021 (5) TMI 944X X X X Extracts X X X X X X X X Extracts X X X X ..... . Sumit Gupta to provide information, but whereas Mr. Sumit Gupta wrote back on 13.05.2019 seeking time to provide pending documents as Mr. Sawhney was not feeling well. In this application, R1 has filed reply for the first time disclosing that the shares of Pipetel Communications Private Limited (Pipetel) and Net4 Network Services Limited (Net4 Network) held by the CD were transferred to Trak Online Net India Private Limited (Trak Online), the business of the CD was transferred to Net4 Network through Master Reseller Agreement (MSA) and Trade Marks of the CD were assigned to the promoter director Mr. Sawhney - This Bench also directed Mr. Sawhney to provide information on passing various orders 03.07.2019, 22.07.2019, 02.09.2019, 27.10.2019 and 20.12.2019, but till date no progress, except providing piece meal information, which is not enough to figure out the transactions of the Corporate Debtor. Avoidance of preferential transactions, undervalued transactions and fraudulent and wrongful trading and diversion of the business of the Corporate Debtor - HELD THAT:- It is evident that the directors fraudulently transferred the shareholding of the Corporate Debtor in their subsid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wal, Pragati Agarwal, Manisha Agarwal, Pallavi Mishra, Charchika Yadav, Gauhar Mirza and Nishant Doshi, Advs. ORDER B.S.V. Prakash Kumar, Actg. President CA 1140/2019 AND 1756/2019 1. During the progress of CIRP against the Corporate Debtor namely Net 4 India Ltd. (herein after referred as Net4 India or the Corporate Debtor); the Resolution Professional (RP) filed two Company Applications against a promoter director and other companies which continued as subsidiaries, an associate company of the Corporate Debtor. 2. CM 140/2019 (Dairy Number: 0710102094832019) is filed u/s. 19 of Insolvency and Bankruptcy Code (the Code) against the Promoter-Director Jasjit Singh Sawhney (Sawhney) because Mr. Sawhney and Mr. Sumit Gupta failed to provide information to the RP for discharging his functions during the CIRP. 3. CA 1756/2019 is filed u/s. 43 (Preferential transactions), 45 (Avoidance of undervalued transactions), 49 (Transactions defrauding creditors), 66 (Fraudulent trading or wrongful trading) of the Code for avoidance of preferential transactions, undervalued transactions and fraudulent and wrongful trading and diversion of the business of the Corporate Debtor b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds the rights to the domain for the duration of the registered period. It can be renewed indefinitely (up to 10 years at a time). A Registrar is an organization that acts as an interface between a registrant and a registry. The Registry is a database that contains registrant information for 2nd level domains beneath a given top-level domain. Registration is a process whereby a registrant registers a domain with the registrar, whenever this registration expires, the registrant can renew or extend the registration. Registrar sells domain names that provide registration service and offer other value-added services applicable to domains. 8. In this case, ICANN and other organizations like ICANN have registered domain licence with Net4 India/Corporate Debtor acting as Registrar. Since this registration remains for a specified period, as and when the specified period expires, the Registrar shall renew its registration, if that registration is not renewed, then the registrant who in turn receives this domain services from the registrars will be put to inconvenience. 9. If any interruption comes to the services the customers getting from the registrars such as Net4 India, the end use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing information of the corporate debtor, to which Mr. Sawhney on 19.03.2019 replied seeking time to provide information, subsequent to it, one of the employees of the Corporate Debtor namely Mr. Sumit Gupta sent an email on 31.03.2019 along with some information. As that information was not sufficient to discharge CIRP functions, this Applicant had mailed on 02.04.2019, 15.04.2019, 16.04.2019, 23.04.2019 and 07.05.2019 requesting Mr. Sawhney and Mr. Sumit Gupta to provide information, but whereas Mr. Sumit Gupta wrote back on 13.05.2019 seeking time to provide pending documents as Mr. Sawhney was not feeling well. In this application, R1 has filed reply for the first time disclosing that the shares of Pipetel Communications Private Limited (Pipetel) and Net4 Network Services Limited (Net4 Network) held by the CD were transferred to Trak Online Net India Private Limited (Trak Online), the business of the CD was transferred to Net4 Network through Master Reseller Agreement (MSA) and Trade Marks of the CD were assigned to the promoter director Mr. Sawhney. 13. For this applicant has filed this application, this Bench also directed Mr. Sawhney to provide information on passing vario ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Corporate Debtor for the year 2016-2017. With regard to the data before 2016, it was stated that they were washed away in Chennai floods; it is incredibly unbelievable because as per MCA records the accounts were maintained at NOIDA. The Promoter-Director having set up a case that several transactions were held during the ordinary course of business of the corporate debtor before admission of the company petition, the RP says, duty is cast upon the directors especially Mr. Sawhney to prove that transfer of shareholdings, issual of preference shares, diversion of the corporate debtor business to Net4 Network Services Limited, assignment of trade marks to Mr. Sawhney himself are not hit by the provisions dealing with avoidance transactions, undervalued transactions and fraudulent transactions. For which, the RP has asked for the originals of them, but they are so far not provided. In view thereof, the Applicant, based on the photo copies the Promoter-Directors relied upon, has filed CA1756/2019 against the parties involved in the purported transactions to say that all these transactions led to infer that the Promoter Directors wantonly set up these transactions and diverted the w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aster Reseller Agreement, the CD transferred trademarks net4 and net4 with different suffixes to Mr. Sawhney and dilution of the shareholding parties. All this has come out only when the RP filed application asking for supply of material papers of the CD to the RP. 18. The alleged transactions reflecting diversion of the valuable asset of the corporate debtor as a whole are reflected in the table below: 19. So as to change bill payments to R2, R1 has set up transfer of customer database to Net4.COM from the website Net4.IN. To set up a foundation for transfer of shareholding of the corporate debtor in Pipetel and Net4 Network, it was stated that the corporate debtor was indebted to Trak Online. 20. Indeed the Corporate Debtor had 51% of Pipetel shareholding, out of that shareholding; it is shown as the CD on 01.04.2017 transferred 38000 shares to R4 in consideration of certain antecedent liabilities alleged to be owed by the Corporate Debtor to R4. 21. As per the version of R1, the RP Counsel says, the shareholding of the Corporate Debtor in Pipetel has been reduced to 17.98% from 51%. Though transfer is recorded in the ledger of the Corporate Debtor on 01.04.2017, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue of the CD would be approximately ₹ 33 Crore for each year, for the financial years 2017-18, 2018-19 having already passed after alleged diversion of the business, the minimum diversion of the revenue from the company up to July 2019 was estimated at ₹ 78 Crore, if it is calculated up to Nov'2020, it would be ₹ 123 Crore. 27. The RP has no access to records for the revenue generated by R2 by diversion of the business of the Corporate Debtor and has thus estimated the diversion based on the past performance of the Corporate Debtor, which in all fairness is the minimum opportunity loss to the CD. 28. As per the purported Master Reseller Agreement, R2 was to incur all costs and to share 25% of profits from the business with the Corporate Debtor. However, from the books of the accounts, it is observed that the Corporate Debtor made payments for domain purchases. Further the books of the accounts reflect an amount of ₹ 3.48 Crore was payable to R2 in Apr'2017 and it was increased to ₹ 8.45 Crore on CIRP commencement date, therefore instead of the Corporate Debtor receiving the profits as mentioned in the alleged Reseller Agreement, the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly come into R4 cannot be straight away treated as profit to R4. Revenue as it is will not become profit, expenses and other costs shall be deducted from the revenue. In view thereof, he says, how such revenue could be held out as estimated profit to the corporate debtor incurring significant losses for 5 to 6 years before admission of the company petition. 33. R2 says that in the CoC meeting, Resolution Plan was approved for ₹ 2.5 Crore, out of which, the Resolution Applicant has deposited only ₹ 50 Lakhs. With regard to the remaining amount, the Resolution Applicant has proposed to raise the debt for the Resolution Plan. From one side, the RP says that the estimated revenue generation is around ₹ 78 Crore since 2016, then how the CD could be sold to the Resolution Applicant for only ₹ 2.5 Crore. The respondents' side says that it is nothing but reflecting that the RP in connivance with the Resolution Applicant decimated the value of the CD. When Net.4 Network (R2) has taken over the business of the Corporate Debtor, the Corporate Debtor was financially in bad shape, and its infrastructure was 7 to 10 years old, its employees already left the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , R1 has not placed any trademark registrations of net4 in the name of him. b) If the so called Right to Use Trademark and Domain Names Agreement dated 01.09.2000 said to have been executed in favour of the Corporate Debtor is examined, it is evident that the stamp paper used for writing this agreement is not reflecting either the Purchaser's name or the date of purchase of the said stamp paper. c) In the Trademark Registration Certification dated 16.05.2001, it has not disclosed anywhere that this trademark was earlier owned by R1. e) When this Assignment Deed dated 10.01.2017 is examined, it appears that it is evident that R1's father Mr. Amarjith Sawhney (related party) executed this Assignment Deed in favour of R1 on behalf of the Corporate Debtor. f) No Board Resolution of the Corporate Debtor has been annexed to show that Board approved transfer of this trademark or assignment of this trademark to R1. There is no proof reflecting that his father is permitted to execute the Assignment Deed in favour of R1. Now his father is no more, even if execution of the assignment deed executed on behalf of the Board is taken as genuine document, it is not suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the company records accrue over a period of time, when supporting documents are not present to an action asserted by the company management and when such actions are doubtful and not taken place as per the procedure laid under the Companies Act and the Code, it is then obvious that the RP will report that such actions will fall under the transactions as mentioned under the Code. It is exactly what the RP has done in this case. It may be said here, since the RP has asserted that the management indulged in avoidable transactions, undervalued transactions and fraudulent transactions, he shall adduce evidence to that effect. It is true if the RP is part of any of the transactions, and he is in know of any of the facts aforementioned, it is understandable that duty is cast upon him to prove his case. But that is not the case here. RP is a person authorised to set the record in place and correlate the information provided, and to draw inferences, and accordingly from one side to run the company, from other side to take necessary actions against the pitfalls evident from the presence of record or absence of record. But when no information is available to correlate actions set forth bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 shares of Pipetel held by the CD to Trak Online as an adjustment against part of the debt alleged to be payable by the CD to Trak Online. The RP is provided secretarial audit report for the financial year ended 31st March 2017 reflecting the CD entering into a debt settlement agreement dated 26.05.2016 with Trak Online to clear its dues of ₹ 2 Crore by transferring 38,000 shares of ₹ 10 each of Pipetel and balance amount of ₹ 2.60 crore to be paid in monthly installments. For the CD having failed to make payment as per the agreement dated 26.05.2016, R1 says, the CD entered into another agreement dated 20.09.2016 with Trak Online to clear its dues of ₹ 1 crore by transferring its 35,000 shares of ₹ 10 each of Net4 Network (R2) to Trak Online. And with regard to the balance amount of ₹ 1.67 crore, the respondents' side says, it was to be paid in monthly installments. After these two share transfers, the CD shareholding in Net4 Network was reduced from 100% to 18.40% and the shareholding of the CD in Pipetel was reduced to 17.98% from 51%. 40. The Respondents side says that in view of the Hon'ble Supreme Court judgment in Anuj Jain, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resaid two companies to Trak Online. 43. Under Article 82A (k) of the AOA of the CD, so long as Madison India Capital HC (Madison) held at least 3% of the CD shares, entry of any material agreement by the CD with any group company/affiliates requires unanimous approval of the Board of Directors or at least the approval of each of the Director of the CD. Madison held 8.46% equity in the CD as on 07.06.2017 and has seat on the Board. But Madison has mentioned in its affidavit dated 06.05.2019 confirming that no notices for Board meeting was sent to it after December, 2015, therefore even if the shareholding the CD held in its subsidiaries is transferred to any related party or any other person without compliance under Article 82A (k), it is void ab initio. 44. As per Section 56 of the Companies Act, 2013, no transfer of shares shall be registered unless proper instrument of transfer Form SH4 duly stamped and executed by or on behalf of the transferor or transferor has been delivered to company together with the share certificates. In the present case, only copy of the share agreements have been provided, Form SH4 has not been provided reflecting transfer of shares. The only evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... twork, by which Net4 Network is managing all the operations of the CD and providing services to its customers. The reason given for such transaction is, Net4 India having suffered with huge losses for few years, Net4 Network was appointed as Master Reseller to continue the business of the CD. 49. But to prove that the directors of the CD transferred its business to Net4 Network for the benefit of the corporate debtor, duty is cast upon the directors of the corporate debtor to prove that this business was transacted at the relevant point of time and timely reporting has been done and the transaction is transparent and it is for the benefit of the corporate debtor and its creditors. Let us see what the directors of the Corporate Debtors have done. 50. The CD entering into Master Reseller Agreement with Net4 Network is a related party transaction, as per Section 188 of the Companies Act, 2013, the CD was required to take Board approval before entering into such agreement, besides this, it requires unanimous approval of the Board to enter into such transaction, but that has not been done. 51. The reason is not known for not providing the original of the Master Reseller Agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Code. 53. In a business like this, the valuable assets would be trade names, licenses, registrations and services. When these assets have been taken out from the company one after another, the value of the company would vanish within no time. It is not the case of R1 that the Corporate Debtor did not do any business at any point of time, had it been so, there would not have been any occasion for transfer of its shareholding, its business and its trade names to various other entities. 54. As per the records shown by the corporate debtor in the year 2016, the turnover of products or service category was about ₹ 32.18 Crore. As on 31.03.2016, Net4 Network was loss making company. Now the point for determination is as to whether or not this transfer of shareholding, transfers of the business of the CD through Master Reseller Agreement and assignment of trademark to R1 have taken place in the ordinary course of business and to defraud the creditors of the CD. 55. For determination of given facts in issue, they shall be supported by proof, if the facts and the assertions made by the parties are proved by adducing documentary evidence, then a conclusion can be arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Creditors. 58. Whenever anybody desires any Court, as stated in Section 101 of the Evidence Act, to give judgment as to any legal right or liability, the person asserting such right shall prove that those facts exist. Initially the RP having stated that the shareholding of the CD was illegally transferred, the CD business was diverted, trademark of the CD was assigned to R1, it is obvious that those facts have to be proved by R1. 59. Since R1 himself stated on affidavit about transfer of business of the CD through MSA and abut transfer of its trademarks, the burden of proof shifts upon R1 and other answering respondents that such transfer happened during the ordinary the course of business, as per the procedure laid down under Companies Act, 2013 and it has been done beyond the prescribed period mentioned under Section 43 47 of the Code and also to prove that all these acts are not intended to defraud the Creditors of the CD. We must also mention that R1 has been asserting transfer of shareholding, execution of Master Reseller Agreement, Assignment of Trademark, as per Section 103 of Indian Evidence Act, burden of proof with regard to those particular facts lie upon R1 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the Forms with ROC from time to time as and when any resolution is passed by the Company but not even a single resolution has been filed with the ROC reflecting that the Company passed resolution for transfer of shareholding or for transfer of the business of the company or for transfer of trademark to R1. As to Master Reseller Agreement is concerned, the domain name registration being the main business of the Company, the CD shall pass special resolution reflecting transfer of the asset of the CD to Net4 Network, but no such resolution is stated to have been passed nor any such resolution is notified to the ROC reflecting transfer of business of the Corporate Debtor to Net4 Network. Based on the failure of R1 and answering respondents to prove existence of facts as stated by them, it is to be construed they failed to prove transfer of shareholding of Net4 Network and Pipetel to Trak Online. 62. Since Company records are structured in such a way that every transaction that happens in the Company is recorded not only in the Company records but also with various regulating authorities on accrual basis as stated under the Companies Act, those transactions are to be presumed as tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CD and put it in Net4 Network and shareholding of Net4 Network and Pipetel was transferred to Trak Online defrauding the creditors of the CD. 65. With regard to the contention of the Respondents that not making Pipetel as the party to the proceedings is fatal to the proceedings, we hold that since Pipetel is not going to be affected either by cancelling the transfer of shares held by the Corporate Debtor to Trak Online and since shares are freely transferable from one person to another under the Companies Act, not making Pipetel as a party to this proceeding will not have any adverse effect over Pipetel. 66. As to assignment of trade name, since this assignment is in relation to an action falling within the ambit of IBC to cancel the assignment of trademark in the name of R1, this issue need not be taken to trademark authority for such cancellation, only requirement is the applicant shall place this order before Trade Mark Authority to rectify the records. 67. The transactions afore mentioned will not be called as transfers made in the ordinary course of business, as to the business of the CD, providing domain service and collection of license fees will fall within the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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