TMI Blog2021 (12) TMI 1325X X X X Extracts X X X X X X X X Extracts X X X X ..... the liquidator or the resolution professional is of the opinion that the corporate debtor has at a relevant time given a preference in such transaction and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transaction and for, one or more of the orders referred to in Section 44. Thus, the preliminary enquiry which this Adjudicating Authority is required to do is to first ascertain as to whether the Corporate Debtor has given any preference. Only thereafter, the Adjudicating Authority is required to examine as to whether the scope of enquiry of giving preference, has happened within and during the specified time, referred to as relevant time . The transaction sought to be impugned by the Resolution Professional does not pertain to 'Corporate Debtor giving preference over other creditors', however it relates to a creditor who is invoking the pledge on account of default by the Corporate Debtor and under no stretch of imagination the said transaction can be brought under the confines of 'preferential transaction' as defined under Section 43 of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2016 - application dismissed. - MA/731/2019 in CP/280/IB/2018, MA/769/2019, MA/731/2019 in CP/280/IB/2018, MA/114/2021 in MA/731/2019 in CP/280/IB/2018 and IA/04/2021 in MA/731/2019 in CP/280/IB/2018 - - - Dated:- 24-12-2021 - S. Ramathilagam, J. (Member (J)) And Anil Kumar B., Member (T) For Appellant: P.S. Raman, Senior Advocate, N.P. Vijay Kumar, Savitha Devi, Advocates, P.H. Arvind Pandian, Senior Advocate and Avinash Krishnan Ravi, Advocate For Respondents: Krishnendu Datta, Senior Advocate for Rohan Rajasekaran, Advocate, Gopal Sankaranarayanan, Senior Advocate, Karuppaiah Meyyappan and Deepak Kumar, Advocates ORDER Anil Kumar B., Member (T) 1. The MA/731/2019 is an Application filed by Applicant viz. the Resolution Professional of the CD viz. Empee Distilleries Limited under Section 43 and 45 of the Insolvency and Bankruptcy Code, 2016 read with Rule 11 of NCLT Rules, 2016 seeking relief as follows; a. Direct the Respondents to transfer the shares, subject matter of this application, to the benefit of the Corporate Debtor. b. Alternatively, if the shares have been disposed of by the Respondents, then the proceeds of the same be directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dran, as the 'Resolution Professional' of the Corporate Debtor in terms of Section 22 of IBC, 2016. 6. It is averred in the Applicant that the Corporate Debtor is a listed Company incorporated on 15.09.1983 with the registered office situated as Chennai which is in the distillery industry and having modern processing units at 5 locations. Further, it is averred in the Application that after taking charge as the 'Resolution Professional' of the Corporate Debtor, the Applicant was taking steps to take control over the assets and management of the Corporate Debtor, however it is stated that the erstwhile Directors and key managerial personnel of the Corporate Debtor did not co-operate and hence the Applicant was forced to approach this Adjudicating Authority under Section 19 of IBC, 2016 and this Adjudicating Authority has also passed an order in the said Application. 7. It is stated that due to non-availability of access to the SAP accounting system, the Audit firm appointed by the Applicant could not proceed with their auditing of preferential and other transactions audit envisaged under the provisions of IBC, 2016. Since the promoters/directors of the Corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .01.2020 and the successful Resolution Applicant viz. SNJ Distilleries has taken over the assets and management of the Corporate Debtor. Reply of the Respondent 10. The 1st and 4th Respondents have filed their counter statement and it is averred that the Application has been filed without affording any opportunity to the Respondents herein to provide clarification in relation to these transactions. However, as regards the fact, it was submitted that the Corporate Debtor vide its Board Resolution dated 23.05.2015 had approved to borrow/avail Inter Corporate Loan for a sum of ₹ 100 Crore. Further vide Resolution dated 14.08.2015, the Corporate Debtor had resolved to avail corporate loan of ₹ 20 Crore from the 1st Respondent in one or more tranches and had provided security for the said loan. Accordingly, in the month of January 2016, the Corporate Debtor had executed a Loan Agreement with the 1st Respondent and the shares of the 2nd Respondent were pledged to the 1st Respondent to secure the said loan vide Share pledge agreement dated 26.02.2016. The 1st tranche of the loan being ₹ 12.50 Crore was disbursed on 02.03.2016 and the 2nd tranche of ₹ 7 Crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d hence it is the contention of the Learned Counsel for the Respondent that the invocation of pledge was done in the ordinary course of business and in the best interest of the 1st Respondent Company. Rejoinder of the Applicant 14. The Applicant has filed rejoinder and it is stated that the statutory auditors have in their written reply dated 06.08.2019 confirmed that only ₹ 14 crore had been given as a loan to the Corporate Debtor by the 1st Respondent. Further, in the books of the Corporate Debtor, the loan from the 1st Respondent is shown as unsecured loan and the auditors have also confirmed that the above said loan as unsecured. It is also stated in the rejoinder that the Corporate Debtor has not registered the charge and the same clearly indicate that the loan agreement, pledging of shares and the subsequent invocation are all back dated transactions. It was also alleged in the rejoinder that the Corporate Debtor has not produced any bank statements evidencing disbursement of ₹ 19.5 Crore by the 1st Respondent and it is also stated that the Corporate Debtor has not reported about the invocation of pledge of shares of the 2nd Respondent by the 1st Respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estments Private Limited by the 1st Respondent for a consideration of ₹ 18 Crore by an Agreement purported to have been executed on 25.10.2018 and that it is not known how the 1st Respondent sold 4,00,02,500 shares when the quantity allegedly pledged was only 4,00,00,000 shares. Also in the rejoinder the Applicant has alleged various discrepancies in the Share Purchase Agreement entered into between the 1st Respondent and M/s. Goodyield Investments Private Limited. Under the said circumstances, the Learned Counsel for the Applicant prayed to allow the application. Submissions made by the Applicant 18. Learned Senior Counsel Mr. P.S. Raman who appeared for the Applicant embarked his argument on the relationship between the parties, he would submit that the Corporate Debtor, the 1st Respondent and the 2nd Respondent along with several other group companies are owned and managed by the 3rd Respondent. The 3rd Respondent is the Director of the 1st and 2nd Respondent and the 4th, 5th and 6th Respondents are the wife, son and daughter of the 3rd Respondents, who are also directors in either one or all of the entities of the group company. It was submitted that the business af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er amount that are recovered would accrue to the benefit of the CoC. It was also submitted that the Resolution Plan which was approved by this Adjudicating Authority, in turn, allowed for taking over the assets belonging to the subsidiaries of the Corporate Debtor. 21. The Learned Senior Counsel Mr. P.S. Raman further submitted that after approval of the Resolution Plan, the first meeting of the Monitoring Committee was held and in the said meeting it was insisted that the avoidance application be prosecuted and the proceeds be handed over to the successful resolution applicant. It was further submitted that the approval of the Resolution Plan was challenged before the Hon'ble NCLAT and the promoters challenged the taking over of the subsidiaries of the Corporate Debtor by the successful resolution applicant, however Hon'ble NCLAT has upheld the order passed by this Adjudicating Authority approving the Resolution Plan. Aggrieved by the same, it is seen that an SLP was filed by the Hon'ble Supreme Court and the said SLP also came to be dismissed thereby upholding the Resolution Plan. 22. Thus, it was contended by the Learned Senior Counsel that the impugned transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Professional ought to have placed before the COC all information and orders pertaining to impugned transactions along with the Resolution Plans. Having chosen to prioritize the resolution plan application and with delays in the successful Resolution Applicant seeking for impleadment, the Resolution Professional is solely at fault for not obtaining orders in MA/731/2019 prior to 20.01.2020. 26. It was further submitted by the Learned Senior Counsel for the 2nd Respondent that apart from expressly stating in Clause xii in the Resolution Plan that all pending proceedings shall abate upon approval of the Plan, a careful reading of the first line of Clause xxxiv of the Resolution Plan would reveal that the same contemplates only a situation where orders have been passed or transactions which have already been avoided as on date of approval of the plan, in this case being 20.01.2020. Hence, it was submitted that, neither is the RP empowered by any of the terms of the Resolution Plan to continue the avoidance application nor is the continuance of the same contemplated in the Plan. It was submitted that there is no express clause in the Application so as to proceed with the avoidanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 3rd Respondent, consequently, was a subsidiary to a listed company, as a result of which, it could not claim all the benefits of being a purely private limited company. It was submitted that vide the said due diligence, the Applicant herein has found certain discrepancies in the allegedly undertaken transactions by Corporate Debtor, in relation to the shares held by it, in the 3rd Respondent. 30. It was submitted by the Learned Senior Counsel for the successful Resolution Applicant that the 2nd Respondent in MA/731/2019 was incapable of making any such advances to the Corporate Debtor herein, as the 2nd Respondent at the relevant point of time, was a company with negative networth, making losses, which did not have any sources whatsoever, to advance such amounts. It was further submitted that the share capital of the 2nd Respondent Company was only ₹ 10 Lakh and the 2nd Respondent has accumulated losses of ₹ 2.80 Crore. Further, it was submitted that the alleged first tranche of ₹ 12.5 Crore had taken place on 27.02.2016 i.e. in the Financial Year 2015-2016, whereas the Balance sheet of the 2nd Respondent Company does not indicate any such loan having been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35. The Learned Senior Counsel for the successful Resolution Applicant submitted that as per the Resolution Plan a total sum of ₹ 475.04 Crore has been given by it on the basis of valuing the entire assets of the Corporate Debtor, including the shares held by the Corporate Debtor in its subsidiary, which during the CIRP was informed as being sub-judice vide proceedings in MA/731/2019, wherein the transfer of the said shares illegally and preferentially invoking an alleged pledge by the 2nd Respondent herein, is under challenge. It was submitted that the successful Resolution Applicant has conducted a substantial due diligence of the invocation of the alleged pledge by the 2nd Respondent and as such from the various public documents and registers of the Corporate Debtor and other related companies, has collated substantial information and evidences, which establish the fraudulent, preferential and undervalued nature of transaction. Hence, it was submitted that the successful resolution applicant has filed an impleading Application MA/769/2019 to bring on record those facts before this Tribunal. Under such circumstances, the Learned Senior Counsel for the successful Resolution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e given a preference, if- (a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and (b) the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53 (3) For the purposes of sub-section (2), a preference shall not include the following transfers- (a) transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee; (b) any transfer creating a security interest in property acquired by the corporate debtor to the extent that- (i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest, and was used by corporate debtor to acquire such property; and (ii) such transfer was registered with an information utility on or before thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal as the case may be, may make an application for avoidance of such transaction to the Adjudicating Authority if the terms of such transaction required exorbitant payments to be made by the corporate debtor. (2) The Board may specify the circumstances in which a transactions which shall be covered under sub-section (1). Explanation.--For the purpose of this section, it is clarified that any debt extended by any person providing financial services which is in compliance with any law for the time being in force in relation to such debt shall in no event be considered as an extortionate credit transaction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts are different and such difference is explicit in the related provisions. As noticed, the question of intent is not involved in Section 43 and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time. However, whether a transaction is undervalued requires a different enquiry as per Sections 45 and 46 of the Code and significantly, such application can also be made by the creditor under Section 47 of the Code. The consequences of undervaluation are contained in Sections 48 and 49. Per Section 49, if the undervalued transaction is referable to sub-section (2) of Section 45, the Adjudicating Authority may look at the intent to examine if such undervaluation was to defraud the creditors. On the other hand, the provisions of Section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons responsible therefore. We are not elaborating on all these aspects for being not necessary as the transactions in question are already held preferential and hence, the order for their avoidance is required to be approved; but it appears expedient to observe that the arena and scope of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e underlying principles and the object cannot be lost sight of. In other words, the construction has to be such that leads towards achieving the object of these provisions. 18.1. Looking at the broad features of Section 43 of the Code, it is noticed that as per sub-section (1) thereof, when the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has, at a relevant time, given a preference in such transactions and in such manner as specified in sub-section (2). to any person/persons as referred to in sub-section (4), he is required to apply to the Adjudicating Authority for avoidance of preferential transactions and for one or more of the orders referred to in Section 44. If twin conditions specified in sub-section (2) of Section 43 are satisfied, the transaction would be deemed to be of preference. As per clause (a) of sub-section (2) of Section 43, the transaction, of transfer of property or an interest thereof of the corporate debtor, ought to be for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon'ble Supreme Court in the matter of Anuj Jain (supra) contemplates that where the liquidator or the resolution professional is of the opinion that the corporate debtor has at a relevant time given a preference in such transaction and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transaction and for, one or more of the orders referred to in Section 44. Thus, the preliminary enquiry which this Adjudicating Authority is required to do is to first ascertain as to whether the Corporate Debtor has given any preference. Only thereafter, the Adjudicating Authority is required to examine as to whether the scope of enquiry of giving preference, has happened within and during the specified time, referred to as relevant time . 41. From the chequered history of the present case, as adumbrated supra it is seen that the transaction which is sought to be questioned/impugned by the Resolution Professional pertains to the invocation of the share pledge agreement by the 1st Respondent which allegedly took place during the 1st week of October 2018. The impugned tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction sought to be impugned by the Resolution Professional does not pertain to 'Corporate Debtor giving preference over other creditors', however it relates to a creditor who is invoking the pledge on account of default by the Corporate Debtor and under no stretch of imagination the said transaction can be brought under the confines of 'preferential transaction' as defined under Section 43 of IBC, 2016. 46. During the course of arguments and even in the rejoinder it is stated that pending admission of Section 7 Application, the Corporate Debtor has paid a sum of ₹ 1 Crore to Union Bank of India over the total default amount of ₹ 10 Crore. It is also seen from the record of proceedings that no direction was given by this Adjudicating Authority to pay any amount to the Financial Creditor. The Corporate Debtor, during the pendency of Section 7 Application has paid a sum of ₹ 1 Crore to the Financial Creditor and if we apply the definition of Section 43 of IBC, 2016 only the said transaction made by the Corporate Debtor would attract 'preferential transaction'. However, it is seen that the RP has not moved any Application seeking to bri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned above, the RP is required to approach the appropriate forum to quash the same in terms of the Judgment of the Hon'ble Supreme Court in the matter of Embassy Property Developments Private Limited -Vs- State of Karnataka and Others; (2020) 13 SCC 308 and cannot be sought to nullify the same before this Adjudicating Authority. 50. Secondly, one of the contentions raised by the Learned Senior Counsel for the Resolution Professional that the successful Resolution Applicant has paid a sum of ₹ 80 Crore more only after an assurance was given that the shares of the Corporate Debtor in the 2nd Respondent would be reversed is totally untenable since we are unable to comprehend as to how such an assurance can be given when the matter is sub-judice before a forum and without knowing its final outcome. We have perused the Information Memorandum issued by the Resolution Professional and the RP in the Information Memorandum has made the following disclosure about the shares of the Corporate Debtor in Apollo Distilleries and Breweries Private Limited: The Board of Directors during FY 2015-16 passed necessary resolution for accepting Inter Corporate Loans aggregating to ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor in the 2nd Respondent Company has been invoked by Apollo Distilleries and Breweries Private Limited and as such the said shares were not part of the Information Memorandum, however, the successful Resolution Applicant cannot now strengthen his case by referring to the clauses in the Resolution Plan by stating that they are entitled to the said proceeds. In any case, it is held that the impugned transaction does not even fall under Section 43 of IBC, 2016. 52. The Learned Senior Counsel for the successful Resolution Applicant relied upon certain clauses in the Resolution Plan in order to state that proceeds of the present Applicant should go to the benefit of the successful Resolution Applicant. The relevant clauses as found in the Resolution Plan are reproduced hereunder; Clause 3.1 (iv) The Resolution Applicant, in the manner specified supra, shall take control over the entire assets of the Corporate Debtor including licenses, permits, all types of investments, permissions, brands, intangible assets, sundry debtors, vehicles, stock, finished goods, semi finished goods, spares and parts and other sanctions accorded by any appropriate authority in law, to carry out its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nner. Clause 3.1 (xxxv) On and post the approval date of the Resolution Plan, the share certificates/any securities held by the Corporate Debtor in any company whatsoever, including its group companies/subsiding companies viz. Empee Sugars Chemicals Ltd., Appollo Distilleries and Breweries Pvt. Ltd. and EDL Properties Ltd., shall be handed over to the Resolution Applicant herein, free from any encumbrances. It is made clear that taking over of shares shall not result in any liability of such companies falling upon the Resolution Applicant or the Corporate Debtor, post the approval of the Resolution Plan. Clause 3.1 (xxxvi) The Resolution Applicant states that the amount offered in this Plan is comprehensive and is consideration for all the clauses/benefits mentioned in this Resolution Plan. For the sake of clarity, it is mentioned that each and every term of this Resolution Plan wherein benefits are accruing to the Resolution Applicant shall be considered as mandatory and non-negotiable terms of this contract. Clause 3.2 (6) Investments made by the Corporate Debtor, including in its subsidiaries shall be handed over to the new management of the Corporate Debtor. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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