TMI Blog2022 (4) TMI 374X X X X Extracts X X X X X X X X Extracts X X X X ..... CIRP Regulations, 2016 is mandatory or directory? - HELD THAT:- Regulation 35A of the CIRP Regulations imposes a duty on the Resolution Professional to take measure within the timeline as prescribed. In performance of such duty the public in general has no control including the Corporate Debtor. In event it is held that any action taken by Resolution Professional beyond the time prescribed in Regulation 35A of the CIRP Regulations is prohibited, it shall cause serious general inconvenience or injustice to the Corporate Debtor. One of the objective of the Code is to maximise the assets of the Corporate Debtor. In event the actions taken by the Resolution Professional after the timeline prescribed in Regulation 35A of the CIRP Regulations are to be annulled, the undervalued and fraudulent transactions will go out of the reach of Resolution Process, reach of the Court and shall cause great inconvenience and injustice to Corporate Debtor - thus, the timeline prescribed in Regulation 35A of the CIRP Regulations is only directory and any action taken by the Resolution Professional beyond the time prescribed under Regulation 35A of the CIRP Regulations cannot be held to be non-est or vo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Authority to consider the Application on merits and take appropriate decision to benefit the Corporate Debtor. Adjudicating Authority committed error in rejecting the Application - Appeal allowed - decided in favor of appellant. - Company Appeal (AT) Insolvency No. 583 of 2021 - - - Dated:- 6-4-2022 - [Justice Ashok Bhushan] Chairperson, [Dr. Alok Srivastava] Member (Technical) And [Ms. Shreesha Merla] Member (Technical) For the Appellant : Mr. Abhijeet Sinha, Mr. Sidhartha Sharma, Mr. Arjun Asthana, Advocates For the Respondent : Mr. Subhasish Bhowmick, Advocate for R1 Ms. Debaleena Ganguly, Advocate for R2 Mr. Jishnu Saha, Senior Advocate with Mr. J. Patnaik, Advocate for Intervenor Ms. Manisha Pandey, Advocate for R3 4. Ms. Mousumi Dey, Advocate for R6. JUDGEMENT Ashok Bhushan, J: 1. This Appeal has been filed by the Resolution Professional challenging the Order dated 26.02.2021 passed by the Adjudicating Authority (National Company Law Tribunal, Kolkata Bench, Kolkata) in I.A. No. 742/KB/2020 in CP (IB) No. 518/KB/2018 by which Order, I.A. No. 742/2020 filed by the Resolution Professional has been rejected. 2. Brief facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board of India (Insolvency Resolution Process for Corporate Persons), Regulations, 2016 (Hereinafter referred to as CIRP Regulations, 2016 ) and by Section 46 of the Code. Aggrieved by the Order rejecting the I.A. 742/2020, this Appeal came to be filed by the Resolution Professional. 3. We have heard Mr. Abhijeet Sinha, Advocate for the Resolution Professional-Appellant, Mr. Shubhasish Bhowmick, Advocate for Respondent No. 1, Ms. Debaleena Ganguly, Advocate for Respondent No. 2, Ms. Manisha Pandey for Respondent No. 3 4 and Mr. Jishnu Saha, Sr. Advocate for Intervenor. 4. Mr. Abhijeet Sinha, Learned Counsel for the Appellant submitted that the Adjudicating Authority committed error in rejecting the Application I.A. 742/2020 of the Appellant. He submits that Regulation 35 A of CIRP Regulations, 2016 is only a directory regulation and the Application filed by the Appellant beyond the period prescribed under Regulation 35A was not liable to be rejected on the ground that it has not been filed within the timeline prescribed under Regulation 35A. Mr. Sinha submits that the Adjudicating Authority again committed error in relying on Section 46 for rejecting the Application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebtor which were dealt in the lease deed were allegedly mortgaged with the Financial Creditor to secure the loan taken in the year 2013 and no lease could have been executed without the consent of the Financial Creditor and further no lease could have been executed for the period of 29 years. 5. Mr. Subhasish Bhowmick, Advocate for Respondent No. 1 refuting the submissions of Learned Counsel for the Appellant contends that the Appellant could not be allowed to question the Lease Deed which was executed on 30th November, 2016 by the Corporate Debtor beyond the lookout period of two years as prescribed under Section 46 of the Code. It is further submitted that the dispute is pending regarding the Lease Deed in the Civil Court where there is also an Interim Injunction in favour of the Respondent No. 3 and the Appellant has concealed all details with regard to the Civil Proceedings in this Appeal. Learned Counsel for Respondent No. 1 has made several requests for restructuring of their Account which was not accepted and Bank has classified the dues of the Company as NPA . Respondent No. 1 has also filed an Appeal vide diary No. 16919/2019 challenging the Order dated 18.10.2019 whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (e) of Transfer of Property Act, 1882 the Lease could not have been granted for more than a period of three years wherein the present case lease claims to be having granted for 29 years. Lease hold rights granted after the property has been mortgaged without the consent of the Creditor is illegal. The creation of lease of entire factory along with the land of the Corporate Debtor was a fraudulent exercise. The Corporate Debtor not only handed over the land and other assets of the Corporate Debtor but also business to Respondent No. 3 which is presently carrying on business using the trademark of the Corporate Debtor. It is submitted that Application filed by the Resolution Professional under Section 43 and 45 read with Section 49 and Section 66 and 60(5) has wrongly been rejected by the Adjudicating Authority. The Plan submitted by Intervenor proceeds on the premise that entire land on which the factory of Corporate Debtor is established would be transferred to the Intervenor to enable him to continue to run the factory of the Corporate Debtor. The lease transaction is required to be declared as fraudulent and cancelled and the land and factory of the Corporate Debtor be permitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o issued a Notice for contempt against the suspended directors on 04.02.2020 due to non-compliance of Order directing the suspended director to extend cooperation with the Resolution Professional. After receipt of the transaction audit Report under the Code which was finalised on 14th August, 2020. I.A. No. 742/2020 has been filed by the Resolution Professional-Appellant. In the I.A., following reliefs have been prayed for by the Resolution Professional: a. Declare that the execution of the lease deed is in the nature of transaction as described in section 45 of the Code, 2016 and reverse the transaction in accordance with section 49 of the Act or such other relevant provision; b. Declaration that the lease deed executed on 30th November, 2016, and registered on 15th December, 2016 with Imax Infrastructure Pvt. Ltd. be declared as cancelled, null and void in terms of section 49 of the prior to the transfer of the said land through the illegal lease transaction; c. Appointment of an independent expert to assess evidence relating to the value of the property under Section 46(2) of the I B Code; d. Direct Imax Infrastructure Pvt. Ltd. to forthwith make the differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cribed a period during which Resolution Professional has to form an opinion whether corporate debtor has been subjected to any transaction covered under Section 43,45, 50 or 66 and the period during which he shall make a determination and a period of one hundred thirty-fifth day of insolvency commencement date during which he shall apply to the Adjudicating Authority. The expression used in Regulation 35A shall form an opinion shall make a determination and he shall apply to the Adjudicating Authority . The question which has come up for consideration before us is as to whether the time period prescribed for taking different measures under Regulation 35A are mandatory and Resolution Professional is not competent to take any action beyond the timeline prescribed and due to non-compliance of timeline prescribed in Regulation 35A, the Application deserves to be dismissed? iv. In the present case, the Adjudicating Authority has taken a view that Appellant Resolution Professional has not complied Regulation 35A in filing the I.A. No. 742 of 2020. In paragraph 30 of the Impugned Order, following has been observed by the Adjudicating Authority: 30. The facts and circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w from construing it the one way or the other . vi. The I B Code, 2016 contains timeline for different actions the time period prescribed under Regulation 35A of the CIRP Regulations is time period which casts a duty on the Resolution Professional to take measures as prescribed in Regulation 35A of the CIRP Regulations. The Privy Council in Montreal Street Railway Vs. Normandin AIR 1917 PC 142 had laid down following principles of statutory interpretation: When the provisions of a statute relate to the performance of a public duty and the case is such that to hold null and void acts in neglect of this duty would work serious general inconvenience, or injustice to persons who have no control over those who are entrusted with the duty, and at the same time would not promote the main object of the Legislature, it has been the practice to hold such provisions to be directory only. vii. The above preposition of the Privy Council was quoted with approval by Hon ble Supreme Court. The same preposition was reiterated by Hon ble Apex Court in (2016) 11 SCC 31 in Lalaram Vs. Jaipur Development Authority wherein paragraph 106 following has been held: 106. As noticed h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within time prescribed which are question relating to each case and has to be examined on case-to-case basis and if there are reasons due to which Resolution Professional could not file the Application within time the same has to be examined on merit. ix. Coming to the facts of the present case, it is clear that there was no cooperation by the Suspended Directors, documents and assets were not handed over to the RP, RP had to move an Application under Section 19(2) of the Code. The Order was passed on 09th December, 2019 by the Adjudicating Authority directing the suspended Directors to extend cooperation and it was only thereafter on 15th February, 2020 the lease deed was shared by Respondent No. 1 with the Corporate Debtor. The Transaction Audit Report was finalised on 14th August, 2020 and thereafter the Application was filed. x. The view which we are taking with regard to the interpretation of Regulation 35A of the CIRP Regulations fully finds support from the Judgment of the Hon ble Supreme Court in (2017) 16 SCC 143 in Surendra Trading Company Vs. Juggilal Kamlapat Jute Mills Company Limited and Ors. . The Hon ble Apex Court in the above case had occasion to consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation under sub-clause (a) of clause (ii) give a notice to the applicant to rectify the defect in his application within seven days of the date of receipt of such notice from the adjudicating Authority. xi. In paragraph 18 of the Judgment of Hon ble Supreme Court in Surendra Trading Company Vs. Juggilal Kamlapat Jute Mills Company Limited and Ors. the Apex Court noticed and approved the view of the Appellate Tribunal that period of 14 days is not mandatory. It is useful to extract paragraph 18 of the Judgment which is to the following effect: 18. The aforesaid statutory scheme laying down time limits sends a clear message, as rightly held by the NCLAT also, that time is the essence of the Code. Notwithstanding this salutary theme and spirit behind the Code, the NCLAT has concluded that as far as fourteen days time provided to the adjudicating authority for admitting or rejecting the application for initiation of insolvency resolution process is concerned, this period is not mandatory. For arriving at such a conclusion, the NCLAT has discussed the law laid down by this Court in some judgments. Therefore, we deem it proper to reproduce the discussion of the NCLAT itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilatory tactics, delaying the disposal of cases much to the chagrin of the plaintiffs and petitioners approaching the court for quick relief and also to the serious inconvenience of the court faced with frequent prayers for adjournments. The object is to expedite the hearing and not to scuttle the same. The process of justice may be speeded up and hurried but the fairness which is a basic element of justice cannot be permitted to be buried. 34. Further, Hon ble Supreme Court in the matter of Smt. Rani Kusum vs Smt. Kanchan Devi (2005) 6 SCC 705, concurring with the ratio laid down in Kailash Versus Nanhku (supra) held that: 10. All the rules of procedure are the handmaid of justice. The language employed by the draftsman of processual law may be liberal or stringent, but the fact remains that the object of prescribing procedure is to advance the cause of justice. In an adversarial system, no party should ordinarily be denied the opportunity of participating in the process of justice dispensation. Unless compelled by express and specific language of the statute, the provisions of CPC or any other procedural enactment ought not to be construed in a manner which would leav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 or section 10. 43. Thus, in view of the aforementioned unambiguous position of law laid down by the Hon ble Apex Court and discussion as made above, we hold that the mandate of sub-section (5) of section 7 or sub-section (5) of section 9 or sub-section (4) of section 10 is procedural in nature, a tool of aid in expeditious dispensation of justice and is directory. xii. The Hon ble Supreme Court further noticed the view of this Tribunal that period of 7 days for rectification of defects as contained in Proviso Section 7(5) and Proviso Section 9(5) and Proviso Section 10(4) are mandatory. Following was noted in Paragraph 20 of the judgment. The view of the Tribunal holding 7 days period as mandatory was reversed by the Hon ble Supreme Court and following was laid down in Paragraph 24: Further, we are of the view that the judgments cited by NCLAT and the principle contained therein applied while deciding that period of fourteen days within which the adjudicating authority has to pass the order is not mandatory but directory in nature would equally apply while interpreting the proviso to sub-section 5 of Section 7, Section 9 of sub-Section 4 of Section 10 as well. Afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... require an independent expert to assess evidence relating to the value of the transactions mentioned in this section. ii. Now we come to Section 66 which deals with fraudulent trading and wrongful trading. Section 66 is as follows: 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 commenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndertake any roving inquiry beyond the timeframe stipulated in the Code and the regulations. iv. The Code contains a scheme which provides for avoidance of undervalued transaction under the period prescribed under Section 46. We may look into other provisions of the Code dealing with other kind of transactions. The time period as prescribed under Section 46 is not applied with regard to other nature of transactions for example we take Section 49 which contains heading transaction defrauding creditors . Section 49 is as follows: 49. Transactions defrauding creditors.- Where the corporate debtor has entered into an undervalued transaction as referred to in sub-section (2) of section 45 and the Adjudicating Authority is satisfied that such transaction was deliberately entered into by such corporate debtor- (a) for keeping assets of the corporate debtor beyond the reach of any person who is entitled to make a claim against the corporate debtor; or (b) in order to adversely affect the interests of such a person in relation to the claim, the Adjudicating Authority shall make an order- (i) restoring the position as it existed before such transaction as if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t date. The person can save himself from prosecution if act had been done more than 5 years before the Insolvency Commencement date. Converse is that any acts mentioned under Clause (a) of Section 69 if done within 5 years the doer can be punished. The scheme of Section 69 thus clearly indicates that under Section 49, which deals with transactions defrauding creditors the time period prescribed under Section 46(2) is not attracted. We thus conclude that for transactions defrauding creditors and fraudulent trading or wrongful trading as under Section 66 the timeline prescribed under Section 46 is not applicable and the Adjudicating Authority erred in holding the Application No. 742/2020 not maintainable as hit by Section 46(2) which opinion of the Adjudicating Authority is not in accordance with the statutory scheme of the Code. Now we need to notice other transaction which were alleged to be questioned in I.A. No. 742/2020. The Application which is filed by the RP contained following heading at page 119 of the Appeal Paper Book: Application under Section 43, Section 45 read with Section 49, Section 66 and Section 60(5) of the Insolvency and Bankruptcy Code, 2016 along with oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orate debtor, as stipulated under Section 49 of the I B Code. viii. The above paragraph xv indicates that in so far as the Lease Agreement was concerned that was sought to be questioned under Section 49 and 66 of the Code and whereas the preferential transactions were attacked were under Section 43 of the Code. Thus the Application contained the allegations which were falling both under Section 43, 45 and Section 49, 66 and in so far as the allegations referable to Section 49, 66 the timeline prescribed under Section 46 is not attracted. 13. We thus answer Question Nos. I, II III in following words: Answer I The Application filed by the Resolution Professional relating to Sections 43 and 45 read with Sections 66 and 60(5) of the Code is not to be rejected filed beyond the period of 135th Day of Insolvency Commencement Date only on the ground of non-compliance of Regulation 35 A of the CIRP Regulations, 2016. It shall depend on the facts of each case as to whether there are genuine reasons to consider the Application on merits even filed beyond 135th day. Answer II The expression shall in regulation 35A (1), 35A(2) and 35A(3) is not mandatory and requirement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the corporate debtor out of the reach of the creditor bank, thereby making it difficult for them to liquidate it in the event of liquidation and make its claims as against such asset. The pleadings in paragraph xv and xvi have already been extracted as noted above and further in Paragraph xiv and xvi again following has been pleaded: xiv. It is further imperative to mention here that the Corporate Debtor has also entered into numerous related party transactions with M/s. Shree Ram Saw Mill Private Limited, M/s. Shova Properties Pvt. Ltd., cumulating to a sum of ₹ 16,60,000/- (Rupees Sixteen Lakh and Sixty Thousand Only). The details of related party transactions are elucidated in a chart as under: Name of the Related party Relation Transaction from 01.04.2017 to 31.12.2019 Shree Ram Saw Mill Pvt Ltd Om Prakash Pandey is the common Director Opening ₹ 6,69.481.00 Receipt ₹ 3,02,944.00 Payments ₹ 11,10,000.00 Closing- ₹ 14,76,537.00 Shova Properties Pvt Ltd Om Prakash Pandey is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the Adjudicating Authority. Non-Filing of the Reply in the application was substantial ground for raising adverse inference against the Respondents against whom serious allegations were made by the RP in the Application. Further the factum of non-cooperation by the suspended directors and therefore issue of order under Section 19(2) by the Adjudicating Authority itself as well as contempt notice issued by the Adjudicating Authority on 04.02.2020 clearly speaks the conduct of the Respondent Nos. 1 to 7 and observations of the Adjudicating Authority that Resolution Professional failed to substantiate the allegations is unsustainable. We thus are of the view that there were substantial pleadings in the Application within the meaning of Section 49 and 66 of the Code and Adjudicating Authority committed error in rejecting the Application. 14. Learned Counsel for the Respondent Nos. 1 to 3 has laid much emphasis on the submission that the Appellant has concealed the Civil Court Proceedings which are pending with regard to the Lease in question. It is relevant to note that no efforts were made on behalf of Respondents who were party to the Civil Proceedings to bring the Orders on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suit No. 97/2017 shall have no bearing on the Application which has been filed by the RP under Section 49 and 66 of the Code before the Adjudicating Authority. 17. Learned Counsel for the Respondent No. 1 as well as Respondent Nos. 3,4 and 5 had made submissions that RP who is Appellant before us has concealed the proceeding of T.S. No. 97/2017. The suit i.e. TS 97/2017 was filed much before the initiation of CIRP against the Corporate Debtor, the CIRP was initiated on 18.10.2019 at the time when injunction order was already passed by the Trial Court. There is no substance in the argument of Learned Counsel for the Respondent No. 1, 3, 4 and 5 that RP has concealed the Order dated 12th July, 2019 before the Adjudicating Authority. RP was not a party to the Civil Proceeding i.e. Case No. 97/2017 hence there is no occasion for RP to conceal the said proceeding. A party can be guilty of concealment of fact and concealment of proceeding when he is party to the said proceeding and does not disclose it. The Respondent Nos. 1,3,4 and 5 were parties to the proceeding and if they wanted to rely on any Order passed in the Civil Proceeding it was incumbent on them to bring on record. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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