TMI Blog2022 (9) TMI 631X X X X Extracts X X X X X X X X Extracts X X X X ..... OTHERS [ 2019 (12) TMI 188 - SUPREME COURT ], in which the Hon ble Apex Court has clearly noted that the Adjudicating Authority has the jurisdiction to enquire into allegations of fraud when there is a prima facie case of fraudulent initiation of CIRP. The Assignment to Suraksha is not a bona fide one, peculiar to the facts of the attendant case and the loan amounts do not satisfy the essential requisites of a Financial Debt as envisaged under the Code. This Tribunal observed that the fundamental scope objective of IBC is Resolution and Maximization of Assets and not Recovery of loans which do not strictly fall within the definition of Financial Debt as defined under Section 5(8) of the Code. Appeal allowed. - COMPANY APPEAL (AT) (INSOLVENCY) No. 795 of 2021 & I.A. No. 1332 of 2022 COMPANY APPEAL (AT) (INSOLVENCY) No. 806 of 2021 & I.A. No. 2221 of 2021 COMPANY APPEAL (AT) (INSOLVENCY) No. 927 of 2021 & I.A. No. 1534 of 2022 - - - Dated:- 8-9-2022 - Ocean Deity Investment Holdings Limited, PCC Versus Suraksha Asset Reconstruction Limited , Mack Star Marketing Private Limited Sumit Ranjan Saha Versus Suraksha Asset Reconstruction Limited , Mack Star Marketi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... phoned Off to various HDIL entities and was used to repay the loans by these entities to Yes Bank Limited. 7. The bench notes that the Corporate Debtor is a body Corporate and has independent identity distinct from the shareholders. The Bench also notes that the Corporate Debtor had borrowed the money and it must be repaid. Since the Corporate Debtor had borrowed the money, it cannot take a plea of intra shareholders dispute or allegation of internal wrong doings by the constituent shareholders as a reason for not meeting its repayment obligation. 8. Further, the alleged misuse on unauthorized use of the Term Loans by the constitutes of the Corporate Debtor does not in any way negate the existence of Financial Debt and the right of the Financial Creditor to recover the loans even assuming that the Corporate Debtor had diverted the money and misused the Term Loans. It does not discharge the Corporate Debtor of it is indebtedness in respect of loans and does not absolve the Corporate Debtor from repaying the same. 9. In any case, the Term Loans have been reflected in the balance sheet of the Corporate Debtor and is reflected in the CIBIL Report. The facts of the case c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar and the Appellant/Ocean Deity Investment Holdings Limited ( Ocean Deity ) by way of these collusive transactions; that after several months of the Enforcement Directorate ( ED ) having arrested Mr. Rana Kapoor, the Promoter of Yes Bank for conspiring with HDIL Promoter to cheat Mack Star, the Adjudicating Authority has passed the Order dated 20.09.2021. The Adjudicating Authority, despite having the attachment Orders and the EDs prosecution Complaint against the Promoters of Yes Bank and HDIL, did not address these issues and also did not take any cognizance of the findings of CBI and ED regarding the Criminal Conspiracy between Yes Bank and HDIL to evergreen the stressed loans of Yes Bank. Both CBI and ED have independently concluded that there was a Criminal Conspiracy, pursuant to which act, there was a three steps circular flow of funds from Yes Bank, whereby Rs.147Crores/- have fraudulently been disbursed in the name of Mack Star; the amount was disbursed to Yes Bank Accounts of HDIL Group Companies; these loan amounts from Yes Bank Accounts of HDIL Group Companies i.e., Rs.146Crores/- were used for discharging the earlier loans availed by the financially stressed HDIL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an FIR against the officials of the Yes Bank. The Learned Sr. Counsel brought to the notice of this Tribunal that apart from Mr. Rana Kapoor, three other senior Members of Yes Bank Management were named in the Enforcement Case and none of these Members charged with money laundering were ever shareholders of Mack Star and therefore this fraud cannot be characterized as an intra-shareholder dispute. Learned Sr. Counsel drew our attention to the Provisional Attachment Orders providing details of its comprehensive investigation into this loan fraud and unequivocally concluded that Yes Bank has illegally sanctioned a loan which is a result of conspiracy between Mr. Rana Kapoor and Wadhawan of HDIL; 2.9 Further, in January 2016, the investors realized that the Wadhawans had taken fraudulent loans from the YES Bank in the name of M/s Mack Star Marketing Pvt Ltd. They informed YES Bank Ltd. Even after this YES Bank Ltd. disbursed 3 instalments of loan amounting to Rs.19.60 Crore to Mack Star's account on 23.03.2016, 26.04.2016 25.05.2016 2.11 That unknown officials of Yes Bank dishonestly ignored the terms of Mack Star's Articles that expressly prohibited Mack S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s need for funds and the ultimate end-use because they knew that the ultimate use was to finance loan repayments by the HDIL Group Companies. 13. ..the benefit of this arrangement accrued solely to Yes Bank, which was able to evade the applicable capital provisioning norms by evergreening its loans instead of declaring them as NPAs Yes Bank is mischaracterizing facts by pretending to be a bona fide lender . 24. when funds were credited to Mack Star s Yes bank account and subsequently transferred to HDIL Group companies, such transfers were often initiated by Yes Bank using instructions obtained by them before disbursal of the loans . It is submitted that the Adjudicating Authority is silent about the findings of these investigations in the Impugned Order. It is argued that both CBI and ED are Statutory Bodies and the results of the investigations arrived by them read together with the determination made by PMLA Adjudicating Authority ought not to have been ignored by the Adjudicating Authority, before considering the Admission of the Section 7 Petition. The illegality attached to the loans in question is also passed on to Suraksha. It is the Assignee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the Board of Mack Star on 01.09.2017 by removing all Wadhawan directors from Mack Star Board. Since the Financial Year 2017-18 all of Mack Star Annual Reports explicitly state that Yes Bank defrauded Mack Star and loans were fraudulently obtained by the erstwhile management of Mack Star (HDIL Promoter) in collusion with Yes Bank. It is further submitted that there are six separate references in Mack Star s Annual Report for 2019-20 to the Yes Bank loans, being illegal. Learned Counsel relied on the Judgement of the Hon ble Supreme Court in Asset Reconstruction Company India Ltd. Vs. Bishal Jaswal and Ors. , (2021) 6 SCC 366, wherein the Hon ble Supreme Court has observed that every entry would not amount to an acknowledgement of debt as it is not uncommon to have an entry in the Balance Sheet with notes annexed, forming part of the Balance Sheet and that it would depend on the facts of each case whether such an entry would amount to an acknowledgement of debt . All these transactions were orchestrated without the knowledge of the Investor or the Investor s Directors which has been clearly stated in the FIR registered by the CBI against the officials of the Yes Bank and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ency Application was defective in as much as Mr. Tikmani who was appointed as the IRP resigned in May 2019; an email was sent by Suraksha on 13.09.2021 only to create a fraudulent paper trail to conceal the fact that the Application was defective; that Mr. Tikmani has withdrawn his consent and Mr. Shailen Shah had also withdrawn his consent on 01.09.2021; Mr. Tikmani has withdrawn his consent on 13th May itself and therefore Mr. Shailen Shah was nominated in his place; but Suraksha in their Reply to I.A. 2221/2021 falsely stated that Mr. Tikmani has withdrawn his consent after the Admission Order was passed by the Adjudicating Authority, which makes it evident that Suraksha is admitting to cover a fatal lacuna in its Insolvency Application, which remained a defective one as per Section 7(3)(b) of the Code from 01.09.2021 to 20.09.2021, the date on which the Adjudicating Authority passed the Order Admitting the Application. The subsequent Order 27.10.2021 passed by the Learned Adjudicating Authority appointing Mr. Shukla as the IRP cannot operate retrospectively to cure the aforesaid deficiency in the Insolvency Application. 6. Submissions of the Learned Sr. Counsel Mr. Ramji ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no scope of going into any dispute under Section 7 of the Code. There is no final adjudication by Civil or Criminal Courts pertaining to the purported disputes raised by the Plan. The suit filed in the Hon ble High Court of Bombay in 2020 is nothing but an attempt to hinder the Resolution Process. In fact, the Hon ble High Court of Bombay refused to pass an Interim Order pertaining to the loan facility which demonstrates that there was no prima facie case in favour of Mack Star. Mack Star was also making all efforts to settle the debts as can be seen from the various emails exchanged between the parties. The Articles of Association of Mack Star do explicitly bar Mack Star from raising funds from Financial Institutions. Suraksha cannot be dragged into the matter where there is an intra-shareholders dispute between the investors and HDIL Promoters. Moreover, borrowings of funds is an activity specifically mentioned in the Memorandum of Association of Mack Star as being a part of authorized business of Mack Star. Having full knowledge of the debt , the Appellant did not take any steps to challenge the said transactions until the filing of the Section 7 Application. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Respondent/Suraksha are detailed as hereunder: I. Term Loan III was a sum of Rs.7,60,00,000/- and was disbursed on 12.11.2012. II. Term Loan IV was for a sum of Rs.40,00,00,000/- and was disbursed in 5 tranches on 29.03.2014, 30.04.2014, 29.05.2014, 28.06.2014 and 26.07.2014. III. Term Loan V was for a sum of Rs.40,00,00,000/- and was disbursed on 29.09.2015. IV. Term Loan VI was for a sum of Rs.60,00,00,000/- and was disbursed in 6 tranches on 07.01.2016, 29.01.2016, 26.02.2016, 23.03.2016, 26.04.2014 and 25.05.2016. 8. It is important to peruse the table depicting the flow of funds together with the relevant dates to understand whether there was any circular movement of funds. The said table is reproduced as hereunder: Term Loan Disbursal Date Amount of Loan Disbursed to Mack Star (INR Crs.) Amount Diverted from Mack Star by Yes Bank (INR Crs.) Company of HDIL Group to which the funds were diverted Amount immediately routed back to Yes Bank (INR Crs.) III 12.11.12 7,600 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 146,033 146,091 9. It is significant to mention that the aforestated table is not disputed by the Respondent. Interestingly Rs.40 Crores/- was disbursed by Yes Bank directly to the Bank Account of Wadhawans HDIL instead of Mack Stars Bank Account and this fact too is not disputed. We find force in the submissions of the Learned Sr. Counsel Dr. Singhvi that out of the total loans of Rs.147 Crores/-, 140 Crores/- relating to Term Loans IV V VI were sanctioned for the purpose of renovating Kaledonia which is a brand new building and barely two years old, constructed at a cost of Rs.100 Crores/-. The material on record does not show any undertaking obtained from the Appellant prior to the disbursal of these loans. It is also seen from the record that Yes Bank continued disbursing the loans even after the Appellant addressed a letter to Yes Bank on 18.03.2016 stating that the Wadhawans were not authorized to avail these loans as per the terms of Mack Star s Articles of Association. It is depicted from the aforenoted table that more than 99% of the loan amount disbursed by Yes Bank were routed back to Yes Bank as repayme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ergreen the accounts of HDIL with Yes bank to save them from becoming NPA. The entire circulation of funds was happening within the Yes Bank System (i.e. loans disbursed by Yes Bank into Mack Star s Yes Bank account were immediately diverted to Yes bank accounts of HDIL group companies, which used these funds on the same day to discharge liabilities owed by these HDIL group companies to Yes Bank) and therefore, higher management of Yes Bank was very much aware about the illegal dealings and was party to the whole scheme. (Emphasis Supplied) 12. It is also material to examine the submissions of Mr. Venkatavarthan N. Iyengar, former Director on the Board of Mack Star, appointed by the Wadhawans, in the Comm. Suit No. 298/2020, filed by Mack Star and the Appellant herein, before the Hon ble High Court of Bombay, seeking a declaration that the loans were void ab initio. The germane extracts related to the issue on hand is reproduced as hereunder: 6. The HDIL Group had over time availed of loans amounting to several thousand crores from Yes Bank for land acquisition and real estate development. Yes Bank was the primary banker and lender to the HDIL Group and in such capac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat more than 99% of the loan amount disbursed was used in order to discharge the liabilities owned by Wadhawans HDIL Group to Yes Bank and was never put to use by Mack Star. 14. At this juncture, we address to the contention of the Learned Sr. Counsel Mr. Ramji Srinivasan that the Appellant being the majority shareholder had clearly participated and approved the Resolution, giving consent to the Board of Directors of Mack Star to borrow sums of money as deemed necessary and therefore now cannot turn around and say that the Appellant was unaware of these financial transactions. Mr. Ramji Srinivasan vehemently contended that the footnote of the Balance Sheet of the Mack Star for the Financial Year 2020 reflects the amount of Rs.1,27,53,55,000/ admitting that the said amount was obtained from the Yes Bank and therefore what needs to be seen is whether there is a debt and default as envisaged by the Hon ble Apex court in M/s. Innoventive Industries Ltd. (Supra). It is the case of the Respondent that the Adjudicating Authority need not delve into the question of whether the debt is disputed or not as long as the debt is due and payable . Learned Counsel also placed relianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existence of any such debt. Merely because the amounts are reflected in the Balance Sheet it cannot be directly construed as an acknowledgement of debt if there is a note in the Balance Sheet which states otherwise indicating that there is a caveat/footnote that such an entry would not amount to any acknowledgement of debt . We place reliance on the observations made by the Hon ble Supreme Court in Asset Reconstruction Company India Ltd. Vs. Bishal Jaswal Ors. , (2020) 16 SCC 366, in which the Hon ble Apex Court has observed as follows: 21 In fact, it is not uncommon to have an entry in a balance sheet with notes annexed to or forming part of such balance sheet, or in the auditor s report which must be read along with the balance sheet, indicating that such entry would not amount to an acknowledgement of debt for reasons given in the said note. 35 .it would depend on the facts of each case as to whether an entry made in a balance sheet qua any particular creditor is unequivocal or has been entered into caveats, which then has to be examined on a case by case basis to establish whether an acknowledgement of liability has, in fact, been made.. 17. Therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anctioned in the name of Mack Star by Yes Bank; the said loan amounts were diverted to HDIL which in turn used those amounts to pay back Yes Bank for the loans taken by them. The circular movement of funds shows that most of the loan amount was used in order to discharge liabilities owned by HDIL Group and the Wadhawans to Yes Bank. It is also not understood as to how without any instruction from Mack Star, Rs.40 Crores/- which was disbursed in the name of Mack Star on 23.09.2015 was diverted on the same day to HDIL. 18. The aforenoted conclusions by the premier Investigating Agencies are germane to the issue on hand as what has to be seen by this Tribunal is whether these loan amounts are payable in law and can be defined as Financial Debt as defined under Section 5(8) of the Code. Section 5(8) of the Code reads as follows: 5(8) financial debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes- (a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; (c) any amount raised pursu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2021 wherein it was held as under: G.3.2 Financial Creditor and Financial Debt 43. Under Section 5(7) of the IBC, a person can be categorised as a financial creditor if a financial debt is owed to it. Section 5(8) of the IBC stipulates that the essential ingredient of a financial debt is disbursal against consideration for the time value of money. This Court, speaking through Justice Rohinton F Nariman, in Swiss Ribbons Pvt. Ltd. v. Union of India10 has held: 42. A perusal of the definition of financial creditor and financial debt makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, an operational debt would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local authority. 44. In this context, it would be relevant to discuss the meaning of the terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e principal clause or at least has the features which could be traced to such essential elements in the principal clause. In yet other words, the essential element of disbursal, and that too against the consideration for time value of money, needs to be found in the genesis of any debt before it may be treated as financial debt within the meaning of Section 5(8) of the Code. This debt may be of any nature but a part of it is always required to be carrying, or corresponding to, or at least having some traces of disbursal against consideration for the time value of money. In the light of the aforesaid pronouncement of the Hon ble Supreme Court, we have examined the facts of this case. 22. The term disbursement has been interpreted clearly in the case of Pioneer Urban Land and Infrastructure Ltd. Vs. Union of India , (2019) 8 SCC 416, which held that the disbursal must be money and must be against consideration for the time value of money . Such money should no longer be with the lender, but with the borrower, who then utilizes the money for the correct purpose it is intended for. In the instant case, the money disbursed by Yes Bank was not utilized for the purpose int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Authority was right in concluding that as far as there is a debt and a default and amount is due and payable , the Section 7 Admission is inevitable and the scope of the Code is very limited. The Hon ble Supreme Court in Vidarbha Industries Power Ltd. Vs. Axis Bank Ltd . 2022 SCC Online SC 841 has observed as follows: 88. Ordinarily, the Adjudicating Authority (NCLT) would have to exercise its discretion to admit an application under Section 7 of the IBC of the IBC and initiate CIRP on satisfaction of the existence of a financial debt and default on the part of the Corporate Debtor in payment of the debt, unless there are good reasons not to admit the petition. 89. The Adjudicating Authority (NCLT) has to consider the grounds made out by the Corporate Debtor against admission, on its own merits. For example when admission is opposed on the ground of existence of an award or a decree in favour of the Corporate Debtor, and the Awarded/decretal amount exceeds the amount of the debt, the Adjudicating Authority would have to exercise its discretion under Section 7(5)(a) of the IBC to keep the admission of the application of the Financial Creditor in abeyance, unless ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged by Yes Bank demonstrate that the Term Loans disbursed in the name of Mack Star is an eye-wash and Yes Bank has disbursed these loans with an ulterior motive. Having observed so, we hold that the Assignment to Suraksha is not a bona fide one, peculiar to the facts of the attendant case and the loan amounts do not satisfy the essential requisites of a Financial Debt as envisaged under the Code. This Tribunal observed that the fundamental scope objective of IBC is Resolution and Maximization of Assets and not Recovery of loans which do not strictly fall within the definition of Financial Debt as defined under Section 5(8) of the Code. 29. For all the aforenoted reasons, we allow this Appeal and set aside the Impugned Order passed by the Learned Adjudicating Authority (National Company Law Tribunal, Mumbai Bench, Court III), on 20.09.2021. In effect, Order(s) passed by Ld. Adjudicating Authority appointing Interim Resolution Professional , declaring moratorium, freezing of account and all other Order(s) passed by Adjudicating Authority pursuant to the Impugned Order, are set aside. The Adjudicating Authority will now close the proceedings. The Corporate Debtor i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating Authority which was allowed on 27.10.2021. It was strenuously argued by Dr. Singhvi that no explanation has come forthwith from Suraksha justifying the misrepresentation that Mr. Tikmani has withdrawn his consent on 30.09.2021 and that Suraksha falsely stated that Mr. Tikmani has withdrawn his consent after the Admission Order was passed. It is argued that Mr. Tikmani had withdrawn his consent on 13.05.2019 itself and that there was no IRP in the case from 01.09.2021 to 20.09.2021. 36. It was strenuously contended by the Learned Sr. Counsel Mr. Srinivasan that Mr. Tikmani had vide letter dated 13.05.2019 withdrawn his consent and gave a no objection for appointment of Mr. Shailen Shah as the new IRP; that amended Form-5 was permitted by the Adjudicating Authority vide Order dated 28.05.2019 and therefore on 03.06.2019 Suraksha filed an amended Section 7 Application to reflect the change of name from Suraksha Asset Reconstruction Private Limited to Suraksha Asset Reconstruction Limited and subsequently filed Form-2 nominating Mr. Shailen Shah as the IRP. It is contended that Suraksha filed Written Submissions on 01.09.2021 before the Adjudicating Authority and the nominated ..... X X X X Extracts X X X X X X X X Extracts X X X X
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