National Company Law Appellate Tribunal
M/S. Sandhya & Co vs V. Mahesh on 2 March, 2023
NATIONAL COMPANY LAW APPELLATE TRIBUNAL
AT CHENNAI
(APPELLATE JURISDICTION)
TA No.156/2021 (Comp. App. (AT) (CH) (Ins.) No. 994 of 2020/TR)
Under Section 61 of the Insolvency and Bankruptcy Code, 2016
(Arising out of the `Impugned Order' dated 13.10.2020 in
IA/491/IB/2020 in CA/1/IB/2017, passed by the 'Adjudicating
Authority' National Company Law Tribunal, Division Bench - I,
Chennai)
In the matter of:
M/s. Sandhya & Co.
New No. 12, Wallace Garden
Second Street, Thousand Lights,
Chennai - 600 006, Tamil Nadu ..... Appellant
v.
V. Mahesh
Interim Resolution Professional of
Vasan Health Care Private Limited
No.39/19, Aspen Court, 3rd Floor,
6th Main Road, R.A. Puram,
Chennai - 600028. ..... Respondent
WITH
TA No.157/2021 (Comp. App. (AT) (CH) (Ins.) No. 995 of 2020/TR)
and I.A. No.207/2022
Under Section 61 of the Insolvency and Bankruptcy Code, 2016
(Arising out of the `Impugned Order' dated 13.10.2020 in
IA/473/IB/2020 in CA/1/IB/2017, passed by the 'Adjudicating
Authority' National Company Law Tribunal, Division Bench - I,
Chennai)
In the matter of:
M/s. Sri Adinath Enterprises
No.4, Kodambakkam High Road,
Nugambakkam, Chennai - 600 034
TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp.
App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR)
Page 1 of 33
Tamil Nadu ..... Appellant
v.
V. Mahesh
Interim Resolution Professional of
Vasan Health Care Private Limited
No.39/19, Aspen Court, 3rd Floor,
6th Main Road, R.A. Puram,
Chennai - 600028. ..... Respondent
WITH
TA No.158/2021 (Comp. App. (AT) (CH) (Ins.) No. 996 of 2020/TR)
Under Section 61 of the Insolvency and Bankruptcy Code, 2016
(Arising out of the `Impugned Order' dated 13.10.2020 in
IA/493/IB/2020 in CA/1/IB/2017, passed by the 'Adjudicating
Authority' National Company Law Tribunal, Division Bench - I,
Chennai)
In the matter of:
M/s. Jai Jinendra Enterprises
No.4, Kodambakkam High Road,
Nugambakkam, Chennai - 600 034
Tamil Nadu ..... Appellant
v.
V. Mahesh
Interim Resolution Professional of
Vasan Health Care Private Limited
No.39/19, Aspen Court, 3rd Floor,
6th Main Road, R.A. Puram,
Chennai - 600028. ..... Respondent
WITH
TA No.159/2021 (Comp. App. (AT) (CH) (Ins.) No. 997 of 2020/TR)
Under Section 61 of the Insolvency and Bankruptcy Code, 2016
(Arising out of the `Impugned Order' dated 13.10.2020 in
TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp.
App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR)
Page 2 of 33
IA/476/IB/2020 in CA/1/IB/2017, passed by the 'Adjudicating
Authority' National Company Law Tribunal, Division Bench - I,
Chennai)
In the matter of:
M/s. Vijyalakshmi Enterprises
New No.177, Old No.87, NSC Bose Road,
Sowcarpet, Chennai - 600 079 ..... Appellant
v.
V. Mahesh
Interim Resolution Professional of
Vasan Health Care Private Limited
No.39/19, Aspen Court, 3rd Floor,
6th Main Road, R.A. Puram,
Chennai - 600028. ..... Respondent
WITH
TA No.160/2021 (Comp. App. (AT) (CH) (Ins.) No. 998 of 2020/TR)
Under Section 61 of the Insolvency and Bankruptcy Code, 2016
(Arising out of the `Impugned Order' dated 13.10.2020 in
IA/472/IB/2020 in CA/1/IB/2017, passed by the 'Adjudicating
Authority' National Company Law Tribunal, Division Bench - I,
Chennai)
In the matter of:
M/s. V.S. Enterprises
New No.177, Old No.87, NSC Bose Road,
Sowcarpet, Chennai - 600 079 ..... Appellant
v.
V. Mahesh
Interim Resolution Professional of
Vasan Health Care Private Limited
No.39/19, Aspen Court, 3rd Floor,
6th Main Road, R.A. Puram,
Chennai - 600028. ..... Respondent
TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp.
App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR)
Page 3 of 33
WITH
TA No.161/2021 (Comp. App. (AT) (CH) (Ins.) No. 999 of 2020/TR)
Under Section 61 of the Insolvency and Bankruptcy Code, 2016
(Arising out of the `Impugned Order' dated 13.10.2020 in
IA/475/IB/2020 in CA/1/IB/2017, passed by the 'Adjudicating
Authority' National Company Law Tribunal, Division Bench - I,
Chennai)
In the matter of:
M/s. H.S. Syndicate
New No.12, Wallace Garden
Second Street, Thousand Lights
Chennai - 600 006,
Tamil Nadu ..... Appellant
v.
V. Mahesh
Interim Resolution Professional of
Vasan Health Care Private Limited
No.39/19, Aspen Court, 3rd Floor,
6th Main Road, R.A. Puram,
Chennai - 600028. ..... Respondent
WITH
TA No.162/2021 (Comp. App. (AT) (CH) (Ins.) No. 1000 of 2020/TR)
Under Section 61 of the Insolvency and Bankruptcy Code, 2016
(Arising out of the `Impugned Order' dated 13.10.2020 in
IA/474/IB/2020 in CA/1/IB/2017, passed by the 'Adjudicating
Authority' National Company Law Tribunal, Division Bench - I,
Chennai)
In the matter of:
M/s. Hemanth Mehta & Sons HUF
New No.12, Wallace Garden
Second Street, Thousand Lights
Chennai - 600 006,
Tamil Nadu ..... Appellant
TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp.
App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR)
Page 4 of 33
v.
V. Mahesh
Interim Resolution Professional of
Vasan Health Care Private Limited
No.39/19, Aspen Court, 3rd Floor,
6th Main Road, R.A. Puram,
Chennai - 600028. ..... Respondent
WITH
TA No.163/2021 (Comp. App. (AT) (CH) (Ins.) No. 1001 of 2020/TR)
Under Section 61 of the Insolvency and Bankruptcy Code, 2016
(Arising out of the `Impugned Order' dated 13.10.2020 in
IA/477/IB/2020 in CA/1/IB/2017, passed by the 'Adjudicating
Authority' National Company Law Tribunal, Division Bench - I,
Chennai)
In the matter of:
M/s. Vipul Investment
New No.12, Wallace Garden Road,
Thousand Lights
Chennai - 600 006 ..... Appellant
v.
V. Mahesh
Interim Resolution Professional of
Vasan Health Care Private Limited
No.39/19, Aspen Court, 3rd Floor,
6th Main Road, R.A. Puram,
Chennai - 600028. ..... Respondent
WITH
TA No.164/2021 (Comp. App. (AT) (CH) (Ins.) No. 1002 of 2020/TR)
Under Section 61 of the Insolvency and Bankruptcy Code, 2016
(Arising out of the `Impugned Order' dated 13.10.2020 in
IA/494/IB/2020 in CA/1/IB/2017, passed by the 'Adjudicating
Authority' National Company Law Tribunal, Division Bench - I,
Chennai)
TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp.
App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR)
Page 5 of 33
In the matter of:
M/s. Hemanth & Co.
New No. 12, Wallace Garden
Second Street, Thousand Lights,
Chennai - 600 006, Tamil Nadu ..... Appellant
v.
V. Mahesh
Interim Resolution Professional of
Vasan Health Care Private Limited
No.39/19, Aspen Court, 3rd Floor,
6th Main Road, R.A. Puram,
Chennai - 600028. ..... Respondent
Present:
For Appellant : Mr. Pawan Jhabakh, Advocate.
For Respondent/IRP : Ms. Yajura Devi, Advocate.
JUDGMENT
(Virtual Mode) [Per; Ms. Shreesha Merla, Member (Technical)]:
Common Order:
TA157/2021 (Comp. App. (AT) (CH) (Ins.) No.995/2020) (`Lead Case'):
1. Aggrieved by the `Impugned Order' dated 13.10.2020 passed by `The Adjudicating Authority', (National Company Law Tribunal, Division Bench - I, Chennai) in I.A.473/IB/2020 in CA/1/IB/2017, M/s.
Sri Adinath Enterprises preferred this `Appeal' under Section 61 of the TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 6 of 33 Insolvency and Bankruptcy Code 2016, (hereinafter referred to as `The Code') to the extent of the rejection of its `Claim' amount.
2. Learned Counsel appearing on behalf of the `Appellant' submitted that based on the commercial understanding between the `Corporate Debtor', and the `Appellant' herein, the `Appellant' had lent a significant amounts of money to the `Corporate Debtor' i.e., Rs.4,90,00,000/- for the utilization and use by the `Corporate Debtor' in its business activities; that the `Corporate Debtor' had executed various documents evidencing the amounts `due and outstanding', and also executed Promissory Notes, promising to pay the `Appellant' on demand the aggregate amount of Rs.4,90,00,000/- with interest at 18% p.a.; in addition to the Demand Promissory Notes, the `Corporate Debtor' has also issued various letters undertaking to repay the entire amount with interest to the `Appellant'; that the `Appellant' pursuant to the `Corporate Debtor' being ordered into Corporate Insolvency Resolution Process (`CIRP') filed `Form-C' on 17.10.2019 before the Respondent for an amount of Rs.10,58,26,750/- along with the documents, substantiating the dues payable by the `Corporate Debtor'.
3. It is argued by the Learned Counsel for the `Appellant' that the term `Financial Debt' is defined under Section 5(8) of the Code to mean a debt along with the interest, if any, which is disbursed against TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 7 of 33 consideration for time value of money, and the `Appellant' submits that the lending of the said amount was routed through the Promoter only upon the request of the `Corporate Debtor', and therefore the amounts are `due and payable' by the `Corporate Debtor' through the `Appellant'. It is contended by the Learned Counsel for the `Appellant' that the `principal amount' was lent to the `Corporate Debtor', primarily with an understanding that the said amount would be used solely for the business operations of the `Corporate Debtor'. The Respondent in its communication dated 19.03.2020 categorically admits that the Promoter of the `Corporate Debtor' had infused the amounts of money lent by the `Appellant' herein which is confirmed and noted in the Books of Accounts of the `Corporate Debtor'. Learned Counsel for the `Appellant' placed reliance on Annexures 5 to 9, in support of his contention that the amount was admitted by the `Corporate Debtor' in the Bank Statements, Demand Promissory Notes, vide Letters confirming the balance in their Books, and in the Statement of Accounts for the Financial Years 2014- 2015, 2015-2016, 2016-2017, 2017-2018 and 2018-2019. The `Impugned Order' has ignored the fact that the Respondent has not even on one occasion questioned the `nature of loan' and the accompanying documents at the time of rejection of `Claim' which concludes the sanctity of the document. The `Doctrine of Indoor Management' is TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 8 of 33 applicable to this case and the onus is not on the `Appellant' to undertake any due diligence but it is for the Managing Director of the `Corporate Debtor' to provide these documents and the same is to be taken at `face value'.
4. It is further contended by the Learned Counsel for the `Appellant' that the Statutory Authorities have also confirmed in the Report that the Managing Director has acted on behalf of the Company and the balance in the Managing Director's Account includes the amounts received by the Company from various third parties.
5. Learned Sr. Counsel for the Respondent Mr. Arvind Pandian submitted that there is no privity of contract between the `Appellant' and the `Corporate Debtor' and the amounts were lent by the `Appellant' to the Promoter who accepted the same in his personal capacity and has nothing to do with the `Corporate Debtor'. Learned Counsel drew our attention to para 8 of the Minutes of the 10th Meeting of the Committee of Creditors (`CoC') of the `Corporate Debtor' convened by the Insolvency Resolution Process (IRP), Mr. V Mahesh and held on 19.12.2020, the said para is reproduced as hereunder:
"8. TO DISCUSS AND TAKE ON RECORD THE APPLICATION FILED BY THE IP BEFORE HON'BLE NCLT, CHENNAI BENCH UNDER SECTION 19 OF IBC, 2016:
TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 9 of 33 The Chairman informed that the Application filed against the Suspended Directors of the CD under Section 19, 60(5) of IBC. 2016 read with Rule 11 of NCLT Rules, 2016 on 10.11.2020 has already been circulated to the CoC vide e-mail on 18.11.2020. The Members of the CoC enquired as to Beneficiaries of the said unauthorized Bank Account.
The Chairman explained that the entire Bank Account statements have been circulated to the CoC and that the same contains voluminous transactions with thousands of entries, which are under verification, compilation and reconciliation. The Chairman was requested to disclose facts as to who has received monies from the CD as repayment of Loans after the commencement of CIR Process and they further insisted that these information may be made transparent and may please be made available to the knowledge and information of all the CoC Members.
Further, the Chairman added that he has received information that few of the Lenders have received payments during CIR Period, including recoveries made vide sale of Personal properties of the Promoters. He explained that the same has been time and again asked to be disclosed by the Lenders for adjustments with their amount of Claim vide various Letters/ e-mails. He informed that once the information received is certain and confirmed he shall mail all the Co Members in this regard. In the meantime, the Chairman once again formally requested all the Lenders to please disclose the recoveries/ repayments made to them either by the CD or by the Promoters or thru' associated entities, or by sale of personal properties or in any other manner.
TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 10 of 33 The Chairman informed that he will circulate a mail, with details of amount repaid to various CoC members from not only the CD, but from the promoter, associates concerns, trusts etc, from 2016-17 onwards, with various significant cut off dates, like from the date of appointment of provisional liquidator, High Court Order for Operating one single account for expense, original CIRP date (i.e., 21.04.2017), Hon ble High Court of Madras (Division Bench) Order, dt 05.09.2019 and then revival of the CIRP on 03.10.2019. The Co members specifically wanted the same to be minutised and a copy of the statement be shared with all in the SAME MAIL, as opposed to the suggestion of the Chairman to independently circulate them. Enforcement of Personal Guarantee thru' sale of Properties of the Promoters thru' legally permitted methods like invoking the personal guarantee, as per the Chairman, and the amount realized thru' that, needs to be reported to CoC and to the IRP/RP as the case may be. These are being sensitive matters would be circulated and taken up for discussion/s in the ensuing CoC Meetings.
Mrs. Meera Arun informed that personal cheques have been taken by some of the Lenders from her late husband forcefully and that she's in the process of unearthing more information on the same. She expressed that amidst this very unfortunate situation, she has not had the mind space to go through and respond to this Application and that she's in the process of examining the available information by way of appointing her own counsel or representative."
6. Learned Sr. Counsel for the Respondent vehemently contended that Minutes of the alleged Board Meeting/Resolution of the `Corporate Debtor' dated 26.12.2014, 05.01.2015 and finally on 26.06.2015, TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 11 of 33 authorizing Dr. A.M. Arun to avail the loans from the `Appellants' clearly specifies that Dr. A.M. Arun would obtain the same in his personal name and capacity and then deposit it into the Company's Account. It is argued that the Board Resolutions dated 26.12.2014, 05.01.2015 and 26.06.2015 were signed by two Directors, Dr, A.M. Arun and Mrs. Meera Arun authorizing Dr. A.M. Arun to sign the necessary documents/papers with the `Appellant' and to collect money in their personal names. It is contended that there is no record of the Meetings of the Board till the date of the CIRP, which was filed with the Registrar of Companies (`RoC').
7. There is no `Written Agreement' of any sort between the `Corporate Debtor' and the `Appellant', and therefore there is no justification for charging of any interest. It is submitted that there is no evidence on record to establish that the money lent by the `Appellant' was used solely for the business purposes of the `Corporate Debtor'. It is argued by the Learned Sr. Counsel that the Audited Accounts of the `Corporate Debtor' for 31.03.2017 were completed only on 07.05.2019 and on 31.03.2018 and hence, confirmation of date of liability for the Promoter earlier is purely fictitious and cannot be taken into consideration. There is no proof that any Board Meetings or General Meetings were conducted and recorded in accordance with the provisions of the Companies Act, 2013, though several documents have been filed TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 12 of 33 with the RoC, for creation of Security Interest, Board Meetings purportedly held, none of which can be taken as valid. A `Claim Form' was filed by the `Appellant' only after the second fresh Public Announcement made on 04.10.2019 and not in the first round of CIRP in 2017, despite the alleged loan pertaining to the year 2015. It is submitted that loans from Directors are allowed as per the provisions of the Companies Act, 2013, subject to certain conditions which are deemed as `Director's loans' and treated accordingly in the Books of Accounts of the `Corporate Debtor'. But loans given by outsiders is prohibited under the Companies Act, 2013, and what is not permitted under the statute cannot be enforced through a backdoor entry. There is a clear disclaimer in the independent Auditors Report for the year ending 2015, 2016 & 2017. The `Appellant' has no locus standi as evidently the consideration was not passed from the `Appellant' to the `Corporate Debtor' and therefore his remedy to is not under the CIRP. Substantial sums of money have been expanded from unauthorized Account of the erstwhile Chairman of the `Corporate Debtor'. Lastly, it is contended that the documents relied upon by the `Appellant' together with the transaction Audit was placed before the CoC for perusal and consideration in the 11th CoC Meeting held on 12.03.2021.
TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 13 of 33
8. Learned Counsel for the `Appellant' submits that the Agreement is dated 12.03.2013 and the act had to be performed within 6 years of the date of the Agreement and therefore the Application is `barred by Limitation' and the `Adjudicating Authority' has proceeded `on merits' but did not address to Limitation.
Assessment:
9. It is the case of the `Appellant' that the amounts were lent to the `Corporate Debtor' through the Promoter, solely for the purpose of conducting the business operations of the `Corporate Debtor', and that this amount of Rs.4,90,00,000/- was lent in three tranches on 26.12.2014, 05.01.2015 and finally on 26.06.2015. Learned Counsel drew our attention to the Demand Promissory Notes executed to establish that the said amounts were indeed lent to the `Corporate Debtor'. It is relevant to reproduce the letter dated 15.12.2014 addressed by the `Corporate Debtor' to the `Appellant' herein seeking a business loan of Rs.3,00,00,000/- for expansion of their business. The payment was required to be made in favour of Dr. A.M. Arun, `who would undertake to repay the loan, promptly along with interest':
TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 14 of 33 TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 15 of 33
10. Section 293 of the Companies Act, 1956 is reproduced as hereunder:
"293. RESTRICTIONS ON POWERS OF BOARD:
TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 16 of 33 (1) The Board of directors of a public company, or of a private company which is a subsidiary of a public company, shall not, except with the consent of such public company or subsidiary in general meeting, -
(a) sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking;
(b) remit, or give time for the repayment of, any debt due by a director except in the case of renewal or continuance of an advance made by a banking company to its director in the ordinary course of business;
(c) invest, otherwise than in trust securities, the amount of compensation received by the company in respect of the compulsory acquisition, after the commencement of this Act, of any such undertaking as is referred to in clause (a), or of any premises or properties used for any such undertaking and without which it cannot be carried on or can be carried on only with difficulty or only after a considerable time;
(d) borrow moneys after the commencement of this Act, where the moneys to be borrowed, together with the moneys already borrowed by the company (apart from temporary loans obtained from the company's bankers in the ordinary course of business), will exceed the aggregate of the paid-up capital of the company and its free reserves, that is to say, reserves not set apart for any specific purpose; or
(e) contribute, after the commencement of this Act, to charitable and other funds not directly relating to the business of the company or the TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp.
App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 17 of 33 welfare of its employees, any amounts the aggregate of which will, in any financial year, exceed fifty thousand rupees, or five per cent, of its average net profits as determined in accordance with the provisions of sections 349 and 350 during the three financial years immediately preceding, whichever is greater. Explanation I. - Every resolution passed by the company in general meeting in relation to the exercise of the power referred to in clause (d) or in clause (e) shall specify the total amount up to which moneys may be borrowed by the Board of directors under clause (d) or, as the case may be, the total amount which may be contributed to charitable and other funds in any financial year under clause (e).
Explanation II. - The expression "temporary loans" in clause (d) means loans repayable on demand or within six months from the date of the loan such as short-term, cash credit arrangements, the discounting of bills and the issue of other short-term loans of a seasonal character, but does not include loans raised for the purpose of financing expenditure of a capital nature.
Explanation III. - Where a portion of a financial year of the company falls before the commencement of this Act, and a portion falls after such commencement, the later portion shall be deemed to be a financial year within the meaning, and for the purposes, of clause (e). (2) Nothing contained in clause (a) of sub-section (1) shall affect -
(a) the title of a buyer or other person who buys or takes a lease of any such undertaking as is TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 18 of 33 referred to in that clause, in good faith and after exercising due care and caution ; or
(b) the selling or leasing of any property of the company, where the ordinary business of the company consists of, or comprises, such selling or leasing.
(3) Any resolution passed by the company permitting any transaction such as is referred to in clause (a) of sub-section (1) may attach such conditions to the permission as may be specified in the resolution, including conditions regarding the use, disposal or investment of the sale proceeds which may result from the transaction:
Provided that this sub-section shall not be deemed to authorise the company to effect any reduction in its capital except in accordance with the provisions contained in that behalf in this Act.
(4) The acceptance by a banking company, in the ordinary course of its business, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise, shall not be deemed to be a borrowing of moneys by the banking company within the meaning of clause (d) of sub-section (1).
(5) No debt incurred by the company in excess of the limit imposed by clause (d) of sub-section (1) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded. Political contributions."
11. It is submitted by the Learned Sr. Counsel for the Respondent that these amounts were paid in cash to the Managing Director and his wife TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 19 of 33 and not to the Company. The Board of Directors of a Company cannot take a loan without a Resolution being passed by the Board. There is no documentary evidence of any such Resolution having been passed in this case. There is no record of any Board Meetings held between April 2015 till the date the CIRP was invoked. There is no Written Agreement between the `Corporate Debtor' and the `Appellant' to establish that the amount was lent directly to the `Corporate Debtor' or that interest at 18% p.a. would be paid. There is no material on record to prove that the disbursement of these loans were made into the Bank Accounts of the `Corporate Debtor'. Though the CIRP was initiated on 21.04.2017 and the Public Announcement was made on 24.04.2017, the `Appellant' had filed their `Claim Form' on 17.10.2019, only after the second fresh Public Announcement on 04.10.2019.
12. Learned Counsel for the `Appellant' placed reliance on the following Judgements in support of his case that the amount lent to the Promoter for and on behalf of the `Corporate Debtor' is a `Financial Debt':
o 'Phoenix ARC Pvt. Ltd.' Vs. 'Spade Financial Services Ltd. & Ors.'1.
o 'Kantu Shankar Dessai & Anr.' Vs. 'Sociedade Agricola Dos Gauncares De Cuncolim E Veroda & Ors.'2.1
(2021) SCC OnLine SC 51 TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp.
App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 20 of 33 o 'Ranvir Ranjit' Vs. 'M/s. Vijay R Vakharia & Ors.'3. o 'Edelweiss Asset Reconstruction Company Limited' Vs. 'V. Mahesh'4.
13. For the applicability of these issues to the matter on hand, the moot question as to whether these amounts were given to the `Corporate Debtor' has to be ascertained and whether these amounts fall within the definition of `Financial Debt' as defined under Section 5(8) of the Code, which reads as follows:
(8) "financial debt" means a debt alongwith 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 dematerialised equivalent;
(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;2
2019 SCC OnLine Bom 9566 3 Comp. App. (AT) (Ins.) No.646/2018 4 IA/156/2020 in CA/1/IB/2017 TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 21 of 33
(e) receivables sold or discounted other than any receivables sold on non-recourse basis;
(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;
Explanation. -For the purposes of this sub-
clause, -
(i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and
(ii) the expressions, "allottee" and "real estate project" shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);
(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;
(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;
(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clause (a) to (h) of this clause"
TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 22 of 33
14. The RP has rejected the `Claim' vide letter dated 19.03.2020, which is reproduced as hereunder for better understanding of the case:
(Emphasis Supplied)
15. It is seen from the record that the erstwhile Promoter has brought in funds in his personal capacity which were permitted as `Director loans' TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp.
App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 23 of 33 and the same was already informed to the `Appellant' that they were treated accordingly in the Books of Accounts of the `Corporate Debtor'. There is no rebuttal by the `Appellant' to the submissions made by the Respondent that loans from Directors are allowed as per the provisions of the Companies Act, 1956 & 2013, subject to certain conditions and that in the instant case, the amount that was brought in by the Promoter into the `Corporate Debtor', was deemed as `Directors loans' and treated accordingly in the Books of Accounts.
16. As regarding the contention of the Learned Counsel for the `Appellant' regarding the `letter of confirmation' of `debt' dated 31.03.2018, it is seen that this `letter of confirmation' was given by Dr. A.M. Arun on behalf of the `Corporate Debtor' is not corroborated by any other records namely Minutes of the Board Meeting or General Meeting or in the Bank Statements of the `Corporate Debtor'. Learned Counsel for the `Appellant' submitted that the Statutory Auditors have confirmed in their Report that the Managing Director had acted on behalf of the Company and the balance in the MD's Account includes amounts received by the Company from various third parties through the MD only.
17. At this juncture, it is relevant to extract from the independent Auditors Report dated 31.03.2015 regarding the said loans, which is detailed as hereunder:
TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 24 of 33 "9. As described in note 41(6) to the financial statements, as at 31 March 2015, the Company's current assets include amounts aggregating Rs.
301,693 (31 March 2014 payable of Rs.445,519,078) as due from the Managing Director (MD) of the Company. As per information and explanation provided to us by the management, the aforesaid balance includes multiple receipts of approximately Rs.547,540,000 in cash which has been deposited into the Company's bank accounts on behalf of the MD until January 2015.
Further, basis our procedures performed on lest check basis, we have noted payments of approximately Rs.3,30,00,000, which as per the information and explanation provided to us by the management have been made during the year ended 31 March 2015 to a third party on behalf of the MD. As further described in the said note, subsequent to the balance sheet date, the Company has received summons under Section 131 of the Income tax Act, 1961 in connection with an income tax proceedings under Section 131 of the Income-tax Act, 1961, conducted by the income tax department on the said third party. We have been unable to obtain a confirmation from this third party for these transactions, the terms of such transactions and the Company's rights and obligations, if any, under this arrangement, from the said third party. Further, in respect of the above transactions between the Company and the MD, the Company has not complied with the provisions of Section 73 of the Act. In views of these circumstances and in absence of sufficient appropriate audit evidence with respect to the transactions involving the company and the MD/third party, including confirmation from the said third party, we are unable to comment upon appropriateness, validity, completeness of such transactions including company's rights and TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 25 of 33 obligations under such arrangement, if any, and the consequential impact on the financial statements of the Company. We are also not able to comment on the extent of such transactions, if any with any other parties in the current year, and its impact, if any, on the accompanying financial statements."
18. The excerpt from the Financial Statements and independent Auditor's Report dated 31.03.2015, relevant to the issue on hand is detailed as hereunder:
"12. As described in Note 41(6) to the financial statements, as at 31 March 2016, the net receivable from the MD of the company amounts to Rs. 29,16,79,035/- (Net of Short term loans and advances aggregating to Rs 54,12,69,927/- and amounts included in Short term borrowings aggregating to Rs. 24,95,90,892/-) (31 March 2015- receivable of Rs. 3,01,693).
As per the explanations of the Management, the MD has acted on behalf of the company and the balances in MD's account include amounts received by the company from various third parties through the MD and amounts repaid to various third parties by the MD, which are in the process of being quantified. As per the explanations of the Management, the MD has acted on behalf of the Company and the balances in MD's account include amounts received by the Company from various third parties through the MD and amounts repaid to various third parties by the MD, which are in the process of being quantified. As per the explanations of the Management, the MD has acted on behalf of the company and the balances in MD's account include amounts received by the company from various third parties through the MD and TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 26 of 33 amounts repaid to various third parties by the MD, which are in the process of being quantified. The company has not produced any documents supporting the above transactions. In the absence of sufficient appropriate audit evidence, we are unable to comment on the effect of the above transactions in the accompanying financial statements. The erstwhile auditors have also given a disclaimer of opinion on the financial statements for the previous year ended 31st March 2015 on the balance receivable from the Managing Director's account.
In respect of the above transactions between the Company and the MD, the Company has not and complied with the provisions of Section 73 and Section 185 of the Act. Under these circumstances and in absence of sufficient appropriate audit evidence with respect to the transactions involving the Company and the MD / third parties, we are unable to comment upon the existence, appropriateness, validity, completeness, of such transactions including company's rights and obligations under such arrangement if any, and the consequential impact on the accompanying financial statements of the Company."
19. This disclaimer Statement made by the Auditors establishes that the `Corporate Debtor' had not produced any documents supporting the impugned transactions. The same disclaimer was also given by the independent Auditor, Mr. PB Vijay Raghavan and Co. for the year ending 2017 stating that there was an `illegal operation' of an unauthorized Bank Account by the erstwhile demised Promoter of the `Corporate Debtor Company'. The contention of the Learned Counsel for the `Appellant' TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 27 of 33 that the amounts were taken in consent of the Board is untenable, keeping in view that the Resolution purported to be passed in the Meeting dated 15.05.2015, it is resolved as follows:
"RESOLVED that the Chairman informed that the Company had approached M/s. Sri Adinath Enterprises, No.4, Kodambakkam High Road, Nungambakkam, Chennai - 600 034. The said company had agreed to finance for the same.
The Board discussed the matter and passed the following resolution:
"RESOLVED to avail a loan of Rs.2,00,00,000/- (Rupees Two Crore only) which will be returned with interest and further resolved that all our cheques will be honored on presentation.
RESOLVED FURTHER that Dr. A.M. Arun -
Managing Director of the Company be and is hereby authorized to sign necessary loan documents / papers with M/s. Sri Adinath Enterprises and the common Seal of the Company be affixed wherever necessary.
RESOLVED FURTHER that Dr. A.M. Arun to collect the money in his personal name and deposit the same into Company's account and the board approved that the repayment made by Company's only.
RESOLVED FURTHER that Dr. A.M. Arun be and are hereby authorized to extend their personal guarantees for this purpose."
20. From the aforenoted Resolutions relied upon by the Counsel for the `Appellant', it is clear that `Dr. AM Arun in his capacity as Managing TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 28 of 33 Director was authorized to sign the documents and to conclude the money in his personal name and deposit the same into Company's Account and the Board approved that the repayment is to be made by Company only'. There are no substantial reasons given as to why the amounts, if meant for the purpose of rendering the operations of the Company, and the Company has a distinct Bank Account, the amount was disbursed to the Personal Account of the Managing Director. The `Adjudicating Authority' has given a finding that there was no copy of any `Notice' convening the Board Meeting or the relevant extract of the attendance of the other Directors on the Board, having been produced before the `Adjudicating Authority'.
21. The Hon'ble Apex Court in 'Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited' Vs. 'Axis Bank Ltd. & Ors.'5, has clearly defined the ingredients of a `Financial Debt' as defined under Section 5(8) of the Code and observed in para 43 as follows:
"43. Having imbibed the basic features associated with a "financial creditor", we need to examine as to who could at all fall in this category. In order to address this core question, delving into the finer connotations of the expression "financial debt", as defined in Section 5(8) of the Code is, obviously, necessary. As noticed, while defining "financial creditor" and "financial debt" in Section 5(7) and Section 5(8) of the Code, both the expressions "means" and "includes" have 5 (2020) 8 SCC 401 TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp.
App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 29 of 33 been used. As per the definition, while "financial creditor" means a person to whom a "financial debt" is owed, it also includes a person to whom such debt has been legally assigned or transferred to. Obviously, a comprehension of this definition of "financial creditor" cannot be complete without taking into account as to what is the meaning assigned to the expression "financial debt". Again, the term "financial debt" has also been defined with the expressions "means" and "includes". A "financial debt" means a debt along with interest, if any, which is disbursed against the consideration for the time value of money; and it includes the money borrowed or raised or protected in any of the manners prescribed in clauses (a) to (i) of Section 5(8)."
22. Even in 'Phoenix ARC Pvt. Ltd.' Vs. 'Spade Financial Services Ltd. & Ors.'6, relied upon by the Learned Counsel for the `Appellants' themselves, the Hon'ble Apex Court has referred to transactions which would only create an illusion that money has been disbursed to a borrower with an objective of receiving consideration in favor of time value of money, when in fact the parties have entered into the transactions with a large motive.
23. The documents relied upon by the `Appellant' with respect to the Promissory Note, the Confirmation Letter dated 31.03.2019, the Statement of the Account (Annexure-5) do not establish that the amounts were lent `directly to the Corporate Debtor', though the amounts have been linked to the Promoter of the `Corporate Debtor', in his personal 6 (2021) SCC OnLine SC 51 TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 30 of 33 capacity, the same cannot be treated as `Financial Debt', as defined under Section 5(8) of the Code, specifically in the absence of any documents, supporting the transactions, namely, the Bank Accounts of the `Corporate Debtor' to substantiate that the amounts were directly lent by the `Appellant' into the coffers of the `Corporate Debtor' meant for the business purposes of the `Corporate Debtor'. It is also pertinent to mention that there is no `Agreement' executed between the `Corporate Debtor' and the `Appellant' herein with respect to the amounts lent or the interest percentage to be paid. At the cost of repetition, merely because the Promoter had acknowledged the `debt' does not tantamount to the same being classified as a `Financial Debt' under the IBC, specially, in the absence of `Loan Agreements', 'terms of repayment', `payment of interest', `tenure of loan', etc., more so keeping in view the Independent Auditor's Report for three consecutive Financial Years.
24. Learned Counsel for the RP Ms. Yajura Devi submitted that Clause 6.2 of the Resolution Plan deals with the provision made for `Financial Creditors'. In the instant case, the amount disbursed is not being considered as a `Financial Debt' and therefore, the `Appellants' do not fall within the definition of `Financial Creditors' as defined under Section 5(7) of the Code.
TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 31 of 33 TA 156, 158 & 160/2021 (Comp. App. (AT) (CH) (Ins.) No.994, 996 &998/2020:
25. In TA 156/2021, it is submitted that the `Appellant' received an email dated 19.03.2020 from the Respondent that out of a total claim of Rs.9,18,36,600/- only an amount of Rs.60 Lakhs/- was being accepted and the interest portion was rejected on the ground that there was lack of proof, or any documentation that this amount was owed to the `Appellant'. In these matters, a part of the `Claim' amount was admitted only because that particular part of the amount was not disbursed directly to the account of the `Corporate Debtor'. In this case, only a `partial amount' of the `total principal amount' was admitted and the interest was not admissible. Keeping in view the forgoing reasons that there is no specific Loan Agreement, the loans were given to the Promoters directly who have transferred these amounts of the `Corporate Debtor', there were no deposits created with these amounts, loans were disbursed to the personal account of the Managing Director, and finally the Report of the Independent Auditors', the relevant extracts of which are reproduced in paras 15 & 16 of this Order, this `Tribunal' is of the earnest view that the Appellants do not fall within the definition of `Financial Creditors' as defined under Section 5(7) of the Code and hence this Appeal is `dismissed' accordingly.
TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 32 of 33
26. IA No.207/2022 is filed in TA 157/2021 seeking to stay the `operation' of the Resolution Plan submitted by M/s. ASG Hospitals Private Limited. As this `Tribunal' holds that the `Appellants' have not satisfied the requisite essentials to fall within the definition of Section 5(7) of the Code to be termed as `Financial Creditors', coupled with the fact that the Resolution Plan was approved on 12.01.2023 by the requisite majority, this IA207/2022 is accordingly `dismissed'.
27. For all the foregoing reasons, this Tribunal does not find any `illegality' or `infirmity' in the well-reasoned `Order' of the `Adjudicating Authority', National Company Law Tribunal, Division Bench - I, Chennai) in observing that the `Applicant'/`Appellant' herein is to seek his/its remedy against the said Promoter and not against the `Corporate Debtor'. Hence, all these `Appeals' are accordingly `dismissed' vide this `Common Order'. No costs.
[Justice M. Venugopal] Member (Judicial) [Ms. Shreesha Merla] Member (Technical) 02/03/2023 HIMANSHU / TM TA No.156-164/2021 (Comp. App. (AT) (CH) (Ins.) No.994/2020/TR, 995/2020/TR & IA No.207/2022 & Comp. App. (AT) (CH) (Ins.) Nos. 996-1002/2020/TR) Page 33 of 33