National Company Law Appellate Tribunal
Mr. Shailesh Bhalchandra Desai ... vs Sanjiv Sheth & Anr on 17 August, 2022
NATIONAL COMPANY LAW APPELLATE TRIBUNAL
PRINCIPAL BENCH, NEW DELHI
Company Appeal (AT) (Insolvency) No. 814 of 2022
IN THE MATTER OF:
Mr. Shailesh Bhalchandra Desai ...Appellant
Liquidator of EMI Transmission Ltd.
Versus
Sanjiv Sheth & Anr. ...Respondents
Present:
For Appellant: Mr. Abhijeet Sinha, Mr. Rajendra Beniwal, Mr. Aman
S. Mr. Saikat Sarkar, Advocates
For Respondent: Ms. Radhika Gautam, Advocate for R-1
Mr. Abhishek Anand, Ms. Prachi W. Mr. Kunal
Godhwani, Mr. Nikhil Anand, Tuhina M., Mr. Anuj
Tiwari, Advocates for R-2.
ORDER
17.08.2022: Heard Learned Counsel appearing for the Appellant and Learned Counsel appearing for the Respondents.
2. This Appeal has been filed against the Order dated 04th May, 2022 passed by the Adjudicating Authority. By which Order, I.A. No. 1631 of 2021 filed by the Appellant has been rejected.
3. The Appellant has filed the I.A. praying for following relief:
"a) Consider and allow the IA No...../2021 in terms of Section 66 read with Section 26 of IBC, 2016, -2-
b) Require the Respondent as stated in this application, to make contributions to the assets of the Corporate Debtor equivalent to the sums of Rs. 3.25 crores in respect of said fraudulent transaction, as the Hon'ble Tribunal may direct,
c) Issue orders that recovery, if any, made pursuant to this Application, shall form part of the liquidation estate as per Section 36 of the Code and shall be exclusive right of the CoC/stakeholders of the Corporate Debtor,
d) Pass appropriate directions/orders in terms of Section 67, of the Code including for recovery/restoration of legitimate amounts due to the Corporate Debtor,
e) And for such other/further order(s) and/or direction (s) as the facts and circumstances of the case may warrant."
4. The brief facts necessary to be noticed for deciding this Appeal are:
The Corporate Debtor had advanced an amount of Rs. 3,25,00,000/- for property. From the material on record, it is clear that on payment of Rs.
30 Lakhs, an Allotment Letter dated 30.04.2012 was issued for commercial property and subsequently in the same financial year the amount aggregating 3,25,00,000/- was paid by the Corporate Debtor by Bank Transactions which is reflected form the material on record.
Company Appeal (AT) (Insolvency) No. 814/2022 -3- The 'Corporate Insolvency Resolution Process' (CIRP in short) was commenced by the Order dated 11th April, 2019 on the Application filed by the Financial Creditor-Dena Bank. The Bank has advanced various financial facilities with regard to which default was made resulting in initiation of proceeding under Section 7 of the Code.
5. The Adjudicating Authority has rejected the Application filed by the Appellant essentially on two grounds; firstly, the period provided for enforcing the specific performance of a contract of three years is over and the Application filed on 30th July, 2021 is barred by limitation. Secondly, the Adjudicating Authority held that the transaction is neither fraudulent nor wrongful trading within the meaning of Section 66 of the Code.
6. Challenging the Order passed by the Adjudicating Authority, Mr. Abhijeet Sinha, Learned Counsel for the Appellant submits that the advance for property of huge amount of Rs. 3,25,00,000/- was not in the normal course of business and the fact that no steps were taken for refund of the amount or for acquiring the property indicate that the transaction was a fraudulent transaction. He further submits that Application was not barred by time and observations by the Adjudicating Authority in paragraph 5 cannot be supported. He submits that the Adjudicating Authority has not adverted to the relevant materials and pleadings and the Observations that transaction is neither fraudulent nor wrongful trading has been made without considering the relevant materials on record.
Company Appeal (AT) (Insolvency) No. 814/2022 -4-
7. Learned Counsel for the Respondent No. 1 as well as Respondent No. 2 have supported the Impugned Order. It is submitted that there was neither any materials nor any pleadings with regard to the transaction so as to cover under it Section 66 of the Code. It is submitted that in the Application which was filed by the Liquidator, pleadings were sketchy and no foundation was laid down for any fraudulent transaction. Further the condition precedent for declaring the transaction as fraudulent or wrongful trading is wanting. It is submitted that neither the pleading nor any material is there to come to any such finding. It is further submitted that the amount which was advanced was against the property. The fact that payment of amount is reflected in the Bank Transaction clearly indicate that there was no fraudulent transaction at the time when it was entered into.
8. We have considered the submissions of Learned Counsel for the parties and have perused the record.
9. The advance for property was made initially on 30th April, 2012 when receipt of Rs. 30 Lakhs was given and subsequently in the same financial year, the entire payment aggregating Rs. 3,25,00,000/- was made which is reflected by the Bank Transfers which is on record. There can be no issue regarding the payments of Rs. 3,25,00,000/- advanced against the property.
10. The Adjudicating Authority in paragraph 5 has observed that since the period of specific performance of agreement is over the debt is not due and payable hence the Application is barred by limitation. We are of the view that in the Application the issue was as to whether the transaction was fraudulent Company Appeal (AT) (Insolvency) No. 814/2022 -5- or wrongful trading within the meaning of Section 66 of the Code. We do not subscribe to the observations made in paragraph 5 of the Adjudicating Authority that application filed by Liquidator was barred by time.
11. Now coming to the observations made in paragraph 6, following has been observed by the Adjudicating Authority:
"6. Apart from the above point of limitation, this Bench also feels that the above transaction is neither "fraudulent" nor "wrongful trading" within the meaning of section 66 of the Code as it was done in the interests of acquiring asset to the Company. In fact, when this Bench brought the above serious legal infirmities to the notice of the counsel appearing for the Liquidator, he has fairly conceded that the above legal infirmities exists in the above Company Petition."
12. Section 66 of the Code provides for fraudulent trading or wrongful trading. Section 66(1)(2) are as follows:
"Section 66: Fraudulent trading or wrongful trading.
66. (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 Company Appeal (AT) (Insolvency) No. 814/2022 -6- 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 commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and
(b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor.
Explanation.--For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor."
13. We have looked into the pleadings made by the Appellant in the Application filed under Section 66. The conditions precedent as required to be fulfilled under sub-section 2 of Section 66 are not even pleaded in the Company Appeal (AT) (Insolvency) No. 814/2022 -7- application. The Adjudicating Authority has come to the conclusion that transaction is neither fraudulent nor wrongful trading. Since elaborate submissions have been made by the Learned Counsel for the parties we have looked into the pleadings and other materials on record. Sub-Section 2 of Section 66 of the Code required fulfilment of two conditions i.e. (a) before the insolvency commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and (b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor. Both the above conditions have to be fulfilled simultaneously. When the Corporate Debtor was allotted commercial space on 30.04.2012 and payments aggregating Rs. 3,25,00,000/- was made in the same financial year there was no occasion for Director of the Corporate Debtor to know that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process. CIRP in the present case was initiated on 11th April, 2019 by the Financial Creditor-Dena Bank. In the application filed by the Liquidator under Section 66 of the Code there is neither any pleading nor any material on record to indicate that Director of the Corporate Debtor knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process. The Adjudicating Authority has rightly come to the conclusion that transaction in question cannot be said to be fraudulent or wrongful trading. Company Appeal (AT) (Insolvency) No. 814/2022 -8-
14. We thus are satisfied that conditions precedent for holding a transaction to be fraudulent trading or wrongful trading is not fulfilled in the present case. We thus do not find any good ground to interfere with the Order impugned.
For the reasons above, the Appeal is dismissed.
[Justice Ashok Bhushan] Chairperson [Mr. Barun Mitra] Member (Technical) Basant/nn Company Appeal (AT) (Insolvency) No. 814/2022