Birla Financial Distribution Ltd vs Jagdish Singh Nain Resolution ...

[Arising out of order dated 13.12.2021 passed by the Adjudicating Authority, National Company Law Tribunal, New Delhi in Case No. IB- 1359/(ND)/2019]

IN THE MATTER OF:

Birla Financial Distribution Ltd. Unit No. 102, 1st Floor, Morya Landmark II, New Link Road Near Infinity Mall, Andheri(W), Mumbai, Maharashtra - 400053. ....Appellant

Versus

Shri Jagdish Singh Nain Resolution Professional of HBN Foods Limited 3rd Floor, 8/28, WEA, Abdul Aziz Road, Karol Bagh, New delhi - 110005. ....Respondent

Present:

For Appellant: Mr. Sunil Kumar Jain, Ms. Rishika Swarup, Advocates.

For Respondent: Mr. Abhishek Naik, Mr. Mrigank Kumar, Gulafsha Kureshi,

Advocates

JUDGMENT

[Per: Barun Mitra, Member (Technical)]

Company Appeal (AT) (Ins.) No. 545 of 2022 1 The present appeal, filed u/s 61 of the IBC Code, 2016 ('IBC' in short) by

the Appellant arises out of order dated 31.12.2021 (hereinafter referred to as

'Impugned Order') passed by the Adjudicating Authority (National Company Law

Tribunal, Delhi Bench-II) in C.P.(IB) No. 1359(ND)/2019. By the Impugned

Order, the Adjudicating Authority admitted the application filed under Sections

66, 68, 69, 70 and other provisions of IBC by the Resolution Professional,

directing the Respondents (including the present Appellant) to contribute jointly

and severally to the assets of the Corporate Debtor which was under Corporate

Insolvency Resolution Process ('CIRP' in short) besides directing criminal

prosecution of the Respondents (including the present Appellant) under Section

69 of IBC. Aggrieved by this impugned order, the present appeal has been

preferred by Respondent No. 21, who is the present Appellant.

2. The brief facts of the case which are necessary to be noted for deciding the

appeal are as follows:

 HBN Foods Ltd, the Corporate Debtor was originally incorporated as a

private limited company on 01.03.2013 and later converted into a public

limited company in July 2013. The main objective of the Corporate Debtor

was manufacture of food products and beverages but deviating there-from,

it launched a collective investment scheme in August 2013 collecting

money from public sans SEBI registration.

Company Appeal (AT) (Ins.) No. 545 of 2022 2  The Investment scheme was stopped abruptly without repayment of the

deposit collected from public leading to an application being filed before

Adjudicating Authority for initiation of CIRP of the Corporate Debtor by

Shri Ashoksing L Rajaput, representing a group of financial creditors. The

above applicant had arrayed a total of 21 respondents in the matter

including the present Appellant.

 The Adjudicating Authority ordered initiation of CIRP proceedings of the

Corporate debtor on 14.08.2018 and appointed an Interim Resolution

Professional ('IRP' in short). The IRP after perusal of the balance sheet of

the Corporate Debtor and its transactions, chose to appoint a chartered

accountant firm for carrying out Transaction Audit ('TA' in short) of the

accounts of the Corporate Debtor.

 The Transaction Auditor accordingly carried out audit for the period from

the date of incorporation of the Corporate Debtor to the date of initiation

of CIRP against the Corporate Debtor and submitted the Transaction Audit

Report ('TAR' in short) on 21.02.2020.

 The TAR besides providing details on the schedule of related party also

contain findings on preferential transactions as per Section 43 of IBC,

undervalued transactions as per Section 45 of IBC, extortionate credit

transactions as per Section 50 of IBC and fraudulent transactions as per

Section 66 of IBC.

 Based on the TAR findings, the Resolution Professional filed IA No

2844/2022 before the Adjudicating Authority for declaring certain Company Appeal (AT) (Ins.) No. 545 of 2022 3 transactions of the Corporate Debtor with the set of 21 respondents

including the present Appellant as sham and fraudulent. The Adjudicating

Authority after considering the matter passed the impugned order wherein

it held that the Corporate Debtor having already come under liquidation,

the proceedings under section 66 of IBC be continued against the

suspended board of directors of the Corporate Debtor and other related

persons including recovery of Rs. 2687.27 lakhs jointly and severally from

the Respondents and directed the Resolution Professional to institute

criminal prosecution against them including the present Appellant.

 Aggrieved by the impugned order, the present Appellant, Birla Financial

Distribution Ltd (Respondent No. 21 in IA No 2844/2020) has preferred

this appeal.

3. Making his submissions, elucidating on the contents of TAR, the Learned

Counsel for the Appellant stated that the TAR noted that Rs.1527.82 lakhs had

been transferred to 14 related parties; around Rs.982.12 lakhs was withdrawn

by 6 erstwhile/suspended Board of Directors; various other transactions were

entered with independent/unidentified parties and Rs.1.25 crores worth

transaction made with the Appellant being the only identifiable independent

party. It was further asserted that the TAR while holding that these transactions

between the Corporate Debtor and other parties including the Appellant during

FY 2013-14 to 2018-19 were sham and fraudulent also observed that the veracity

of the transfer transactions with related parties cannot be ascertained as they Company Appeal (AT) (Ins.) No. 545 of 2022 4 were not supported by documents. Similarly, the withdrawals made by

erstwhile/suspended Board of Directors were also not ascertainable in the

absence of any documents/information. It is also submitted that the TAR noted

that the nature and purpose of transaction amounting Rs.1.25 crores with

present Appellant could not be identified/ascertained in the absence of

documents.

4. Contesting the findings of the IRP and the TAR in respect of transactions

entered into between the Corporate Debtor and the Appellant, it was contended

by the Learned counsel that the Appellant, Birla Financial Distribution Ltd

('BFDL' in short) had sent two letters dated 27.06.2015 and 24.08.2015 to HBN

Dairies and Allied Ltd. ('HBND' in short) which were contractual agreements to

provide "Advisory Services" in relation to reverse merger of HBND. While sending

these letters, the Appellant claims to have been unaware of the Corporate

Debtor having any financial disputes with the financial creditors. Further

pointing out that as per their 'Legal Service Mandate', the Appellant provided

advisory legal services to HBND for which fees was levied and for this purpose

invoices were raised for Rs.1.25 crores. While admitting that this sum was paid

to them not by HBND but by HBN Foods Ltd., it was argued that there was

nothing improper in this arrangement as HBND was a holding company of the

HBN Foods Ltd. Moreover, the fact that these payments can be evidenced

through banking transactions, hence it is wrong on part of the TAR and IRP to

view the transactions as fraudulent withdrawal to defraud creditors. Company Appeal (AT) (Ins.) No. 545 of 2022 5

5. The Learned counsel for the Appellant admitted delay on the part of the

Appellant in furnishing their response before the NCLT on the aforesaid

transactions. It was however urged that the delay was because their Director

having been diagnosed with COVID-19 had to undergo isolation and undergo

prolonged rest due to post-Covid complications. It has also been submitted that

due to COVID, the office premises of the Appellant was closed and hence not

possible to file a reply before the Adjudicating Authority. Pointing out that the

Adjudicating Authority held that since the Appellant did not deny or contradict

the averments made against them, it tantamount to admission thereof, the

Learned counsel for the Appellant stated that with the right to file their reply

having been closed by the Adjudicating Authority on 13.07.2021, it has caused

great prejudice to their interests.

6. Refuting these submissions, it has been contended by the Learned counsel

for the Respondent that payment of Rs.1.25 crores was received by the Appellant

from HBN Foods Ltd. though there was no supporting legal contract between the

Appellant and HBN Foods Ltd. Advancing further arguments, it was stated that

the Appellant failed to explain that while advisory services were provided by them

to HBND, why they raised invoices for payment against HBN Foods Ltd.

Furthermore, when there was no Board Resolution of HBN Foods Ltd. permitting

the payment of fees by them to the Appellant for providing services to HBND, it

was pressed by the Learned Counsel for the Respondent that these transactions Company Appeal (AT) (Ins.) No. 545 of 2022 6 were sham and fraudulent in nature with the intent of siphoning off the money

of the Corporate Debtor to defraud the creditors.

7. The Learned counsel of the Respondent also added that the Adjudicating

Authority had justifiably closed the right to file reply by the Appellant after

noticing that even after the matter was listed on multiple dates and several

adjournments given, no reply had still been filed by them. It was also argued that

it is settled law that failure to make specific denial of averments made and

documents produced against any party amounts to admission. Rebutting the

defence of Covid raised by the Appellant in this regard, it was submitted that

Covid could have at best affected the Director only for a month, but in this case,

the absence has been for far too long and that this was a case of deliberate evasion

since the Appellant had no valid grounds to counter the Avoidance Transaction

application.

8. We have duly considered the detailed arguments and submissions

advanced by the Learned Counsel for both the parties and perused the records.

9. It is seen at pages 60-71 of the Appeal Paper Book that in the TAR, the

Transaction Auditor has put in the disclaimer that "our work was constrained

on account of limited/inadequate/incomplete information and non-

receivable data made available by IRP and available in the public domain."

In respect of their findings on cash withdrawal by the Corporate Debtor, it has Company Appeal (AT) (Ins.) No. 545 of 2022 7 been qualified in the TAR that the "utilisation of cash withdrawal could not be

ascertained due to non-availability of information and hence cannot be

commented upon." In respect of related party transactions, it has been stated in

the TAR that "in absence of availability of any agreement, document or

information, audited financial statement, we are unable to comment upon the

commercial aspect of these transactions or whether these transactions have

taken place in the ordinary course of business of the Corporate Debtor or not.

However, looking to the volume and frequency of these transactions, these

transactions seems to be of suspicion nature of loan entries by Corporate Debtor

to its group concerns. Since no record or document was available with us that's

why we cannot comment whether the provisions of Companies Act, 2017 relating

to loans and investments by the Company have been complied or not." Similarly,

in respect of preferential transactions and avoidance of undervalued

transactions, the TAR notes that in the absence of information or records or

limited information available in public domain, we are not able to identify and

comment upon the transactions. As regards fraudulent transaction, TAR clearly

notes that while their "observations provides the possible

fabrication/diversion of money collected from the public at large, in the

absence of any specific information/documents or agreements or discussion

with Corporate Debtor, we cannot give a conclusive opinion and treat this

as a matter of further investigation subject to availability of information."

Company Appeal (AT) (Ins.) No. 545 of 2022 8

10. Thus on going through the TAR, it is more than amply clear that

Transaction Auditor has admitted inability to comment on the transactions falling

under Sections 43, 45 and 50 of IBC. Even in respect of fraudulent transactions

under Section 66 of IBC, the Transaction Auditor has admitted that they are not

in a position to give a conclusive opinion and that this matter requires further

investigation.

11. We therefore feel that at this juncture it would be useful to study the

analysis and findings of the Adjudicating Authority. That these transactions

requires further investigation has also been acknowledged in no uncertain terms

by the Adjudicating Authority at paras 22-28 of the impugned order, the relevant

excerpts of which is as reproduced below:

***** ***** *****

"22. On perusal of the Audit Report, we observe

that so far the preferential transactions under section 43,

avoidance of undervalued transaction under section 45 and

section 50 are concerned, in the absence of the relevant

documents and information, the Auditor has shows their

inability to comment on these transactions, but so far the

transactions under section 66 i.e. fraudulent transactions

are concerned, the Auditor at the internal page 21 and page Company Appeal (AT) (Ins.) No. 545 of 2022 9 53 of the Auditor's Report has given a finding "in our

opinion falsification/diversion of the money collected from

the public at large. However, in the absence of any specific

information documents for agreement for discussion with

the corporate debtor we cannot give a conclusive opinion

that it as is a matter of further investigation is subject to

availability of the information.

***** ***** *****

23. When we consider the findings of the Auditor, in the

light of the conduct of the respondents, who failed to file the

reply, despite several adjournments then we are of the

considered view that by not filing the reply the respondents

number 2 to 21 have accepted the averments made in the

application as well as the finding given by the auditors.

****** ****** ******

24. A perusal of the provision shows that if during the

corporate insolvency resolution process or liquidation

process, it is found that any business of the corporate debtor

has been carried out on with intent to defraud creditors of the Company Appeal (AT) (Ins.) No. 545 of 2022 10 corporate debtor or for any fraudulent purpose the

Adjudicating Authority may on the application of the

resolution professional or liquidator as the case may be pass

an order.

25. In terms of the provisions and the Transaction Audit

Report, when we consider the submissions of the applicant

then we are of the considered view that the transactions

referred to in the Transactions Audit Report, comes under the

purview of section 66 of the IBC.

26. In sequential to above, we are, therefore, of the

considered view that the respondents no. 2 to 21, the

suspended board of directors of the corporate debtor and

other related persons were carrying on business with intent

to defraud the creditors of the corporate debtor or with

fraudulent purpose and accordingly, they misappropriated

Rs.2687.27 lakhs and diverted to their own use with intent to

defraud the creditors. Therefore, they are liable to make such

contribution to the assets of the corporate debtor.

27. Accordingly, we direct the Respondents number 2 to

21 to make contribution of Rs. 2687.27 Lakhs (Two Thousand Company Appeal (AT) (Ins.) No. 545 of 2022 11 Six Hundred Eighty Seven Lakhs and Twenty Seven

Thousand) jointly or severely to the assets of the corporate

debtor within a period of maximum 02 (two months from the

date of this order. And if they fail to pay the aforesaid amount

within the prescribed period, then same shall be realized from

their property/properties.

28. Apart from that the applicant is also directed to

institute a criminal prosecution against the Respondents

numbers 2 to 21 under section 69 of IBC 2016 in accordance

with the provision of law."

12. In sum, Transaction Auditor has admitted inability to comment on the

transactions falling under Sections 43, 45 and 50 of IBC and in respect of

fraudulent transactions under Section 66 of IBC also did not give a conclusive

opinion and opined need of further investigation. This aspect was also

emphatically asserted by the Learned counsel for the Appellant while making his

pleadings. We find that the Adjudicating Authority has also taken due cognisance

of the observations made in the TAR that in respect of the alleged fraudulent

transactions under Section 66 of IBC, no conclusive opinion could be given by

them and that the matter required further investigation. There is clear

convergence of opinion between the Transaction Auditor and the Adjudicating

Authority that further investigation was warranted in the matter. Viewed against Company Appeal (AT) (Ins.) No. 545 of 2022 12 this backdrop, we also note that the Adjudicating Authority had indeed given

several opportunities to the Appellant to deny/contravene the findings of the TAR.

Be that as it may, we may not lose sight of the fact that the Appellant has

explained his inability to send a response as he was Covid stricken for nearly a

month and that post-Covid complications had prolonged the recuperation period.

The Appellant has also pointed out that even his office set-up faced work

disruption due to Covid and hence the inability to send a timely response. The

abnormal situation caused by the Covid pandemic at that point of time is well

recognised and benefit of doubt could well have been extended to the Appellant.

The plea of indisposition due to Covid as taken by the Appellant did not quite

deserve to be brushed aside and ignored. In the light of these facts we feel that

the foreclosure of the Appellant's right to file reply by the Adjudicating Authority

on 13.07.2021 could have been pretty well avoided to enable proper and objective

examination of the issue at hand so as to arrive at a conclusive determination on

the nature of transactions. We also note that inspite of the fact that TAR had

clearly suggested further investigation, we do not find any steps having been

taken by the Resolution Professional after receipt of the TAR to conduct further

investigations into the said transactions so as to conclusively determine the

fraudulent nature of transactions and establish the possible diversion of funds

with the intent to defraud the creditors of the corporate debtor.

13. Given the aforesaid discussion and in the face of the given facts and

circumstances, we are of the considered opinion that the real nature of Company Appeal (AT) (Ins.) No. 545 of 2022 13 transactions in question requires deeper examination and the matter be put to

rest only after the true character of the transactions is unravelled. The need for

unearthing the true nature and character of these transactions has acquired

special relevance in the present matter since the Adjudicating Authority has

ordered initiation of criminal prosecution of the Appellant under Section 69 of

IBC besides directing recovery of Rs. 2687.27 lakhs jointly and severally

including from the present Appellant while fore-closing his right to reply, which

prima-facie militates against the principles of natural justice.

14. For the foregoing reasons, we therefore set aside the impugned order

and remand the matter back to the Adjudicating Authority for taking

appropriate steps to conduct a detailed and in-depth investigation of the

transactions in dispute to arrive at a conclusive opinion whether they fall

within the bracket of Section 66 of the IBC without getting influenced by

any comments made in this judgment and decide on merits in accordance

with law. We also restore the right of the Appellant to furnish his

reply/clarifications on the transactions in question in the interest of justice.

However, while allowing one more opportunity to the Appellant to be heard,

the Adjudicating Authority may like to fix the timeline to obviate the scope

of dragging the matter any further by the Appellant. Until further

investigation is completed, no further steps be taken to institute criminal

prosecution against the Appellant nor enforce the recovery of any amount

Company Appeal (AT) (Ins.) No. 545 of 2022 14 towards these transactions. The appeal is disposed of on the above terms.

No order as to costs.

[Justice Ashok Bhushan] Chairperson

[Dr. Alok Srivastava] Member (Technical)

[Mr. Barun Mitra] Member (Technical)

Place: New Delhi Date: 02.11.2022 Shashi

Company Appeal (AT) (Ins.) No. 545 of 2022 15