Drive India Enterprise Solutions ... vs Valay Group

NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI Company Appeal (AT) (Insolvency) No. 940 of 2020 (Arising out of Order dated 11.08.2020 passed by the Adjudicating Authority (National Company Law Tribunal), Court No.5, Mumbai Bench, in M.A. 3951/2019 in C.P. 2409/I&B/MB/2019)

IN THE MATTER OF: Drive India Enterprise Solutions Limited Through its Authorized representative 7, Kamla Executive Park, Off Andheri Kurla Road, Andheri (East), Mumbai-400059, Maharashtra. Also At: B1/G2, Second Floor, Mohan Cooperative Industrial Estate, Mathura Road, New Delhi-44. .... Appellant Vs 1. Valay Group, A/7, Swamiraj Vihar, Near Suncity Complex, Anand Nagar, Sinhagad Road, Pune, Maharashtra. 2. Uday Sakrikar, Resolution Professional/ Liquidator Of Starconn Mobility Private Limited, 303, Rahul Vihar A, Lane No.8, Dahanukar Colony, Kothrud, Pune, Maharashtra.

3. Shirpal Gandhi, Flat No.315, City Park Society, S. No.586 A/5/1/ Pitale Nagar, Bibwewadi, Maharashtra.

4. Aman Gupta, Flat No.1002, CTS 210 FP-72, Kalyani Nagar, Puna, Maharashtra.

5. Prachay Advisors Private Limited, Through its Authorised Representative, Office No.309, S. No.1723, P No.29/2 City Square, Shivajinagar, Bhamburda, Pune, Maharashtra. ... Respondents

Company Appeal (AT) (Insolvency) No. 940 of 2020 1 Present: For Appellant: Mr. Jitender Chaudhary, Mr. Vaibhav Kamble, Advocates.

For Respondent: CS Omkar Deosthale, for R-2.

Mr. Harshavardhan Bhende, for R-3 & R-4

JUDGMENT

ASHOK BHUSHAN, J.

This Appeal has been filed against the order dated 11th August, 2020

passed by National Company Law Tribunal, Court No.5, Mumbai Bench

allowing Application filed by Resolution Professional to initiate liquidation

process.

2. Brief facts of the case and sequence of the events necessary to decide

this Appeal are:

(i) Respondent No.1 Valay Group issued a Demand Notice as per

Section 8 of the Insolvency and Bankruptcy Code, 2016

(hereinafter referred to as the 'Code') claiming an outstanding

dues of Rs.11,60,610/- to Starconn Mobility Pvt. Ltd., the

Corporate Debtor.

(ii) On 13th August, 2019, Adjudicating Authority issued notice on

Section 9 Application filed by Respondent No.1. The Company

Petition was taken up on 13th August, 2019 and thereafter on

23rd August, 2019 and the matter was adjourned to 29th

August, 2019. On 29th August, 2019, the Corporate Debtor -

Starconn Mobility Private Limited appeared and accepted the

Company Appeal (AT) (Insolvency) No. 940 of 2020 2 liability as well as default. The Adjudicating Authority reserved

the order on 29th August, 2019 on Section 9 Application. By

an order dated 17th September, 2019, Adjudicating Authority

admitted the Application under Section 9 of the Code. The

Adjudicating Authority in its order has noted that learned

Counsel appearing on behalf of the Corporate Debtor admits

the liability and default and hence there is no objection for

admission of the petition by the Corporate Debtor. One Shri

Ashish Vyas was appointed as Interim Resolution Professional

(IRP) by the said order.

(iii) On 28th September, 2019, the IRP made a public

announcement regarding start of the Corporate Insolvency

Resolution Process (CIRP) as per the provisions of the Code.

(iv) Respondent No.5 after coming to know about the paper

publication filed its claim in Form-C to IRP on 09.10.2019

claiming total outstanding amount of Rs.58,80,274/-. The IRP

constituted the Committee of Creditors consisting of only

Respondent No.5 - Financial Creditor.

(v) The first meeting of the Committee of Creditors (CoC) was held

on 22.10.2019, wherein a Resolution was passed to replace the

IRP with Mr. Uday Shreeram Sakrikar as a Resolution

Professional (RP). Under 'any Other Matter', a Resolution was

taken by the CoC that it would be better to take company in

direct liquidation. In the meeting, IRP has raised an Agenda

Company Appeal (AT) (Insolvency) No. 940 of 2020 3 Item for conducting a transactional/ forensic audit, which was

deferred to be taken up in the next meeting of CoC. In

pursuance of Resolution of CoC dated 22nd October, 2019, an

Application was filed by RP under Section 33, sub-section (2)

of the Code for passing an order of Liquidation.

(vi) The Appellant - Drive India Enterprises Solutions Limited

came to know about the initiation of CIRP on 16th November,

2019, on which date it sent an email to IRP that they are

Operational Creditor of Corporate Debtor, who owes Rs.22-25

crores. They sought 15 days' time to submit their claim. By

an email dated 22nd November, 2019, the Appellant submitted

its claim in Form-B claiming dues of Rs.214,174,456/- as

receivable from M/s Starconn Mobility Pvt. Ltd. on the basis of

the invoices filed along with the claim. On the same day, the

Appellant wrote an email to IRP praying that they need last

three years' audited financial statements/ purchase register/

sales register/ GST return/ bank book of StarConn Mobility

Pvt. Ltd. On 30th November, 2019, IRP wrote an email, asking

the Appellant to share Ledger statement of Starconn Mobility

and calculation of interest was also asked for. On 4th

December, 2019, an email was received from IRP to the

Appellant again requesting for the documents as referred to in

earlier email. IRP also informed that he will be handing over

to RP appointed by NCLT. On 04.12.2019 itself, the Appellant

Company Appeal (AT) (Insolvency) No. 940 of 2020 4 had sent a Ledger Statement and interest working. On 9th

December, 2019, IRP has written to the Appellant that he has

handed over the charge to Mr. Uday Sakrikar, the Resolution

Professional and the Appellant may communicate with RP. On

12th December, 2019, the Appellant wrote an email to Mr. Uday

Sakrikar, RP requesting him to provide Financial Statements

for last three years. RP was also requested to provide update

on status of the Appellant's claim and list of members of the

CoC. RP for the first time on 16th December, 2019 wrote to the

Appellant "I am sorry for the delay, I will revert back by EOD"

(vii) On 17th December, 2019, Valay Group, who had filed the

Application under Section 9 filed their claim as Financial

Creditor, which was admitted and list of creditors was drawn

on 21st December, 2019 including Valay Group as Financial

Creditor.

(viii) On 18th December, 2019, the Application filed by RP for

liquidation was taken up by the Adjudicating Authority. The

Adjudicating Authority took the view that there is no specific

resolution to liquidate the Corporate Debtor. The RP was

directed to call a meeting of CoC and pass proper resolution

and produce the same.

(ix) The RP called a meeting of CoC on 28th December, 2019.

(x) The RP after sending email on 16th December, 2019 to the

Appellant, did not sent any communication including

Company Appeal (AT) (Insolvency) No. 940 of 2020 5 communication regarding order of the NCLT dated 18th

December, 2019 regarding convening of the meeting of the

CoC.

(xi) On 28th December, 2019, meeting of CoC held with

Respondent No.5 as only Financial Creditor and its two

Suspended Directors. The CoC passed Resolution, giving its

consent to initiate Liquidation of the Corporate Debtor. After

CoC meeting dated 28th December, 2019, the RP filed the

Resolution dated 28.12.2019 before the Adjudicating

Authority.

(xii) The Adjudicating Authority heard the Application on 1st

January, 2020, heard the Counsel for the Applicant and

reserved it for orders.

(xiii) The Appellant on 13th and 22nd January, 2020 wrote to the RP

requesting to update about the status of their claim, RP was

also requested to provide number of creditors and their

amount involved. It was also requested by Appellant that they

will like to join as part of CoC meeting and date and time of

CoC meeting by communicated.

(xiv) On 25th January, 2020, RP sent an email to the Appellant,

sending the list of creditors as on 21st December, 2019 and

certain documents were also sent. For the first time RP

informed the Appellant that Application under Section 33 of

the Code has been filed and orders for the same are awaited.

Company Appeal (AT) (Insolvency) No. 940 of 2020 6

(xv) On 5th February, 2020, a personal meeting was held at the

place of RP in which Appellant's three officials had appeared.

In the meeting, the Appellant has also raised their suspicious

about the way IBC filed by Valay Group and entire process

being held by Prachay Advisors. The Appellant also

emphasized the forensic audit of books of accounts of the

Corporate Debtor. An email dated 8th February, 2020 was sent

by the Appellant mentioning the details of the meeting held on

5th February, 2020. On 12th February, 2020, the Appellant

again requested regarding their claim. The Resolution

Professional on 12th February, 2020 admitted the claim of

Appellant in totto.

(xvi) On 17th February, 2020, the Resolution Professional sent an

email to the Appellant informing that claim of the Appellant

has been verified and found in order and it is being accepted.

In the email Resolution Professional also stated that since the

Appellant has been included in the List of Creditors for an

amount of Rs.21,41,74,456/- they are entitled for notice of

CoC meeting they being an operational creditor for an amount

aggregating not less than 10% of the debt of the Company. List

of Creditors, Version 3.0 was also communicated, in which the

Appellant was also included as one of the Operational Creditor.

In the email, RP also wrote that the List of Creditors will be

filed with NCLT Mumbai. On 7th March, 2020, the Resolution

Company Appeal (AT) (Insolvency) No. 940 of 2020 7 Professional provided the copy of 2nd CoC meeting dated 28th

December, 2019.

(xvii) On 11th August, 2020, the Adjudicating Authority passed the

impugned order of Liquidation under Section 33. Aggrieved by

the order dated 11th August, 2020, this Appeal has been filed

by the Appellant (Operational Creditor).

3. We have heard Shri Jitender Chaudhary, learned Counsel for the

Appellant, Shri CS Omkar Deosthale, learned Counsel for Respondent No.2

and Shri Harshavardhan Bhende, learned Counsel for Respondent Nos.3

and 4. No one appeared for Respondent Nos.1 and 5.

4. Shri Jitender Chaudhary, learned Counsel for the Appellant,

challenging the Liquidation order, submits that the impugned order is

vitiated by material irregularity and fraud committed by RP in connivance

and collusion with Corporate Debtor, Respondent Nos, 1, 3, 4 and 5. Both

IRP and RP have not discharged their duties as entrusted to them under

the Code and the relevant Regulations. Although, the Appellant's claim

was received on 22nd November, 2019 by the IRP and thereafter all relevant

documents were submitted by the Appellant, which documents were also

handed over to Respondent No.2 on 5th December, 2019, but the claim of

the Appellant was deliberately kept pending by the RP. The RP did not

inform the Appellant about the Application filed by him under Section 33,

although he sent communication on 16.12.2019. Under order of

Adjudicating Authority dated 18.12.2019, a meeting of CoC was to be

convened by RP, which he actually convened on 28th December, 2019, but

Company Appeal (AT) (Insolvency) No. 940 of 2020 8 no information of Meeting of CoC was given to the Appellant, although the

Appellant was entitled to notice of the Meeting, its stake being more than

10% of the total debt of the Company. The RP deliberately concealed the

material information from the Appellant to somehow get the Liquidation

order passed without consideration of claim of the Appellant. The RP in

CoC Meeting dated 28th December, 2019 did not bring to the notice of the

CoC that claim of the Appellant has already been received on 22nd

November, 2019. The List of Creditors, Version 2.0 was prepared by RP on

21st December, 2019, but the name of the Appellant was not included.

5. Learned Counsel for the Appellant further submits that the

Corporate Debtor had taken a loan and had availed a combined credit limit

from State Bank of India and after filing of the Application under Section

9, they repaid the entire loan amounting to Rs.14.14 crores to the State

Bank of India on 27th August, 2019, on which debt, the State Bank of India

has also issued a No Objection Certificate. By payment of dues, the

properties charged with the State Bank of India were discharged. It is

submitted that Application under Section 9 by Financial Creditor was

managed by Corporate Debtor themselves and despite there being an

Agenda in the meting dated 22nd October, 2019 for transactional/ forensic

audit, no audit was directed. In the Meeting dated 22nd October, 2019, the

CoC blindly accepted the statement of Suspended Director that it has no

asset except the bank balance of Rs.42,408/-. It is surprising that

Financial Creditor, who claimed dues about Rs.54 lakhs, will resolve for

Liquidation without making any efforts to know about the assets and

Company Appeal (AT) (Insolvency) No. 940 of 2020 9 transactions by the Corporate Debtor. This clearly indicates that there was

collusion between the Corporate Debtor, Financial Creditor and the RP.

The Application filed by Financial Creditor under Section 9 was not

objected by the Corporate Debtor and dues were readily admitted. The RP

as per Section 25 of the Code, did not protect the assets of the Corporate

Debtor, including the continued business operations of the Corporate

Debtor and also did not prepare the Information Memorandum as per

Section 29 of the Code. The present was a clear case of material

irregularities and fraud committed to deny the legitimate dues of the

Appellant. The whole IBC process was pre-planned and proceeded on

scripted line, which is apparent from sequence of events clearly exhibited

by taking a decision in the very first CoC meeting to liquidate the Corporate

Debtor. It is submitted by learned Counsel for the Appellant that the

Appellant had already informed the RP and the RP was obliged to initiate

transaction audit and have to form an opinion as per Section 43, 44, 45,

46, 47, 48, 49, 50 and 51 of the Code. In order to circumvent the liabilities

amounting to more than Rs.21 crores to the Appellant, the Corporate

Debtor and Respondent Nos.3, 4 and 5 orchestrated the present CIRP

proceedings. It is a fit case for initiation of prosecution under Section 65

and 69 of the Code.

6. The learned Counsel for Respondent No.2 submits that RP had to act

on the basis of Resolution passed by Committee of Creditors and the

Committee of Creditors have passed Resolution on 22nd October, 2019 for

direct Liquidation of the Corporate Debtor. The Respondent No.2 is duty

Company Appeal (AT) (Insolvency) No. 940 of 2020 10 bound to file Application for Liquidation. Insofar as the claim of the

Appellant is concerned, it is submitted that same was under verification

and on 12th February, 2020, the claim of the Appellant was admitted. The

learned Counsel for Respondent No.2 submits that Liquidator has already

appointed the Transactional Auditor. There is no ground to quash the

Liquidation order. He further submits that suspended Director and

Promoter of the Corporate Debtor were not cooperating and Respondent

Nos.3 and 4 and had not provided the books of accounts and any

information prior to Liquidation order.

7. The learned Counsel appearing for Respondent Nos.3 and 4 denied

the allegations of collusion of Respondent Nos.3 and 4 with Respondent

No.2. He further submits that SBI loan was not willingly paid, but was

recovered by SBI. The Respondent No.3 and 4 in their reply has stated that

they have no objection, if the Liquidation process is stayed or reversed by

this Tribunal.

8. Respondent No.5 did not appear at the time of hearing, however, had

filed its reply stating that they had entered into an Inter-Cooperate Deposit

Agreement with Corporate Debtor on 4th October, 2018 and has advanced

an amount of Rs.50 lakhs. Respondent No.5 came to know about the paper

publication on 30th September, 2019 that Corporate Insolvency Resolution

Process has started against the Corporate Debtor. They filed their claim

on 9th October, 2019 to IRP.

9. We have considered the submission of learned Counsel for the

parties and perused the record.

Company Appeal (AT) (Insolvency) No. 940 of 2020 11

10. The challenge in this Appeal is to an order passed under Section 33

directing for Liquidation of the Corporate Debtor. Section 61, sub-section

(4) of the Code provides for grounds on which an order of Liquidation can

be challenged. Section 61, sub-section (4) is as follows:

"61(4) An appeal against a liquidation order passed under section 33, or sub-section (4) of section 54L, or sub- section (4) of section 54N, may be filed on grounds of material irregularity or fraud committed in relation to such a liquidation order."

11. As per the above provision, the Appeal against order under Section

33 can be entertained only on the grounds of material irregularity or fraud

committed in relation to such a liquidation order. The learned Counsel for

the Appellant has pressed this Appeal on both the grounds that is ground

of material irregularity and fraud. The submission is that entire CIRP was

result of collusion between the Corporate Debtor, Financial Creditor as well

as IRP/RP. We first proceed to examine the allegation of material

irregularity as contended by the Appellant.

12. We may first notice the statutory provisions regarding duties of RP.

Section 25 of the Code, which deals with 'Duties of resolution professional',

is as follows

"25. Duties of resolution professional. -

(1) It shall be the duty of the resolution professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor.

Company Appeal (AT) (Insolvency) No. 940 of 2020 12 (2) For the purposes of sub-section (1), the resolution professional shall undertake the following actions, namely: -

(a) take immediate custody and control of all the assets of the corporate debtor, including the business records of the corporate debtor;

(b) represent and act on behalf of the corporate debtor with third parties, exercise rights for the benefit of the corporate debtor in judicial, quasi- judicial or arbitration proceedings;

(c) raise interim finances subject to the approval of the committee of creditors under section 28;

(d) appoint accountants, legal or other professionals in the manner as specified by Board;

(e) maintain an updated list of claims;

(f) convene and attend all meetings of the committee of creditors;

(g) prepare the information memorandum in accordance with section 29;

(h) invite prospective resolution applicants, who fulfil such criteria as may be laid down by him with the approval of committee of creditors, having regard to the complexity and scale of operations of the business of the corporate debtor and such other conditions as may be specified by the Board, to submit a resolution plan or plans.

(i) present all resolution plans at the meetings of the committee of creditors;

(j) file application for avoidance of transactions in accordance with Chapter III, if any; and

(k) such other actions as may be specified by the Board."

Company Appeal (AT) (Insolvency) No. 940 of 2020 13

13. We may notice provisions of the Insolvency and Bankruptcy Board of

India (Insolvency Professional) Regulations, 2016 also. Regulation 7, sub-

regulation (2), sub-clause (h) provides that Resolution Professional shall

abide by the Code of Conduct specified in the First Schedule of the

Regulations. First Schedule contains 'Code of Conduct for Insolvency

Professionals'. It is useful to notice Item No.1, 12 and 14 only for the

purpose of this case:

"1. An insolvency professional must maintain integrity by being honest, straightforward, and forthright in all professional relationships.

12. An insolvency professional must not conceal any material information or knowingly make a misleading statement to the Board, the Adjudicating Authority or any stakeholder, as applicable.

14. An insolvency professional must not act with mala fide or be negligent while performing his functions and duties under the Code."

14. The other Regulation, which needs to be noticed is the Insolvency

and Bankruptcy Board of India (Insolvency Resolution Process for

Corporate Persons) Regulations, 2016, which contain details of Regulation

for carrying out insolvency resolution process. Regulation 13 deals with

'Verification of claims'. Regulation 13(1) is as follows:

"13. Verification of claims.

(1) The interim resolution professional or the resolution professional, as the case may be, shall verify every claim, as on the insolvency commencement date, within seven days from the

Company Appeal (AT) (Insolvency) No. 940 of 2020 14 last date of the receipt of the claims, and thereupon maintain a list of creditors containing names of creditors along with the amount claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims, and update it."

15. Regulation 27, requires RP to within seven days of his appointment

to appoint two registered valuers to determine the fair value and the

liquidation value of the Corporate Debtor. Regulation 35A of CIRP

Regulations, 2016 oblige the RP to conduct transaction audit as per

timelines prescribed in regulations. The RP is required to form an opinion

whether Corporate Debtor has been subjected to any transaction covered

under Sections 43, 45, 50 or 66 on or before 75th day of the initiation of

CIRP. Regulation 36 provides for 'Information Memorandum'. Regulation

36(1) and 36(2)(a) & (b) are as follows:

"36. Information memorandum.

(1) Subject to sub-regulation (4), the resolution professional shall submit the information memorandum in electronic form to each member of the committee within two weeks of his appointment, but not later than fifty-

fourth day from the insolvency commencement date, whichever is earlier.

(2) The information memorandum shall contain the following details of the corporate debtor-

(a) assets and liabilities with such description, as on the insolvency commencement date, as are generally necessary for ascertaining their values. Explanation: 'Description'

Company Appeal (AT) (Insolvency) No. 940 of 2020 15 includes the details such as date of acquisition, cost of acquisition, remaining useful life, identification number, depreciation charged, book value, and any other relevant details.

(b) the latest annual financial statements;"

16. We may now examine the events and action of IRP/ RP after the

initiation of CIRP. The CIRP was initiated on 17th September, 2019. Public

announcement was made on 28th September, 2019. The Appellant could

not come to know about the publication and after they came to know only

on 16th November, 2019, they wrote the IRP seeking fifteen days' time to

file their claim. On 22nd November, 2019, the Appellant filed their claim in

Form-B for an amount of Rs.214,174,456/-. The IRP asked for several

documents for verification of the claim, which all were submitted by the

Appellant on 30th November, 2019 and 4th December, 2019. On 5th

December, 2019, the RP took over charge from IRP and received all

documents including the claim of the Appellant, which fact is admitted in

its reply filed in this Appeal. The RP received the claim of Valay Group on

17th December, 2019 and he admitted the said claim within three day and

prepared the List of Creditors of 21st December, 2019 including Valay

Group in the List of Creditors. The RP after taking charge on 5th December,

2019, in pursuance of Resolution dated 22nd October, 2019 of the CoC has

filed an Application for Liquidation before the Adjudicating Authority,

obviously after 5th December, 2019. The Appellant sent an email on 12th

December, 2019 to RP enquiring about the status of its claim and

Company Appeal (AT) (Insolvency) No. 940 of 2020 16 requesting to provide financial statements of the Corporate Debtor, which

the RP communicated on 16th December, 2019 by stating "I am sorry for

the delay, I will revert back by EOD". There has been no communication

from RP after 16th December, 2019 till 25th January, 2021. The Appellant's

claim was submitted on 22nd November, 2019, which was received by the

RP on 5th December, 2019. The Appellant was required to be shared the

relevant details like filing of an Application for Liquidation. After 5th

December, 2019, the RP convened a Meeting of CoC on 28th December,

2019, but did not share the said information with the Appellant nor

Appellant was given any information or the notice of the meeting. The

Appellant's due being more than 10% of the aggregate debt of the Company,

Appellant was entitled to participate in the CoC, which fact has been

subsequently admitted by RP himself in his communication dated 17th

December, 2019.

17. As noted above, under the Insolvency Professional, Regulation, 2016,

by virtue of Regulation 7(2)(h), which oblige the RP to abide by the Code of

Conduct specified in the First Schedule of the Regulations. Regulation 7,

sub-clause (2)(h) is as follows:

"7(2) (h) abide by the Code of Conduct specified in the First Schedule to these Regulations;"

The First Schedule, Item Nos.1, 12 and 14 are extracted above for

ready reference.

Company Appeal (AT) (Insolvency) No. 940 of 2020 17

18. The RP is obliged not to conceal any material information from any

stakeholders. Firstly, it can be said that information regarding filing of an

Application for Liquidation before the Adjudicating Authority after receipt

of the claim of the Appellant was the material information, which ought to

have been communicated to the Appellant by RP. The RP, thus, concealed

the said information from the Appellant. Secondly, when CoC Meeting was

convened by RP on 28th December, 2019 for consideration of the Resolution

for Liquidation, the said convening of the Meeting was material

information, which ought to have been shared by RP with the Appellant,

who was stakeholder and was going to be adversely affected by any

Resolution of Liquidation passed in the Meeting. Thirdly, the fact that the

claim of Appellant was received on 22nd November, 2019, was also material

information, which ought to have been placed before the Adjudicating

Authority, who was going to consider the Application for Liquidation. No

information of receipt of the claim of the Appellant has been submitted by

RP to the Adjudicating Authority.

19. Under Regulation 36 of Resolution Process for Corporate Persons

Regulation, the Resolution Professional has to prepare an 'Information

Memorandum', which has to be submitted to each Member of the

Committee within two weeks of his appointment. Regulation 36, sub-

clause (2)(d) is as follows:

"(2) The information memorandum shall contain the following details of the corporate debtor-

(d) a list of creditors containing the names of creditors, the amounts claimed by them, the amount of their

Company Appeal (AT) (Insolvency) No. 940 of 2020 18 claims admitted and the security interest, if any, in respect of such claims;"

20. Even if, the RP has not admitted the claim of the Appellant till the

preparation of Information Memorandum, the details of the claim of the

Appellant were required to be included in the Information Memorandum.

Even if, the claim has not been formally admitted, the name of creditors

and the amount claimed as per above statutory provision, has to be

included in the Information Memorandum. The RP has concealed the

above information in the Information Memorandum and has not prepared

the Information Memorandum as required by Regulation 36, which was

necessary for the Meeting dated 28th December, 2019. The Financial

Creditor, who was the sole Member of the CoC was also not made aware

that there is a claim by the Appellant of an amount of Rs. 21 crores. The

above are clear instances of material irregularity committed by RP in

conducting CIRP.

21. The learned Counsel for the Appellant has also rightly highlighted

the fact that on 27th August, 2019, that is, after initiation of CIRP, the

Corporate Debtor has made a payment of Rs.14.14 crores to the State Bank

of India, who certified that charge, which was created on 4th August, 2015

for the immovable properties of the Corporate Debtor, by payment of the

above amount was satisfied. The payment was made after filing of the

Section 9 Application of the Code and State Bank of India released the

properties of the Corporate Debtor, which were mortgaged. The CIRP was

initiated by Financial Creditor for an amount of Rs.11 lakhs and shortly

Company Appeal (AT) (Insolvency) No. 940 of 2020 19 after filing of the Application by Financial Creditor, the Corporate Debtor

paid an amount of Rs.14.14 crores to the State Bank of India.

22. The conduct of Financial Creditor in the very first Meeting of the CoC,

resolving to go for Liquidation also does not inspire any confidence. It is

relevant to note that the Liquidation was not in the Agenda Item and the

same was taken under in any other Item on 22nd October, 2019. The RP

in Meeting dated 22nd October, 2019 on Item No.1 regarding "To discuss

and deliberate on the financial position of the Company', the submission

of one of the Suspended Director was taken as gospel truth, without

making any effort to find out financial status and transactions of the

Corporate Debtor. Agenda Item No.1 is as follows:

"The IRP has invited attention of members at Exhibit 3, which contained Note on Financial position of company and summary of Historical Financials of the Company. The IRP has informed that Financials for Year Ended 31st March 2019 is under preparation.

The COC has asked few questions related to historical event of the Company. Suspended Director Mr. Aman Gupta informed following:

 All employees of the company have left.  Due to non-payment of rental payment, entire assets of the company has been removed by landlord.

 With above mentioned facts and background that the Corporate Debtor is not a going concern, the historical financials should only be used for historical references and does not provide current financial position of the Corporate Debtor. Below

Company Appeal (AT) (Insolvency) No. 940 of 2020 20 are balance of Corporate Debtor for bank accounts, as on date

Bank Account Number Balance (Rs.) YES Bank 055181300001080 896 SBI - Current 34987491312 5,846 Account SBI - CC 35151915664 --

DBS 830210080112 35,666 Total 42,408"

23. There was also Agenda for appointment of Transactional auditor,

that is, Agenda Item No.8, which was discussed in following words:

"Agenda Item No.8. To discuss on transaction audit of the Company and appointment of transactional auditor With the background mentioned in point 4 above regarding forfeiture of entire assets of the Company located at license premise due to non payment of rental payment and other facts, the IRP has proposed to conduct a transactional/ forensic audit. The COC has informed to IRP to submit a note on the basis of his assessment post the meeting and to take it in next meeting of COC."

24. The learned Counsel for the Appellant submitted that he has brought

before the RP several transactions entered into the month of September

2019 by the Corporate Debtor, which required a thorough investigation. In

this context, we may refer to communication of the Appellant dated 8th

February, 2020 to the RP, which communication was sent after personal

Company Appeal (AT) (Insolvency) No. 940 of 2020 21 meeting with the RP by the Appellant on 5th February, 2020. In the email,

following was stated: -

"Time and again through telecommunications, vide our various communications, letter dated 23-Jan-2020 and also during this personal visit, we raised our concern with respect to books of accounts and business dealings of Starconn. We expressed our suspicion about the way IB filed by Valay Group and the entire process being handled by Prachay Advisors. As mentioned by you the total non-cooperation by Prachay Advisors in the matter also indicates the shady aspect in dealing of IBC Process.

During the meeting we brought to your attention that:

1. In the year Fy 2017-18 Starconn recorded loss of INR. 21.87 Crores filed with MCA during Jan'20. However, as per MCA record during Fy 2018-19, Starconn discharged all the obligation towards credit facility availed from SBI. Therefore, the source of borrowing or deployment of funds need to be made clear.

2. We have also produced the records of transactions entered into during 2019 between Swipe Innovation/ Starconn/ other Group Companies & BGM to manipulate the books of accounts. In consideration of the above we requested you to provide us ledger account of BGM. However, you denied stating that as per provision of IBC you are not authorized to provide such records related to Corporate Debtor.

3. On our request to provide balance of DIESL as per books of accounts of Starcon, you communicated us that as per Starconn books INR 3.30 Crores is payable to DIESL. To this we highlighted and placed on record the balance conformation obtained from Starconn

Company Appeal (AT) (Insolvency) No. 940 of 2020 22 management from time to time and stressed our concern that why such entries as documented in the balance confirmation are not recorded in the books of accounts of Starconn.

Considering overall IBC matter being processed/ dealt with, we apprehend that Starconn is being deliberately liquidated under the shadow of IBC to safeguard the interest of the promoters. Therefore we are emphasizing for forensic audit of books of accounts of Starconn. You have mentioned that under the provision of IBC only members of CoC are eligible to request Forensic Audit and any other documents related to Corporate Debtor. However, we hereby request you to represent our matter before CoC and In light of the discussion, documents and all the above transactions you may recommend forensic audit of Starconn to CoC."

25. Thus, present was a case where RP was informed by the Appellant

that entire IBC process is being solely carried on by Respondent No.5,

which is suspicious. It is further relevant to notice that RP on 17th

February, 2020 wrote to the Appellant informing that pursuant to

admission of claim of Appellant on 12th February, 2020 and that the List

of Creditors Version 3.0 will be filed before NCLT. In the said

communication, following was stated:

"Hence, as per the aforesaid provisions, DIESL being an operational creditor for an amount aggregating not less than 10% of the debt of the Company shall be entitled to receive the notice of the CoC meeting and attend the

Company Appeal (AT) (Insolvency) No. 940 of 2020 23 same but shall have no voting right or participating right in such meeting.

Since DIESL was included in the List of Creditors of Starconn Mobility Private Limited for an amount of Rs.21,41,74,456/- on 12th February, 2020 pursuant to admission of claim, we shall provide serve the notice of such CoC meeting to you henceforth.

Further, we shall place your letter revealing the possibility of mala fide intention of promoters and directors of the Company and considering the conducting of a Forensic Audit before the CoC in the forthcoming meeting the details of which shall be provided to you shortly.

Furthermore, please find attached herewith the List of Creditors (Version 3.0) as will be filed with Hon'ble NCLT, Mumbai Bench for your reference."

26. On pointed query with the Counsel for RP whether information of

admitting the claim of the Appellant was communicated to the Adjudicating

Authority, learned Counsel for the RP said that no such information was

placed before Adjudicating Authority. When RP himself on 17.02.2021

stated that he will file the List of Creditors before NCLT, Mumbai bench, it

was his duty to file the said List of Creditors (Version 3.0), which was

relevant and material for the process. Admittedly, NCLT reserved the order

on 1st January, 2020 and the same was pronounced only on 11th August,

2020. There was sufficient time with RP to inform Adjudicating Authority

about the developments.

Company Appeal (AT) (Insolvency) No. 940 of 2020 24

27. When we look into the sequence of events and correspondence

exchanged between the parties, we arrive at the conclusion that RP was

deliberately keeping the relevant information away from the Appellant and

wanted Liquidation order to be passed without even bringing into the notice

of the CoC or the Adjudicating Authority about the claim of the Appellant.

We are thus, satisfied that material irregularity was committed in the entire

process leading to Liquidation, which is sufficient to set aside the

Liquidation order.

28. Learned Counsel for the Appellant has also made submissions

regarding collusion and fraud committed by Corporate Debtor with the aid

of Respondent No.5 and Respondent No.2. He has also submitted that

filing of the Application by Financial Creditor - Valay Group was also

malicious. Learned Counsel for the Appellant has also referred to various

transactions conducted by the Corporate Debtor to defraud the creditors.

These are issues, which can be enquired by NCLT under Section 65 and 69

of the Code.

29. We may refer to a judgment of the Hon'ble Supreme Court in (2020)

13 SCC 308 in Embassy Property Developments Private Limited vs.

State of Karnataka and Others, where Hon'ble Supreme Court after

referring to Section 65 made the following observation:

"50. The objection of the appellants in this regard is well founded. Section 65 specifically deals with fraudulent or malicious initiation of proceedings. It reads as follows:

"65. Fraudulent or malicious initiation of proceedings.--(1) If, any person initiates the insolvency resolution process or liquidation

Company Appeal (AT) (Insolvency) No. 940 of 2020 25 proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency or liquidation, as the case may be, the adjudicating authority may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees. (2) If, any person initiates voluntary liquidation proceedings with the intent to defraud any person, the adjudicating authority may impose upon such person a penalty which shall not be less than one lakh rupees but may extend to one crore rupees."

51. Even fraudulent tradings carried on by the corporate debtor during the insolvency resolution, can be inquired into by the adjudicating authority under Section 66. Section 69 makes an officer of the corporate debtor and the corporate debtor liable for punishment, for carrying on transactions with a view to defraud creditors. Therefore, NCLT is vested with the power to inquire into

(i) fraudulent initiation of proceedings as well as (ii) fraudulent transactions. It is significant to note that Section 65(1) deals with a situation where CIRP is initiated fraudulently "for any purpose other than for the resolution of insolvency or liquidation".

30. We are of the view that it is not necessary for us to record any finding

with respect to allegations, which are covered by Sections 65 and 69 of the

Code and it is for the Adjudicating Authority to consider such issues and

take an appropriate decision and if necessary, take follow-up action.

31. We, thus, are satisfied that sufficient grounds have been made in

this Appeal as specified by Section 61, sub-section (4) for allowing this

Company Appeal (AT) (Insolvency) No. 940 of 2020 26 Appeal. In result, we allow the Appeal and set aside the impugned order

dated 11th August, 2020 and remit the matter to NCLT to pass appropriate

direction with regard to CIRP of the Corporate Debtor and take such

measures as are necessary in accordance with law.

32. Let a copy of this order be also sent to the Insolvency and

Bankruptcy Board of India to take cognizance and take appropriate action

with regard to proceedings conducted by RP as noticed above.

The appeal is allowed accordingly. No order as to costs.

[Justice Ashok Bhushan] Chairperson

[Dr. Alok Srivastava] Member (Technical)

NEW DELHI

31st January, 2022

Ash/NN

Company Appeal (AT) (Insolvency) No. 940 of 2020 27