Mr. Shailesh Bhalchandra Desai ... vs Sanjiv Sheth & Anr

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.

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 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.

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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

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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

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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.

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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