Randhir Singh Tomar And Ors vs Sunil Kumar Agarwal

Y2Y Fashions Private Ltd., Corporate Office: 341, 3rd Floor, Vipul Trade Centre, Sector 48, Gurgaon - 122018. ... Appellant No. 3

Versus

Sunil Kumar Aggarwal, Liquidator/ Erstwhile Resolution Professional M/s. YS Marchandise International Pvt. Ltd. E-29 South Extension-II, New Delhi-110049. ... Respondent

Present:

For Appellant : Ms. Ishita Srivastava, Advocate

For Respondent : Mr. Vinod Kumar Chaurasia, Advocate

Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 1 of 17 Judgment (Date: 12.12.2022)

[Per.: Dr. Alok Srivastava. Member (Technical)]

1. This appeal is filed under section 61 of the Insolvency and

Bankruptcy Code, 2016 (in short 'IBC') by the Appellant, who is

aggrieved by the order dated 8.6.2022 (hereinafter called the,

Impugned Order') of the Adjudicating Authority (National Company

Law Tribunal, New Delhi) in I.A. No. 5170 of 2021 in CP (IB) No.

136/ND/2019.

2. The Appellant has stated and argued in the appeal that the

Corporate Debtor YS Marchandise International Pvt. Ltd. (the

Appellant is its ex-director), was engaged in the business of selling

goods as an aggregator between brands and e-commerce/online

market places and teleshopping channels. He has stated that the

corporate debtor was required to keep a large inventory of goods

for supply once orders were received on the e-marketplace or

teleshopping channels, but due to market conditions certain

primary customers/teleshopping channels terminated their

business relationship with the corporate debtor, leaving it with a

large inventory of goods which had to be dispose of. He has

further stated that a new company, Y2Y Fashions Private Limited,

Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 2 of 17 was started by ex-directors of the corporate debtor, which started

its own teleshopping platform and the corporate debtor YS

Marchandise International Pvt. Ltd started doing teleshopping,

digital and offline marketing of goods through this new company.

3. The Appellant has further stated that in order to carry on its

business, Y2Y Fashions Private Limited entered into a T-Commerce

Vendor Agreement on 17.3.2018 with the corporate debtor,

whereby the corporate debtor started to supply goods and also

provide services such as hosting and technology services, logistics

services, courier expenses and packing service etc. to the new

company Y2Y Fashions Private Limited on payment of certain

commission and charges. He has further stated that the purported

'commission' included charges for various activities as

aforementioned as well as a margin for sale of return as is clearly

stated in the T-Commerce Vendor Agreement. The Appellant has

explained that the new company Y2Y Fashions Private Limited was

incorporated to help the corporate debtor to sell its huge inventory

stock as its former premises had been "sealed" as a result of

Hon'ble Supreme Court's order and many items in stock such as

furniture/partitions of work spaces/storage shelves were created

according to the specifications of the old warehouse, which if not

Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 3 of 17 sold to the new company, would have been sold in open market as

junk causing huge loss to the corporate debtor.

4. The Appellant has claimed that section 10 application for the

insolvency resolution of the corporate debtor was admitted by the

order dated 6.6.2019 passed by the Adjudicating Authority, and

Corporate Insolvency Resolution Process (in short 'CIRP') of the

corporate debtor is in progress. He has added that during the

CIRP, a forensic and transaction audit of the corporate debtor was

conducted by the Resolution Professional and in view of certain

observations in the Forensic and Transaction Audit Reports, an IA

No. 1601/2019 was filed by the Resolution Professional for certain

avoidance transactions, which was later withdrawn with liberty

granted to the Resolution Professional to file a fresh application

under section 66 of IBC, whereafter IA No. 5170/2021 was filed by

the Resolution Professional under section 66 of IBC on which the

Impugned Order came to be passed whereby the ex-directors of the

corporate debtor were directed to deposit Rs.83.97 lakhs into the

account of the corporate debtor from the date of the Impugned

Order.

5. We heard the arguments of both the parties and perused the

record.

Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 4 of 17

6. The Learned Counsel for Appellant has submitted that the

Adjudicating Authority has relied solely on bald and baseless

observations in the Forensic and Transaction Audit Reports to

arrive at the conclusion in the Impugned Order without giving due

consideration to the reasons pleaded by the Appellant regarding

the bonafide nature of the transactions which were carried out in

the normal course of business. She has argued that the 'sealing' of

the corporate debtor's warehouse after the order of Hon'ble

Supreme Court order in the beginning of the year 2018 and

cancellation of agreement with some teleshopping channels, the

corporate debtor had no option but to take the stock stored in the

old warehouse which was worth almost Rs. 4 crores. She has

further submitted that the corporate debtor, therefore, shifted the

said stock in a DTDC warehouse in Gurgaon and since the said

assets were about two to three years old, much of which was

custom-made to meet the corporate debtor's requirements, the

only other way by which the stock could have been disposed of was

to sell most of it at scrap value which would have caused huge loss

to the corporate debtor.

7. The Learned Counsel for Appellant has further submitted

that in view of the constraints the corporate debtor entered into T-

Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 5 of 17 Commerce Vendor agreement with Y2Y Fashions Private Ltd. on

17.3.2018, whereby the corporate debtor undertook to bear the

expenses for an initial period of five years or in case of losses to

Y2Y Fashions Private Limited, the whole of the fixed expenses in

relation to running of Y2Y Fashions Private Limited and the cost in

relation to developing and running of product and brand on actual

basis in the form of reimbursement of expenses/additional

commission in accordance with law. She has contended that there

is a justified explanation about the higher 'commission' amount

that has been paid by the corporate debtor from Y2Y Fashions

Private Limited as the 'commission' amount includes charges for

services such as hosting of website and technological backup,

packing, logistics and payment etc. She has also submitted that

the commission for selling goods on portals like that of Y2Y

Fashions, is in general practice, somewhat higher than the

standard retail commission paid to offline sale agents, and

therefore, the commission charged by Y2Y Fashions is as per

market practice and Y2Y Fashions was paying similar commission

to other clients.

8. The Learned Counsel for Appellant has explained that what

has been termed as 'commission' is actually a total amount that is

inclusive of service fees paid for hosting website and technology,

Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 6 of 17 customer support, logistics services, packing and other related

services to ensure customer satisfaction and therefore, the finding

in the Transaction Audit Report with respect to the

commission/sale expenses is flawed and ought to have been

ignored by the Adjudicating Authority after considering the

reasons for the somewhat higher charges termed as 'commission'.

She has further argued that disposal of tangible assets by sale by

the corporate debtor to Y2Y Fashions cannot, therefore, be called

fraudulent transaction with intention to defraud the creditors, but

they are transactions carried out in the normal course of business.

She has finally contended that the reliance placed by the

Adjudicating Authority on Transaction Audit Report is completely

misplaced and the Impugned Order, therefore, suffers from a

serious error, ought to be set aside.

9. The Learned Counsel for the Liquidator/Respondent has

argued that the present appeal has been filed by the Appellant to

delay the dissolution process of the corporate debtor and it should

be noted that it has been more than three years since the CIRP

was initiated on 6.6.2019. He has further submitted that the

Resolution Professional, in compliance of its duties under section

25(2)(j) of the IBC appointed a Transaction Auditor and another

Forensic Auditor to identify any preferential, undervalued,

Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 7 of 17 extortionate, fraudulent transaction and/or any transaction done

with the intention to defraud creditors, and both the Auditors in

terms of their mandate carried out detailed examination and

analysis of transactions and furnished their reports. He has

argued that the findings in the transaction in the Forensic Audit

Report are based on the books of accounts of the corporate debtor,

audited financial statements, bank statements, loan agreements,

sales and purchase registers, stock and fixed assets registers and

tax returns and, therefore, reflect the actual and correct basis of

the transactions in question.

10. The Learned Counsel for Respondent has further explained

that the corporate debtor had sold goods amounting to Rs.53.38

lakhs to Y2Y Fashions whereas only a cost of Rs. 20.65 lakhs was

incurred on behalf of Y2Y Fashions. Besides this, a net payment

of Rs. 3.54 lakhs was paid to Y2Y Fashions and a sum of Rs. 3.26

was adjusted against the balance other party, and thus, a total

amount receivable was Rs.80.83 lakhs from Y2Y Fashions. He has

further argued that there was no recovery of the amount of

Rs.80.83 lakhs from Y2Y Fashions as is coming out from its ledger

accounts, and this payment was found squared off through

recording of sales expenses amounting to Rs. 83.40 lakhs in the

account of Y2Y Fashions. He has contended that no satisfactory

Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 8 of 17 explanation was provided regarding sales of good, commission

recorded and expenses incurred in relation to the corporate

debtor's related entity Y2Y Fashions and thus, the Impugned

Order, whereby an amount of Rs. 83.97 lakhs has been directed to

be deposited in account of the corporate debtor, is absolutely

correct in facts and circumstances of the case.

11. We note that the T-Commerce Vendor Agreement was

entered between the corporate debtor and a company called Y2Y

Fashions Private Limited on 17.3.2018 (copy attached at pgs.252-

260 of the appeal paperbook, Vol.II) by which the company Y2Y

Fashions Private Ltd. Offered its online marketing platform to the

Vendor Company Y.S, Marchandise International (the corporate

debtor) to sell its products through the said platform. It is also

noted in the T-Commerce Vendor Agreement Mr. Randhir Singh

Tomar/ Appellant represents Y2Y Fashions Pvt. Ltd. and also Y.S.

Merchandise International Pvt. Ltd. i.e. both the signing parties.

The arrangement between the two companies was that the

company Y2Y Fashions Pvt. Ltd. shall offer to the vendor Y.S.

Merchandise International Pvt. Ltd. its services through

"OneIndiaTV" Infrastructure for facilitating sales to the Vendor's

products, and the services shall include hosting and technology,

customer support, logistics services, payment services and all the

Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 9 of 17 other related services to ensure customer satisfaction on behalf of

the Vendor and for this arrangement, the Vendor company was

required to pay service charges as specifically mentioned and

decided in the mutually agreed cost sheet and the corporate debtor

was authorised to collect payments on behalf of the Vendor's

company Y.S. Merchandise International Pvt. Ltd. in respect of

orders received through "OneIndiaTV" Infrastructure.

12. The relevant portion of the T-Commerce Vendor Agreement

regarding the "Arrangement" and "Consideration and Payment

Terms" are reproduced below for ready reference :-

"2. Arrangement

2.1 The Company shall offer to the Vender its services through "OneIndiaTV" Infrastructure for facilitating sale of the Vendor's product which shall include hosting and technology, customer support, logistics services, payment services and all the other related services to ensure customer satisfaction on behalf of the Vendor. For this arrangement, the Vender shall pay service charges as specifically mentioned and decided in Cost Sheet Mutually agreed and Signed by Both Parties to the agreement

Xxx xxxx xxxx xxxx

3. Consideration and Payment Terms

3.1 The Company shall collect the Payment on behalf of the Vender in respect of the Orders received through "OneIndiaTV"

Infrastructure. To consideration of the services rendered under these presents, the Company, shall charge the Services charges to the Vendor in respect of delivered order (s) at the rates Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 10 of 17 specified and mutually decided by the Company and the vendor for such product Combos Separately which will be signed by both the parties to the Agreement as a Cost Sheet.

The said Cost Sheet can be amended to modify at any rate for Service Charge in respect of any product Combo. Any amendment to such Cost Sheet will be express and written such amended Cost Sheet is to be treated as part and parcel of the agreement."

13. We further note the submission of the Appellant that in view

of the "sealing" of the corporate debtor's warehouse in pursuance

of Hon'ble Supreme Court's order and the cancellation of its

arrangement with HomeShop18 and ShopCJ, the corporate debtor

was left with huge inventory of goods which had to be sold and for

this purpose, the promoters of the corporate debtor incorporated a

new company, namely Y2Y Fashions Pvt. Ltd., which started its

own teleshopping platform under the brand name "OneIndiaTV",

which made videos and booked slot on TV channels like many

other DTH service providers. We also note the Appellant's

contention that the commission/charges recovered from the

corporate debtor actually related a number of services such as

operational cost, hosting website and technology, customer

support, logistics services, packing and other related services to

ensure customer satisfaction which were all included in one term

'commission'. This contention of the Appellant is supported by

clause 2.1 of the T-Commerce Vendor Agreement, which is

reproduced above, and therefore clearly appears to be done as part Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 11 of 17 of normal business arrangement between Y2Y Fashions and the

corporate debtor.

14. The Adjudicating Authority has dealt with the issue of the

excess payment made by way of commission to Y2Y Fashions in

para 15 of the Impugned Order, wherein the following is observed:-

"15. On perusal of the Transaction Audit Report and the Forensic Audit Report referred to supra, so far as the Transections referred to in the applications are concerned, we observe that the Auditor's opinion is that these Transactions and the agreement for increasing the commission on 17th March, 2018, were made with the related party. That it is also mentioned in the Forensic Audit Report that the amount of commission to Y2Y Fashions Pvt. Ltd. has been provided for Rs.7075927.50 but as per the commission invoices provided to the auditor, the amount comes to Rs.7501557 for the financial year 2018-19. We further observe that in the financial year 2016-17, the percentage of commission was 5% in 2017-18 it was 20%, and in 2018-19 it was 32%, which shows that the percentage of commission was increasing."

15. The Impugned Order notes that a total amount of Rs.83.97

lakhs has been found to be misappropriated or diverted by the

corporate debtor with the intention to defraud the creditors. The

Impugned Order observes in para 19 regarding the extra

commission amount paid to Y2Y Fashions Pvt. Ltd. as follows:-

"19. In terms of the provision, now we consider the submissions of the Parties, and it is seen from the averments made in the application and reply, that the Respondent No. 3 is a related party with the Corporate Debtor. The Directors of the corporate debtor and Respondent No. 3 are the common Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 12 of 17 persons and the commission has been increased and the assets of the company has also been disposed of causing loss of Rs. 13.92 lakhs just before the filing of an application u/s 10 of the IBC and initiation of the CIRP, causing diversion of huge amount."

16. The Transaction Audit Report observes and infers the

following regarding the amount receivable of Rs.80.83 lakhs:-

• "The Corporate Debtor has sold goods amounting to Rs. 53.38 lakhs to Y2Y Fashions and Rs.20.65 Lakhs were incurred on behalf of Y2Y fashions. Besides this, a net payment of Rs. 3.54 lakhs was paid to Y2Y and a sum of Rs.3.26 lakhs was adjusted against the balance of other party. Thus, total amount r4eceivable was Rs.80.83 lakhs from Y2Y.

xx xx xx

• We sought the evidences/explanation in support of the above transactions but no satisfactory information/explanation was provided to us regarding sale of goods, commission recorded and expenses incurred non behalf of its related entity."

17. The Transaction Audit Report has further observed that

these transactions are preferential and avoidable transactions

covered under section 43 of IBC.

18. We note that the Appellant has claimed that in view of the

sealing of the corporate debtor's warehouse and cancellation of T-

Commerce arrangement with HomeTown18 and ShopCJ,

Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 13 of 17 promoters and directors of the corporate debtor decided to float a

new company Y2Y Fashions Pvt. Ltd. and the agreement between

the two companies Y2Y Fashions Pvt. Ltd. and the corporate

debtor took place on purely commercial consideration. We also

note his contention that this explanation was provided to the

Transaction Auditor, who without considering the basis and

nature of the transaction, merely looked at the fact that both the

corporate debtor and the new company Y2Y Fashions Pvt. Ltd.

have the same set of directors and promoters, and decided that the

said transactions were infringement of section 43 of IBC.

19. We find substance in this claim when we peruse the

percentage of commission, which rose from 5% in the Financial

Year (FY) 2016-17 to 20% in the FY 2017-18 and further to 32% in

the FY 2018-19 with the fact that the T-Commerce Vendor

Agreement between the two companies was entered on 17.3.2018,

and also the fact that the term 'commission' included many

services being provided by the Y2Y Fashions Company in

accordance with clause 2.1 of the T-commerce Vendor Agreement.

Thus, an increase in commission percentage of 32% in the FY

2018-19 is appropriately explained by the Appellant as being

related to 'commission' representing many services which were

provided by the new company Y2Y Fashions.

Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 14 of 17

20. We also note that the "sealing" of the corporate debtor's

warehouse in early 2018 and also the cancellation of its

teleshopping arrangement with channels such HomeShop18 and

ShopCJ were driving factors that were instrumental in the decision

of the promoters/ex-directors of the corporate debtor to set up a

new company Y2Y Fashions International Limited which would do

website hosting, and provide a number of services as covered in

the T-commerce Vendor Agreement. We are convinced by the

argument of the Appellant that this was done in the normal course

of business to let the corporate debtor function in the changed

business environment. Such an arrangement, even though with

related party, cannot be termed as preferential transactions done

to defraud the creditors of the corporate debtor.

21. We therefore find that the Impugned Order does not consider

the effect of the T-Commerce Vendor Agreement between the

corporate debtor Y.S. Marchandise International Pvt. Ltd. and Y2Y

Fashions Pvt. Ltd. and services being provided by the vendor Y2Y

Fashions Pvt. Ltd. and in a bald manner considers the quantum of

commission to be very high and infer that such high percentage of

commission provided to a related party (Y2Y fashions) was meant

Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 15 of 17 to defraud the creditors of the corporate debtor. Such an inference

is not supported by the facts of the case.

22. In the light of the above, we are of the clear view that the

Adjudicating Authority has committed an error in arriving at the

inference that the amount of Rs.83.97 lakhs was transferred by

the corporate debtor to Y2Y Fashions Pvt. Ltd., a related party, and

is, therefore, a diversion by the corporate debtor and Y2Y Fashions

Pvt. Ltd. with an intention to defraud the creditors of the corporate

debtor by the ex-directors of the corporate debtor.

23. We, therefore, set aside the Impugned Order and direct that

the ex-directors of the corporate debtor and Y2Y Fashions Pvt. Ltd.

shall not be liable to make contribution to the extent of Rs.83.97

lakhs in the account of the corporate debtor. Since the said

transactions have not been found to be avoidance transactions

which infringe section 66 of the IBC, we direct that no criminal

prosecution under section 69 of the IBC is required to be instituted

against the ex-directors of the corporate debtor and Y2Y Fashions

Pvt. Ltd. in relation to such transactions. The appeal is disposed of

accordingly with the afore -mentioned directions.

Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 16 of 17

24. In the facts of the case there is no order as to costs.

[Justice Ashok Bhushan] Chairperson

[Dr. Alok Srivastava] Member (Technical)

[Mr. Barun Mitra] Member (Technical)

New Delhi 12th December, 2022

/aks/

Company Appeal (AT) (Insolvency) No. 917 of 2022 Page 17 of 17