Talha Yunus Sareshwala vs Parsoli Motor Works Pvt Ltd & Ors

NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI Company Appeal (AT) (Ins) No. 1115 of 2020

IN THE MATTER OF: Telha Sareshwala S/o Yunus Sareshwala 6, Faize Mohammedi Society Paldi, Ahmedabad - 380 007, Gujarat ....Appellant

Vs.

1. Parsoli Motors Works Pvt. Ltd Represented through Resolution Professional Mr. Krishna Chamadia B1804, Raheja Heights, Off Gen A K Vaidya Marg, Dindoshi, Malad East, Mumbai City - 400 097 ...Respondent No.1

2. BMW India Pvt. Ltd Tower B 7th floor, Building No.8, DLF Cyber City Phase II Gurgaon HR 122 002 ...Respondent No.2

3. BMW India Financial Services Pvt. Ltd Tower C, 14th Floor, Building No.10, DLF Cyber City Phase -II Gurgaon HR 122 002 ...Respondent No.3

Present:

For Appellant: Mr. Arjun Sheth and Ms. Heena George, Advocates.

For Respondents : Mr. Kunal Tandon, Ms. Richa Sandilya and Ms. Hita Sharma, Advocates for R-1. Mr. Diwakar Maheshwari

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 1 of 38 and Mr. Aditya Vikram Singh, Advocates for R-2 & 3. Mr. Shobhit Jain, Advocate for R-2.

DR. ASHOK KUMAR MISHRA, TECHNICAL MEMBER

1. The appeal has been filed by the 'Appellant'- 'Talha Yunus Sareshwala',

under Section 61 of the 'Insolvency and Bankruptcy Code, 2016' (in short

'Code') against the impugned order dated 04.06.2020 passed by the

'Adjudicating Authority' (National Company Law Tribunal), Ahmedabad

Bench in I.A. No. 300 of 2018 (under Section 65 of the Code) in CP (IB)

No.161/2017.

2. It is the case of the Appellant that R3 - BMW India Financial Services Pvt.

Ltd has fraudulently filed the petition before the 'Adjudicating Authority' and

has put the 'Corporate Debtor' (CD) into 'Corporate Insolvency Resolution

Process' (CIRP). It is alleged by the Appellant that the R2- BMW India Pvt.

Ltd has fraudulently induced the CD in entering into the dealership

agreements from 2014 -2017 and induced the CD to invest approx. Rs. 30

Crore for setting up showrooms and service center to be exclusively used only

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 2 of 38 for selling and servicing BMW vehicles. At a later stage in the year 2017 while

dealership agreement was enforced, the R3 being a group company of BMW

asked R3 to file Section 7 of the Code petition against the CD and put the CD

into CIRP to stifle the legitimate claims of the CD against the BMW group

who is presently controlling the 'Committee of Creditors' (CoC) at 88.57% of

voting power and implicitly controlling the actions of the Resolution

Professional (RP). Presently, as per updated information the company has

been put into liquidation.

3. The Adjudicating Authority vide its impugned order dated 04th June 2020 has

made the following observations before admitting the Section 7 of the Code

petition filed by R3- BMW India Financial Services Pvt. Ltd. The relevant

clauses are reproduced below for ease of reference:

"18.Before pronouncement the judgment in the

matter of CP (IB) 161 of 2017, this Adjudicating

Authority would like to deliberate on the IA No. 300

of 2018 filed by the CD.

18.1. The IA No. 300 of 2018 has been filed by the

CD on the ground that CP(IB) No. 167 of 2017 is a

fraud committed by BMW India Pvt Ltd, the R2 in the

IA in collusion with the Financial Creditor and filed

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 3 of 38 the IA u/s 65 of the Code. Section 65 of the Code read

as under:

"....If, any person initiates the insolvency resolution

process or liquidation 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....."

18.2. This Adjudicating Authority, on perusal of the

records, documents and the arguments put forth by

the counsels of both the parties, has observed that

BMW India Pvt. Ltd., the R2 in the IA No. 300 of

2018 is not a party in the main petition no. 161 of

2017 and has no locus and cannot be impleaded in

the main petition no 161 of 2017.

18.3 Further, the Petitioner of IA no. 300 of

2018/ Respondent of CP (IB) No. 161 of 2017 has

vide numerous communications exchanged with the

financial creditor in CP (IB) No. 161 of 2017 and has

owned full responsibility for the default committed by

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 4 of 38 the CD and promised on number of occasions to

make payment of the defaulted amount. Moreover, no

one either BMW or BMW dealer can force any

customer of Gujarat to buy from the Petitioner only.

Customer is at liberty and he can purchase BMW car

from any part of the country. The concept that a

customer to purchase from a particular dealer is not

tenable and it may be considered as an attempt to

infringe on the right of a customer. Hence, we do not

find any merit in the IA. Hence, the prayer made in

IA No. 300 of 2018 is hereby rejected.

Main Petition No. 161 of 2017

19. The CD has defaulted in making repayment of

financial facilities/ debt to the Petitioner and the date

of default is from 10.04.2016 and onwards as per

Annexure -IV/27. The statement of accounts and the

CIBIL Reports submitted by the application confirm

the default committed by the CD.

20.Considering the material, papers filed by the

Petitioner, facts mentioned hereinabove and the

arguments of both sides, the Adjudicating Authority

is satisfied that,

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 5 of 38 a.The CD availed Financial Facilities from the

Petitioner.

b.Existence of debt is above Rs. One lac;

c.Debt is due and defaulted;

d.Default has occurred on various dates starting

from 10.04.2016 onwards as per Annexure IV/27

e.Petition has been filed on 13.11.2017 i..e within the

limitation period

f. Copy of the Application filed before the Tribunal

has been sent to the CD and the Application filed by

the Petitioner under Section 7 of the IBC is found to

be complete for the purpose of initiation of CIRP

against the CD Company.

Hence, the present CP(IB) No. 161 of 2017 is

admitted with the following directions/ observations.

The date of admission of the petition is 04.06.2020"

4. The Ld. Counsel for the Appellant has submitted that the CD and the

Respondent No.2- BMW India Pvt. Ltd. has entered into dealership agreement

for selling BMW Vehicles in the state of Gujarat since 2007. Since then either

new agreements were executed or renewal letters were signed to continue the

dealership. The dealership agreement duration every time was only for one

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 6 of 38 year and it continued to be renewed or new agreements used to be signed. The

CD performed extremely well and CD was given territory of Gujarat and no

other dealer in India was given the territory of Gujarat for the sale of the BMW

Vehicles. The last dealership agreement entered into between the CD and

Respondent No.2 was on 14th January, 2015 which contains an arbitration

clause. The same agreement was renewed on 09th December, 2017 which was

expired by 31st December, 2017. The CD has also entered into a 'Deferred

Payment Facility Agreement' dated 15th November, 2010 between the CD and

R2 in relation to the sale of BMW vehicles by the R2- BMW India Pvt. Ltd to

the CD which was also aiming arbitration clause. The R3 - BMW India

Financial Services Pvt. Ltd and CD have also entered into an agreement for

'Financing and Working Capital Demand Facilities Agreement'. However,

during the year 2014, the R2 - BMW India Pvt. Ltd allowed the dealers from

outside Gujarat to sale to customers based in Gujarat. The CD has opposed

this as it is a territory violation and it has an adverse impact on CD. In terms

of dealership agreement, the CD was required to spend a minimum amount

based on projected turnover of the CD towards promotion/advertisement. All

this made revenue to deplete while expenditure is to increase. As a result of

this, it became impossible to the CD to survive and caused injury to the CD.

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 7 of 38 As a result of territory infringement correspondence commenced exchange

between the CD and the R2- BMW India Pvt. Ltd during the year 2014 and

2015. The CD considered this as an absolute fraud on the part of the R2- BMW

India Pvt. Ltd. All this resulted into revenue loss of approx. Rs.70 Crore every

year. The number of vehicles sold for customer based in Gujarat was approx.

150-200 vehicle each year to be sold by outside Gujarat dealers of BMW.

BMW group/ R2 made the CD to invest large amount of capital in setting up

showroom and service center at Rajkot in the year 2014 for sale and service

of BMW vehicle and also during 2015, the CD was made to invest large

amount of capital funds in the setting up of new showroom and facility at

Ahmadabad and Surat. All this investment involved approx. Rs.30 Crore from

CD and CD was supposed to recover in 10 years or so, its investment value

recovery based on payback period. The Appellant is alleging that R2- BMW

India Pvt. Ltd induced the CD to make such heavy investment to retain the

dealership of Gujarat but at a later stage it allows outside Gujarat dealers to

sale vehicles of resident of Gujarat. The Appellant is alleging the BMW group

another finance company - R3 filed Section 7 of the Code petition around

November, 2017 for the dues of sale of BMW vehicles by R2 to CD without

placing any bank statement that R3 has made any payment towards R2 and

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 8 of 38 the petition was filed to stifle any kind of prosecution against R2/BMW group

by the CD. It is the case of the Appellant that since the management of the R2

- BMW India Pvt. Ltd and R3 being the part of same group of the BMW

Company the aforesaid events are fraud perpetrated by R2 - BMW India Pvt.

Ltd towards the CD with the connivance of R3 for filing of 'Insolvency

Application' and bringing the CD to a liquidation stage and even involving

the 'Directors' of the CD personal wealth at risk for having their personal

guarantees. All this suggests that the proceedings initiated by the R3/ BMW

Group Companies is a fraudulent or malicious initiation of proceedings and is

covered by Section 65 of the Code for further actions.

5. In addition, the Appellant has also mentioned that the RP has done nothing to

prosecute the claim of Rs.110 Crore against BMW Finance. The Appellant

has also mentioned that BMW group appointed KPMG to get the audit /

valuation of the CD done and pursuant to the same bids from 3rd parties were

invited to take over the CD. BMW India Pvt. Ltd/R2 did not renew the

dealership agreement for the year 2018. As a result, the business of the CD

has collapsed by using Section 7 of the Code by initiating CIRP by another

BMW Group of Companies /R3. The Appellant has also mentioned that they

have filed petition under 'Writ Jurisdiction' before the Hon'ble High Court of

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 9 of 38 Delhi to appoint arbitrators between the CD and BMW Group and lodge a

claim of Rs.110 Crore against BMW Group by the CD but RP who works as

per instruction of the CoC is doing nothing to pursue the claim and all this has

laid to the Appellant to a disastrous financial situations and are, therefore,

sought the relief from this 'Appellate Tribunal' for setting aside the order

dated 04th June, 2020 passed by the 'Adjudicating Authority' and even orally

pleaded to refer the matter back to the Adjudicating Authority to prosecute

under Section 65 of the Code. In order to supplement its claim for remanding

back the matter to the Adjudicating Authority it has cited the Judgment of

Hon'ble Supreme Court in Beacon Trusteeship Limited Vs. Earthcon Infracon

Pvt. Ltd. & Anr. Civil Appeal No. 7641 of 2019 at para 7, 8 & 9 is depicted

below:

"7.Considering the provision of Section 65 of the IBC,

it is necessary for the Adjudicating Authority in case

such an allegation is raised to go into the same. In

case, such an objection is raised or application is filed

before the Adjudicating Authority, obviously, it has to

be dealt with in accordance with law. The plea of

collusion could not have been raised for the first time

in the appeal before the NCLAT or before this Court

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 10 of 38 in this appeal. Thus, we relegate the appellant to the

remedy before the Adjudicating Authority.

8. In case, a proper application is filed, aspect

whether the proceedings have been initiated in

collusive manner will be looked into, in accordance

with law and the appropriate orders have to be

passed, considering the facts and circumstances of the

case. We have made it clear that we have not

commented on the merit of the case. We set aside the

impugned order passed by the NCLAT and dispose of

the appeal in accordance with the aforesaid direction.

9. The interim protection granted by this Court vide

order dated 30.09.2019 shall continue to operate for

a period of four weeks from today. In the meantime, it

is open to the appellant to file appropriate application

for interim protection, if any, before the Adjudicating

Authority."

The Appellant has further cited the judgment of 'Embassy property Vs. State

of Karnataka & Ors.' 2019 (17) Scale 37 to its stands for fraudulent or

malicious proceedings initiated by BMW Group companies. The relevant

portions are given hereunder:

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 11 of 38 "46. The second question that arises for our

consideration is as to whether NCLT is

competent to enquire into allegations of fraud,

especially in the matter of the very initiation

of CIRP.

47.This question has arisen, in view of the

stand taken by the Government of Karnataka

before the High Court that they chose to

challenge the order of the NCLT before the

High Court, instead of before NCLAT, due to the

fraudulent and collusive manner in which the

CIRP was initiated by one of the related parties

of the Corporate Debtor themselves. In the writ

petition filed by the Government of Karnataka

before the High Court, it was specifically

pleaded (i) that the Managing Director of the

Corporate Debtor entered into an agreement on

06.02.2011 with one M/s. D. P. Exports, for

carrying out mining operations on behalf of

the Corporate Debtor and alsofor managing

its affairs and selling 100% of the extracted iron

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 12 of 38 ore; (ii) that the said M/s. D. P. Exports was

a partnership firm of which one Mr. M.

Poobalan and his wife were partners;

(iii) that another agreement dated 11.12.2012 was entered into between the Corporate Debtor and a

proprietary concern by name M/s. P. & D.

Enterprises, of which the very same person

namely, Mr. M. Poobalan was the sole

proprietor; (iv) that the said agreement was

for hiring of machinery and equipment; (v)

that a finance agreement was also entered

into on 12.12.2012 between the Corporate

Debtor and a company by name M/s.

Udhyaman Investments Pvt. Ltd., represented

by its authorized signatory Mr. M. Poobalan;

(vi) that there were a few communications

sent by the said Mr. Poobalan to various

authorities, claiming himself to be the

authorized signatory of the Corporate

Debtor; (vii) that an MOU was entered into

on 16.04.2016 between the Corporate Debtor

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 13 of 38 and M/s. Udhyaman Investments Pvt. Ltd.,

represented by the said Mr. Poobalan,

whereby the Corporate Debtor agreed to

pay Rs.11.5 crores; (viii) that the said

agreement was purportedly executed at

Florida, but witnessed at Chennai; (ix) that

Mr. Poobalan even communicated to the

Director, Department of Mines & Geology as

well as the Monitoring Committee, taking up

the cause of the Corporate Debtor as

its authorized signatory; (x) that the CIRP

was initiated by M/s. Udhyaman Investments

Pvt. Ltd. represented by its authorized

signatory, Mr. Poobalan; (xi) that the

Resolution Applicant namely, M/s. Embassy

Property Development Pvt. Ltd. as well as the

Financial Creditor who initiated CIRP

namely, M/s. Udhyaman Investments Pvt. Ltd.

are all related parties and (xii) that Mr.

Poobalan had not only acted on behalf of the

Corporate Debtor before the statutory

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 14 of 38 authorities, but also happened to be the

authorized signatory of the Financial

Creditor who initiatedthe CIRP, eventually

for the benefit of the Resolution Applicant

which is a related party of the Financial

Creditor.

48.In the light of the above averments, the

Government of Karnataka thought fit to

invoke the jurisdiction of the High Court

under Article 226 without taking recourse to

the statutory alternative remedy of appeal

before the NCLAT. But the contention of the

appellants herein is that allegations of fraud

and collusion can also be inquired into by

NCLT and NCLAT and that therefore the

Government could not have bypassed the

statutory remedy.

49.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:

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 15 of 38 "65. Fraudulent or malicious initiation of proceedings. - (1) If, any person initiates the insolvency resolution process or liquidation 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.

(1) 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."

50.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 69makes 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 aswell as

(ii) fraudulent transactions. It is significant

to note that Section 65(1) deals with a

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 16 of 38 situation where CIRP is initiated fraudulently

"for any purpose other than for theresolution of

insolvency or liquidation".

51.Therefore, if, as contended by the

Government of Karnataka, the CIRP had been

initiated by one and the same person taking

different avatars, not for the genuine purpose

of resolution of insolvency or liquidation, but

for the collateral purpose of cornering the

mine and the mining lease, the same would

fall squarely within the mischief addressed by

Section 65(1). Therefore, it is clear that NCLT

has jurisdiction to enquire into allegations of

fraud. As a corollary, NCLAT will also have

jurisdiction. Hence, fraudulent initiation of

CIRP cannot be a ground to bypass the

alternative remedy of appeal provided in

Section 61."

The Appellant has further cited the judgment of Hon'ble Supreme Court in

'State of Orissa & Ors. Vs. Chandra Nandi' in Civil Appeal No. 10690 of

2017 held that there should be a reasoned order and if the order is without

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 17 of 38 reason the matter can be remanded back to the lower Authority. Para 10 11,

12, 13 & 14 are depicted below:

"10. This Court has consistently laid down that every

judicial or/and quasi judicial order passed by the

Court/Tribunal/Authority concerned, which decides

the lis between the parties, must be supported with the

reasons in support of its conclusion. The parties to the

lis and so also the appellate/revisionary Court while

examining the correctness of the order are entitled to

know as to on which basis, a particular conclusion is

arrived at in the order. In the absence of any

discussion, the reasons and the findings on the

submissions urged, it is not possible to know as to what

led the Court/Tribunal/Authority for reaching to such

conclusion. (See State of Maharashtra vs. Vithal Rao

Pritirao Chawan, (1981) 4 SCC 129, Jawahar Lal

Singh vs. Naresh Singh & Ors., (1987) 2 SCC

222, State of U.P. vs. Battan & Ors., (2001) 10 SCC

607, Raj Kishore Jha vs. State of Bihar & Ors., (2003)

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 18 of 38 11 SCC 519 and State of Orissa vs. Dhaniram Luhar,

(2004) 5 SCC 568).

11. The order impugned in this appeal suffers from

aforesaid error, because the High Court while passing

the impugned order had only issued the writ of

mandamus by giving direction to the State to give some

reliefs to the writ petitioner (respondent) without

recording any reason.

12. We are, therefore, of the view that such order is

not legally sustainable and hence deserves to be set

aside.

13. In view of the foregoing discussion, the appeal

succeeds and is accordingly allowed. The impugned

order is set aside. The case is remanded to the High

Court for deciding the writ petition afresh, out of

which this appeal arises, for its disposal in accordance

with law keeping in view the observations made above.

14. Since we have formed an opinion to remand the

case to the High Court for its fresh disposal on merits,

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 19 of 38 we have not expressed any opinion on the merits of the

case while deciding this appeal. The High Court will,

therefore, decide the appeal uninfluenced by any

observations made by this Court in this order."

6. The Ld. Counsel for the R1/RP has stated that R1 has issued numerous emails

to provide details of Rs.110 Crore claim lodged on R2 so that he can proceed

against R2 but the Appellant has not provided the details. GST Authority have

also issued notice on the CD for an amount of Rs. 35.63 Crore. The RP

remuneration is not paid by the CD but is being paid by the CoC members in

proportion of their voting percentage. It has also been stated by him that no

potential Resolution Applicant filed their plan for the Resolution of the CD,

the CoC in the 4th CoC meeting considering that there were no interested

potential Resolution Applicant, the CoC with 100% voting favored the

liquidation of the CD and accordingly, an application seeking liquidation of

the CD has been filed before the Adjudicating Authority.

7. The Ld. Counsel for the R2 - BMW India Pvt. Ltd has stated that they are

only concerned with the IA No. 300 of 2018 which was filed by the CD under

Section 65 of the Code. They have also stated that the said IA has been rightly

dismissed by the Adjudicating Authority and the impugned order does not

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 20 of 38 merit any interference as it is without jurisdiction and is not maintainable qua

R2. They are abusing the process of the Code and delayed the outcome. They

are bringing the trade disputes into the Code jurisdiction. It has also stated that

Section 65 of the Code proceedings can be initiated only against a 'Financial

Creditor' & 'Operational Creditor' who have initiated the process. Since R2

has not initiated the process, it is not within the ambit of Section 65 of the

Code. It has also stated that the petition of the CD under Section 9 of the

'Arbitration and Conciliation Act, 1996' was dismissed by the Hon'ble Delhi

High Court OMP (1) (Comm) No. 559 of 2017 because the Court has

observed that "it is not possible at least at an ad interim stage in exercise of

its power under Section 9 of the Arbitration and Conciliation Act, 1996 to

direct BMW mandatorily to renew the contract with the petitioner". They

have also stated that the CD filed a petition before the 'Competition

Commission of India' (CCI) vide Case No.11 of 2018 under section 19 of the

Competition Act, 2002 but it was also dismissed for not having made out a

prima facie case. It has also alleged that the Appellant is indulging in forum

shopping and have malafidely intention of initiating vexatious of litigation

against R2- BMW India Pvt. Ltd.

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 21 of 38

8. The Ld. Counsel for the R3 - BMW India Financial Services Pvt. Ltd has

stated that the debt and default is proved and this is sufficient for initiating the

CIRP. The loan transactions between the CD and Financial creditor are stated

below:

a.Floorplan financing agreement dated 15th November,

2010 (FPA) providing credit line, enhanced from time

to time to INR 33 Crore (disbursed/utilized : INR

30,37,04,771.98 as on 31.10.2017) @ page

513/515/524/541/563

b.Working capital demand facility agreement dated 28th

June 2014 providing credit limit of INR 20 Crore

(disbursed/utilized:INR17,49,99,800.01 as on

31.10.2017) (@page 628/637/642/650/659 of Appeal

paper book); and

c.Spare Parts Financing Agreement dated 13.04.2014

(SPA) (disbursed/utilized : INR 3,16,82,078.36 as on

31.10.2017) (@page592/594/621 of Appeal Paper

Book)

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 22 of 38 (Note : the above loan facilities were secured by way of

Deed of Hypothecation, bank Guarantee (invoked and

encashed post-filing of Insolvency Application),

Promissory Notes and Personal guarantees provided by,

inter alia, Mr. Talha Sareshwala, the Appellant herein

@page 467-475 of Appeal paper book)

[Note: The above loan facilities were secured by way of

Deed of Hypothecation, bank Guarantees (invoked and

encashed post-filing of Insolvency Application),

Promissory Notes and personal Guarantees provided by,

inter alia, Mr. Talha Sareshwala, the Appellant herein

(page 467 -475 of Appeal paper book)

The FPA was utilized from time to time, as indicated by

the statement of account at page no.661 to 805 of the

Appeal paper book, while the statement of account

providing details of utilisation under the SPA is

provided at page 806 to 814 of the Appeal paper book.

Further, the utilisation under WC is provided at page

no.815 to 816 of the Appeal paper book.

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 23 of 38 The said statement clearly state that Parsoli had an

aggregate outstanding of INR 51,03,86,650.35 as

principal as of 31.10.2017.

9. Evidence of default and admission thereof are stated below:

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 24 of 38 Based on the above evidence of default, FC filed the Insolvency Application

on 13.11.2017, to which an objection was filed by Parsoli on 29.11.2017,

raising the following frivolous and hyper-technical objections:

a.The computation of default, though contained the date of default,

however the number of days in default was missing (page 1445 of

the Appeal paper book);

b.No evidence provided by FC that it made payment to BMW India

under FPA for the cars purchased by Parsoli (page 1446 of the

Appeal paper book);

c.FC was actually an operational creditor as it steeped into the shoes

of BMW India which sold cars to Parsoli (page 1447 of the Appeal

paper book);

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 25 of 38 d.Default of Parsoli was on account of inaction on the part of BMW

group and since BMW group decided to give a fair exit to Parsoli,

FC could not have initiated the Insolvency Application (page 1451

of the Appeal paper book);

e.The loans were not recalled by the FC, and that Parsoli was a

solvent Company (page 1453 of the Appeal paper book).

Note: it is apparent that no other objection was ever raised at the

time of filing counter on 29.11.2017. However, suddenly Parsoli

filed a Further Affidavit in December, 2017, as an afterthought,

raising objection inter alia (i) on sale of cars by outside dealer to

the customers of Gujarat (page 1828/1830/1851 of the Appeal

paper book) and (ii) regarding alleged erroneous recognition of date

of default (page 1829 of the Appeal paper book). The said

objections, as apparent, pertained to its business dealings with

BMW India, and not with FC.

It is also stated that on 06.01.2018, FC filed its rejoinder affidavit

rebutting all such allegations by providing inter alia (i) bank details

of payments made by FC to BMW India against the cars, (ii) the

email communication whereby Parsoli was informed by FC about

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 26 of 38 payment upon utilisation of FPA, (iii) reiterating the contents of

clause 5.5 of FPA i.e. sale proceeds ought to be utilized to repay

dues under FPA and (iv) admission of default by Parsoli and the

Appellant vide their emails (page 1864-66 of the Appeal paper

book).

The FC filed its response to the said IA on 25.09.2018 demonstrating as to

how the IA was filed to cause delay in the insolvency proceedings. A reply to

the said IA was also filed by BMW India (page 2743-2746 of the Appeal paper

book) pointing out that Parsoli has no locus to file such an application in view

of the provision contained in Section 65 of the Code as it was not BMW India

who had initiated the Insolvency Application. Parsoli filed its rejoinder to the

contentions of BMW India (page 2756 of the Appeal paper book) without any

tenable response to the issue of locus.

It is also stated that the Adjudicating Authority has also recorded its

satisfaction for all parameters of compliances under Section 7 of the Code,

including completeness of the Insolvency Application and proposal of an IRP

(page no. 80/81 of the Appeal paper book consisting of para 20-21 of the

order. Thus,

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 27 of 38 a.FC completely fulfilled the requirements of being a financial

creditor in view of the loan facilities provided to Parsoli, a fact

which was never denied by Parsoli in its contemporaneous

communications;

b.Parsoli defaulted in its repayment obligations under the loan

facilities as described under Section 3(12) r/w section 7(1) of the

Code;

c.The Insolvency Application fulfilled all the mandatory

requirements as laid down under Section 7(3) of the Code by

adducing the relevant records to showcase default for the

consideration of the Adjudicating Authority and proposed an IRP.

In view of the above stated facts, the Respondent No.3 is praying for

dismissal of the Appeal.

10.We have gone through the submissions made by the parties and pleadings

available on record and Hon'ble Supreme Court Judgment cited above and

how to move where fraudulent or malicious initiation of proceedings are

involved under Section 65 of the Code and are having following observations:

a. It is not in dispute that there is no 'debt' and 'default which is the

basic requirement of the Section 7 of the Code. However, the

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 28 of 38 'Adjudicating Authority' has the inherent power to restrict the

perpetuation of applications motivated by fraud or malice under

section 65 of the code which is reproduced below for ease of

convenience:

"Section 65: Fraudulent or malicious initiation of proceedings.

(1) If, any person initiates the insolvency resolution process or liquidation

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.

[(3) If any person initiates the pre-packaged insolvency resolution

process--

(a) fraudulently or with malicious intent for any purpose other than for the

resolution of insolvency; or

(b) 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.]"

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 29 of 38 b. This Tribunal has already held in the case of Amit Katyal Vs.

Meera Ahuja in CA(AT)(Ins) No. 1380 of 2019 that Section 65 of

the Code explicitly said that if any person initiates the Insolvency

Resolution Process or Liquidation proceedings fraudulently or

with malicious intends for any purpose other than for resolution

of insolvency or liquidation, as the case may be, the Adjudicating

Authority may impose the penalty. This Tribunal is also of the

view that Section 65 of the Code could not mean the imposition of

penalty alone.

c. This Tribunal has also held in Company Appeal (AT) (Insolvency)

No. 258 of 2021 in Hystone Merchants Pvt. Ltd Vs. Satabadi

Investment Consultants Pvt. Ltd has held that the Adjudicating

Authority can refuse to admit an application that is otherwise

complete in all respects under Section 7 of the Code if there are

visible science of fraud, collusion or malicious intents under

Section 65 of the Code.

d. The Hon'ble Apex Court has also observed in 'Embassy property

development Pvt. Ltd' as stated (supra) vide para 51 that if the

CIRP had been initiated by one and the same person taking

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 30 of 38 different avatars not for the genuine purpose of Resolution

Insolvency or Liquidation but for the collateral purpose of

cornering the mine and mining lease the same would fall squarely

within the mischief by Section 65(1) of the Code. The

Adjudicating Authority has jurisdiction to enquire into the

allegation of fraud and so also with this Appellate Tribunal.

e. The Hon'ble Apex Court in 'Beacon Trusteeship Limited' as

stated (supra) has also held that "whether the proceedings have

been initiated in a collusive manner will be looked into in

accordance with law and appropriate orders have to passed

considering the facts and circumstances of the case".

f. What we are observing in this case that the 'Adjudicating

Authority' has not gone into the reasons put forth by the counsels

in IA No. 300 of 2018 but has simplicitor mentioned that R2/BMW

India Pvt. Ltd is not a party in the main petition no. 161 of 2017.

The Appellant has elaborately given the reasons for invoking

Section 65 of the Code and has elaborately explained how the

territory infringement has been committed by R2 a group company

of R3 leading to a financial mess and putting the Indian company

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 31 of 38 into such adverse situation leading to lodging a claim of Rs.110

Crore (appearing at page no. 2171 -2400 of the Appeal paper

book).

g. We, therefore, would like to point out some extracts from Hon'ble

Supreme Court Judgment in 'Swiss Ribbons pvt. Ltd & Anr. Vs

Union of India & ors' in Writ Petition (Civil) No. 99 of 2018 that

it may be prescience, distortion and abuses of the provisions of the

Code which may in the form of Section 7 of the Code initiation

where group companies are involved in providing different

facilities and in order to supplement the same the certain extracts

are depicted below:

"Para 8 ,....There may even be possibilities of abuse,

but that too cannot of itself be a ground for

invalidating the legislation, because it is not possible

for any legislature to anticipate as if by some divine

prescience, distortions and abuses of its legislation

which may be made by those subject to its provisions

and to provide against such distortions and abuses.

Indeed, howsoever great may be the care bestowed

on its framing, it is difficult to conceive of a

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 32 of 38 legislation which is not capable of being abused by

perverted human ingenuity. The Court must

therefore adjudge the constitutionality of such

legislation by the generality of its provisions and not

by its crudities or inequities or by the possibilities of

abuse of any of its provisions. If any crudities,

inequities or possibilities of abuse come to light, the

legislature can always step in and enact suitable

amendatory legislation. That is the essence of

pragmatic approach which must guide and inspire

the legislature in dealing with complex economic

issues.‖ (emphasis supplied)

Para 8....... Moreover, as already pointed out above,

the trial and error method is inherent in every

legislative effort to deal with an obstinate social or

economic issue and if it is found that any immunity

or exemption granted under the Act is being utilized

for tax evasion or avoidance not intended by the

legislature, the Act can always be amended and the

abuse terminated.

Para 9.......The objective of the Insolvency and

Bankruptcy Code, 2015 is to consolidate and amend

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 33 of 38 the laws relating to reorganization and insolvency

resolution of corporate persons, partnership firms

and individuals in a time-bound manner for

maximization of value of assets of such persons, to

promote entrepreneurship, availability of credit and

balance the interests of all the stakeholders including

alteration in the priority of payment of government

dues and to establish an Insolvency and Bankruptcy

Fund, and matters connected therewith or incidental

thereto. An effective legal framework for timely

resolution of insolvency and bankruptcy would

support development of credit markets and

encourage entrepreneurship. It would also improve

Ease of Doing Business, and facilitate more

investments leading to higher economic growth and

development.

Para 10 - The Preamble of the Code states as

follows: ―An Act to consolidate and amend the laws

relating to reorganization and insolvency resolution

of corporate persons, partnership firms and

individuals in a time bound manner for maximization

of value of assets of such persons, to promote

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 34 of 38 entrepreneurship, availability of credit and balance

the interests of all the stakeholders including

alteration in the order of priority of payment of

Government dues and to establish an Insolvency and

Bankruptcy Board of India, and for matters

connected therewith or incidental thereto.

Para 12. It can thus be seen that the primary focus of

the legislation is to ensure revival and continuation

of the corporate debtor by protecting the corporate

debtor from its own management and from a

corporate death by liquidation. The Code is thus a

beneficial legislation which puts the corporate

debtor back on its feet, not being a mere recovery

legislation for creditors. The interests of the

corporate debtor have, therefore, been bifurcated

and separated from that of its promoters / those who

are in management. Thus, the resolution process is

not adversarial to the corporate debtor but, in fact,

protective of its interests. The moratorium imposed

by Section 14 is in the interest of the corporate debtor

itself, thereby preserving the assets of the corporate

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 35 of 38 debtor during the resolution process. The timelines

within which the resolution process is to take place

again protects the corporate debtor's assets from

further dilution, and also protects all its creditors

and workers by seeing that the resolution process

goes through as fast as possible so that another

management can, through its entrepreneurial skills,

resuscitate the corporate debtor to achieve all these

ends.

h. There are several issues (violation of dealership agreement, vis a

vis invocation of code for default concurrently happening under

floorplan financing agreement of dealership agreement provided by

same BMW Group Company) raised by the Appellant on

Respondent No.2- BMW India Pvt. Ltd discreetly covering

Respondent No.3- BMW India Financial Services Pvt. Ltd. Since,

some collusion seems to be apparently existing to thwart the claim

of the Corporate Debtor and other related issues. Impugned order

dated 04th June, 2020 has not dealt with this IA and has dismissed

on the ground that BMW India Pvt. Ltd/R2 in the IA No.300 of

2018 is not a party in the main petition no.167 of 2017. Although

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 36 of 38 IBC is a summary proceeding but if large business houses with

multiple business arms are allowed to disrupt on its whims &

fancies small business firm then how IBC can promote

entrepreneurship which is also its objective. Hence it is in the

fitness of justice to remand the matter back in respect of IA 300 of

2018 to the 'Adjudicating Authority' to go into the details of the

allegations & decide either way by giving reasonable & proper

opportunity to all the parties involved. Section 9 of the Code meant

for 'Operational Creditors' have a protection mechanism that if

there is a genuine dispute then even the debt is due and default has

happened, the case is not admitted. However, as far as Section 7 of

the Code is concerned here protection mechanism is provided not

in that section but through Section 65 of the Code, if there is

fraudulent or malicious initiation of proceedings. The Objective of

the Code is to ensure revival and continuation of Corporate Debtor

by protecting the Corporate Debtor from its death. The Court

/Tribunal has to ensure that the Code is not being used by perverted

human ingenuity and to protect against distortion and abuses.

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 37 of 38 i. However, we made it very clear that we are not going deep in the

matter and hence not commenting on the merit of the case.

However, we relegate the appeal partially for the remedy before the

'Adjudicating Authority' in respect of I.A No. 300 of 2018 and

accordingly, we are remanding the matter back to the 'Adjudicating

Authority' by setting aside para 18.2 of the impugned order dated

04th June, 2020 in I.A No. 300 of 2018 in CP(IB) No. 161 of 2017.

j. Accordingly, we dispose of the Appeal. No order as to costs.

Pending Application, if any, stands disposed of.

Interim order, if any, passed by this Tribunal stands vacated.

[Justice M.Venugopal] Member (Judicial)

(Dr. Ashok Kumar Mishra) Member(Technical)

28th February, 2022

New Delhi

Raushan.K

Company Appeal(AT) (Ins)No. 1115 of 2020 Page 38 of 38