2022 (12) TMI 611 - AT - Insolvency and Bankruptcy

Appellate Tribunal rules in favor of ex-directors, finding transactions with Y2Y Fashions were not fraudulent.

Randhir Singh Tomar, Jyoti Varshney, Y2Y Fashions Private Ltd. Versus Sunil Kumar Aggarwal, Liquidator/ Erstwhile Resolution Professional M/s. YS Marchandise International Pvt. Ltd.

The Appellate Tribunal set aside the Impugned Order, ruling that the transactions between the corporate debtor and Y2Y Fashions Private Limited were ... CIRP - bonafide nature of the transactions or not - recovery from the ex-directors of the corporate debtor - forensic and transaction audit of the corporate debtor was conducted - increase in quantum of commission from 5% to 32% - transfer to stock from one warehouse to another, instead of selling the same as scrap - HELD THAT:- 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. 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. 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. 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. Appeal allowed Issues Involved:1. Validity of the T-Commerce Vendor Agreement between the corporate debtor and Y2Y Fashions Private Limited.2. Whether the transactions between the corporate debtor and Y2Y Fashions Private Limited were preferential and avoidable under Section 43 of IBC.3. Whether the increase in commission paid to Y2Y Fashions Private Limited was justified.4. Whether the ex-directors of the corporate debtor were liable to make a contribution of Rs. 83.97 lakhs to the account of the corporate debtor.5. Whether criminal prosecution under Section 69 of the IBC was warranted against the ex-directors of the corporate debtor and Y2Y Fashions Private Limited.Detailed Analysis:1. Validity of the T-Commerce Vendor Agreement:The Appellant contended that the T-Commerce Vendor Agreement was a legitimate business arrangement aimed at selling the corporate debtor's inventory through the new company, Y2Y Fashions Private Limited. The agreement included various services such as hosting, technology, logistics, and customer support. The Appellate Tribunal noted that the agreement was entered into on 17.3.2018 and that the term 'commission' included charges for these services, indicating a normal business arrangement.2. Preferential and Avoidable Transactions:The Respondent argued that the transactions between the corporate debtor and Y2Y Fashions were preferential and avoidable under Section 43 of the IBC. The Transaction Audit Report identified these transactions as preferential. However, the Appellate Tribunal found that the transactions were carried out in the normal course of business due to the sealing of the corporate debtor's warehouse and the cancellation of agreements with other teleshopping channels. The Tribunal concluded that these transactions were not intended to defraud creditors.3. Justification for Increased Commission:The Appellant explained that the increased commission paid to Y2Y Fashions was due to the inclusion of various services in the term 'commission.' The commission percentage rose from 5% in FY 2016-17 to 32% in FY 2018-19. The Tribunal accepted this explanation, noting that the increase was justified by the services provided under the T-Commerce Vendor Agreement.4. Liability of Ex-Directors for Rs. 83.97 Lakhs:The Adjudicating Authority had directed the ex-directors to deposit Rs. 83.97 lakhs into the corporate debtor's account, considering it a diversion of funds. However, the Appellate Tribunal found that the transactions were part of normal business operations and not intended to defraud creditors. Therefore, the Tribunal set aside the Impugned Order, relieving the ex-directors of the liability to make the contribution.5. Criminal Prosecution under Section 69 of IBC:Given that the transactions were not found to be avoidance transactions infringing Section 66 of the IBC, the Appellate Tribunal directed that no criminal prosecution under Section 69 of the IBC was required against the ex-directors and Y2Y Fashions Private Limited.Conclusion:The Appellate Tribunal set aside the Impugned Order, concluding that the transactions between the corporate debtor and Y2Y Fashions Private Limited were carried out in the normal course of business and were not intended to defraud creditors. Consequently, the ex-directors were not liable to make a contribution of Rs. 83.97 lakhs, and no criminal prosecution was warranted. The appeal was disposed of with no order as to costs.