TaxTMI 
TaxTMI 
2018 (5) TMI 1937
X X X X Extracts X X X X
X X X X Extracts X X X X
....rtgage of 858 acres of immovable properly owned and in possession of the Corporate Debtor, to secure the debt of related party i.e. Jaiprakash Associates Ltd., by way of mortgage deeds dated 29th December, 2016, 12th May, 2014, 7th March, 2017. 24th May, 2016 and 4th March, 2016 are the fraudulent and wrongful transactions within the meaning of Section 66 of the Code. 2. The directions have been further sought against the Directors and promoters of the Corporate Debtor to make such contributions to the assets of the Corporate Debtor as it may deem fit, including directions under Section 67 of the code. 3. The directions have been sought under section 48(1)(c) of the Code directing the lenders of Jaiprakash Associates Ltd. in whose favour mortgage of 858 acres of land has been created to release or discharge security interest created by the corporate debtor over its immovable properties towards the financial assistance granted to Jaiprakash Associates Ltd. 4. The directions have been sought for declaring the transactions in question as Preferential transactions under section 43 of the code and pass an order under Section 44 in particular under sub-section (1)(c) thereof aga....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ansactions, undervalued transactions and extortionate credit transactions respectively, Section 66 casts duly on the Resolution Professional to apply to the Adjudicating Authority in respect of fraudulent and wrongful transactions. 8. Petitioner contends that while performing his duties and functions as the Resolution Professional of the Corporate Debtor, and conducting the affairs and business of the Corporate Debtor, on examination of various transactions entered into by the corporate debtor and its promoters shareholders of the company and their Directors, the applicant has found that the business of the corporate debtor has been carried on with the intent to defraud the creditors of the Corporate Debtor and for the fraudulent purpose. The Directors of the corporate debtor did not exercise care or due diligence in minimising the potential loss to the creditors knowing and being fully aware of the financial stress the corporate debtor was going through (having been declared an NPA by the guidelines of RBI). The transactions referred herein also amount to being undervalued and preferential transaction under chapter III of the Code. 9. The Corporate Debtor Company is a specia....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... public under the provision of Companies Act, 1956. Subsequently, these are required to be repaid in full as the FD programme was not covered by the new Companies Act, 2013. Given the cash crunch, the company has not yet repaid the FD holders. The repayment to FD holders is also being monitored by this Tribunal in an ongoing matter. 13. Petitioner further contends that the Corporate Debtor started lacing financial stress and could not honour its project completion deadlines and failed in it commitment to deliver possession of flat to home buyers in time, It started facing litigation from fiat buyers in some forums it also started defaulting in payments of loans and other financial assistance borrowed from financial creditors. It's account was declared as a Non-Performing Account (from now on NPA) as on 30th September 2015 by Life Insurance Corporation and on 31st March 2016 by other lenders. It is obvious that the Corporate Debtor was in dire needs of funds during this period and was facing severe liquidity crunch to complete the construction of projects and deliver the fiats to homebuvers as well as honour the payment obligations to financial Creditors including the Fixed D....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ders, even without securing or obtaining any counter guarantee in return. The mortgage of 858 acres of land, valued at approximately Rs. 5000-6000 crores, by the Directors of the Corporate Debtor to secure the debt of JAL, at the time when the Corporate Debtor itself was in dire need of funds and could have sold/mortgaged unencumbered land to raise funds to complete construction of Hats in a timely manner and to fulfil its obligation to its creditors and prevent value deterioration or erosion or insolvency is highly questionable. Therefore, as soon as the applicant discovered the transaction, the applicant vide its letter dated 5th December, 2017 requested JAL to provide documents concerning the transaction entered between the Corporate Debtor, JAL and the banks about the immovable properties of the Corporate Debtor. 16. The applicant vide its letter dated 29th December 2017 called upon the lenders of JAL in whose favour mortgage of land has been created to provide full disclosure, explanation in respect of transaction as explained above keeping in view of the relevant provisions of the Code. The lenders of JAL denied that the transactions arc covered by the provisions of Sectio....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to honour its project completion deadlines and failed in its commitment to deliver possession of flats to homebuyers in time. It was facing litigation from fiat buyers in sonic forums. The Corporate Debtor has approximately 30,000 flats under construction and once the promoters and Directors of the Corporate Debtor were aware of the financial stress since 30th September 2015 and to undertake such transaction to create an interest in its immovable properly for financial assistance to it's related party has been entered to defraud the Creditors of the Corporate Debtor and the homebuyers at large. It had also defaulted in payment of loans and other financial assistance borrowed from Financial Creditors, including Fixed Deposit Holders. The mortgage was created in complete disregard to the interests of the Creditors and Stakeholders of the Corporate Debtor and the homebuyers at large. Its account was declared as a non-performing account (from now on "NPA") on 30th September 2015 by LIC and on 31st March 2016 by the lenders, the Corporate Debtor was in dire needs of funds during this period and was facing severe liquidity crunch to complete the construction of projects and deliver ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e and insolvency was imminent. The Corporate Debtor ought to have exercised due diligence in minimizing the potential loss to the financial Creditors. Operational Creditors, creditors (including home buyers) and other stakeholders of the Corporate Debtor. However, evidently the Directors of the Corporate Debtor despite being fully aware of the said factum of default, admittedly failed to exercise due diligence in minimising the potential loss to its creditors and entered a transaction which on face-of it, is a transaction entered to give benefits to its related party with a clear intent to defraud its creditors. This land could have been sold today to generate cash that would have been sufficient to complete the construction of flats. The flat buyers are directly affected adversely by this decision. 22. Applicant further contends that the said transaction of the creation of mortgage constitute an undervalued transaction within the meaning of sub-section (2)(b) of Section 45 of the Code as it is made without any consideration of economic gain and had not taken place in the ordinary course of business of the Corporate Debtor. 23. The applicant states that transaction shall be c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ant states that sub-section (1) of section 45 provides that if the Resolution Professional, on an examination of the transactions of the corporate debtor under section 43(2) determines that certain transactions were made during the relevant period under section 46, which were undervalued, then the Resolution Professional shall make an application to the Tribunal to declare such transaction as void and reverse the effect of such transaction in accordance with the provisions of the code. 28. It is further contended that the said creation of interests by Directors of the Corporate Debtor on the immovable properties of the Corporate Debtor in favour of the lenders of JAL, i.e. related company is a fraudulent arid wrongful transaction within the meaning of section 66, and a preferential transaction and undervalued transactions within the meaning of sections 43 and 45 respectively of the Code. The Promoters and Directors of the Corporate Debtor have connived and conspired to cause loss to the creditors of the Corporate Debtor. 29. Section 25 of the Code casts a duty upon the Resolution Professional to file avoidance application in accordance with chapter III of the Code. Section 66....
X X X X Extracts X X X X
X X X X Extracts X X X X
....heir wisdom. Such decisions cannot the questioned by the applicant by present circumstances without proving by cogent evidence that the decision of the directors was fraudulent. Even today, the corporate debtor has 741 acres of unencumbered land which could have been used, but not done, by the applicant for raising interim finance for the said purposes of the Corporate Debtor, which is part of the statutory duty. 33. It is pertinent to mention that these facts are already disclosed in various documents in public domain, including the Financial Results of the Corporate Debtor which were widely circulated and uploaded on the website, Prospectus issued in 2010 for the initial public offer, filing done with various Regulatory Authorities like the ROC with whom the Financial Statements, Charges for creation of Security and Offering Documents have been filed under Stock Exchanges and also the Information Memorandum issued by the applicant on 1st December, 2017. It is further contended by the JAL some isolated transaction does not amount to fraudulent conduct of business of the corporate debtor. It is further contended by the JAL the sections 43 and 45 of the IBC came into effect w.e.f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Jaiprakash associates Ltd (JAL.) which held 71.64% of its equity share capital as on 31 March 2017. The shares of the corporate debtor are listed on BSE & NSE. It has about 1,29,000 shareholders. The paid-up value of the shares held by Jaiprakash Associates Ltd is Rs. 995 crores as on 31st March. 2017 which amounts to direct contribution by Jaiprakash Associates Ltd to the capital of the Corporate Debtor. On the advice of Yamuna Expressway Industrial Development Authority (YEIDA), JAL agreed to incorporate an SPV for implementation of the project. Accordingly, Jaypee Infratech Ltd. (Corporate Debtor) was incorporated as an SPV on 5th April 2007. The contract was awarded to the answering respondent and accordingly the answering respondent was appointed as the "Concessionaire". The answering Respondent transferred all its valuable rights and benefits and obligations under the Concession Agreement vide Assignment Agreement dated 19th October 2007 followed by Project Transfer Agreement dated 22nd October 2007 to the SPV. The entire project cost of Rs. 13,486 crores was made through a mix of debt of Rs. 6550 crores and equity (including internal accruals from Real Estate Development) of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....orporate debtor has been substantially higher than the outstanding liabilities, the fair market value of the land mortgaged to the lenders alone aggregate Rs. 17.116 crores as per the last valuation done on 30th June 2016 through G.A. Advisory Private Limited, the IDBI Bank empanelled valuers. The fair market value of all the assets of the corporate debtor as on 31st March 2017 is shown as Rs. 32.882.03 crores by the answering respondent in a table. The answering respondent has mentioned that land comprising 1738 acres of land mortgaged to IDBI led consortium and 590 acres of unencumbered land with the company is valued as Rs. 20.111 crores on most conservative basis taken by IDBI itself in its application. 40. The answering respondent has further contended that the financial position of the corporate debtor was very strong notwithstanding the temporary financial crunch. The fair market value of the assets was as high as Rs. 32,880 crores against the total outstanding liability of Rs. 12,902 crores only. The debt to equity ratio was also very comfortable. As on 31st March, 2015. it was 1.34, on 31st March, 2016 it was 1.50 and on 31st March, 2017 it was 1.57. For infrastructure ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ision taken by the Directors of the Corporate Debtor which were taken at the relevant time keeping in view the facts and circumstances then prevailing and in good faith and after due diligence. The applicant has no legal right to question the economic wisdom of the directors of The Corporate Debtor and the lenders and has no legal right to say that they ought to have acted only in a particular manner. The Board of Directors who took the decision were not lower level executives having limited knowledge but comprised of senior officers of the Lenders as their Nominee Directors, and also Independent Directors appointed as per prevailing legal requirement and had considerable experience and expertise in the field of finance and business management. 45. The answering respondent further contended that the jurisdictional condition for invoking section 66 is that the business of the Corporate Debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose. 46. In the present case, the Corporate Debtor has been carrying on the business of Infrastructure Development. Regarding schedule VI to the Companies Act 2013, the Corporate Debtors....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... which would be for fetched and patently unreliable and cannot be given any credence. 49. The answering respondent has questioned the applicability of section 43 of IB code. It is contended that section 43 will apply only if it is shown that the corporate debtor has at the relevant time given preference in such transactions and such manner as laid down in sub-section (2), to any persons as referred to in sub-section (4), as provided in sub-section (2) a corporate debtor shall be deemed to have given preference only to cases where there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surely or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and such transfer had the effect of putting such creditor or a surety or a guarantor in a beneficial position than to have been in the event of distribution of assets being made in accordance with section 53. 50. The answering respondent contends that none of the ingredients of section 43(2) is satisfied in respect of impugned transactions. In the instant case, the impugned mortgages have been crea....
X X X X Extracts X X X X
X X X X Extracts X X X X
..../mortgages do not violate any applicable laws. 55. Answering respondent has also questioned the applicability of section 60(5)(a) of I & B Code. It is contended that clause (a) of sub-section (5) of section 60 provides that NCLT shall have jurisdiction to entertain or dispose of any application or proceeding by or against the corporate debtor or corporate person. There is no dispute as to the jurisdiction of this tribunal, but in the present case, the question of invoking the jurisdiction of this Tribunal does not arise as the relevant provisions referred lo above are not applicable. 56. ICICI Bank has also filed its objection against the application filed by Resolution Professional. It is stated in the objection that ICICI Bank is a secure financial creditor of the Corporate Debtor. It is submitted that ICICI Bank has filed its claim against the corporate debtor before the Resolution Professional for a total amount of Rs. 304,10,12,486.52 as on 9th August 2017 about the financial assistance granted to the Corporate Debtor. It is further contended that the ICICI bank is also a member of the Consortium of lenders (JAL lenders) that sanctioned the credit facilities to the holdi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ied on the documents received by him to fit his case, to mislead and defraud this Tribunal. It is further submitted that the Resolution Professional has impliedly incriminated the answering respondent in its allegations of fraud which are not supported by any cogent reasons are documentary evidence whatsoever. The mere reckless allegation of fraud is irresponsible. Any such allegation is to be supported by cogent evidence to set-aside the impugned transactions. The impugned transactions equally do not fall under the avoidance rules concerning undervalue transactions. A transaction is required to be subjected to scrutiny under section 45 of the code to determine whether such transaction has been undervalued only if such transaction is a preferential transaction that fails within section 43(2) of the Code and not otherwise. The answering respondent contends that impugned transactions are not preferential transactions. 61. In the instant case, the corporate debtor has created a security interest in favour of the JAL lenders including the answering respondent herein for adequate consideration of the grant of loans to JAL, its holding company. It is also relevant to mention here that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....with clean hands, valuable consideration and bona fide intent with the belief that the corporate debtor created the Consortium mortgages as well as the Exclusive mortgages for purely commercial purposes without any intent to defraud creditors. The merits of the impugned transactions were duly approved under the requested corporate authorizations, by applicable law. 63. The burden of proof is on the applicant to prove that there was subjective intent to defraud the creditors by keeping the property out of the reach of the creditors. The impugned transactions have been carried out in the ordinary course of business of the applicant for the valuable and commercially valid consideration. Hence the impugned transactions cannot he termed a transaction intended to defraud the creditors of the corporate debtor. It is further submitted by the answering respondent that the Resolution professional has failed to appreciate that the necessary filing/registration undertaken by the corporate debtor with the registrar of companies. CERSAI. The public record was available to everyone including the lenders of the corporate debtor. It is further submitted that despite the knowledge of the Consorti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Court vide its order dated 21st March 2018 has directed the applicant to proceed with finalising the Resolution Plan. Therefore, the applicant has been taking necessary steps required for finalizing the Resolution Plan. 69. The above order was in the modification of the earlier order dated 4th September, 2017. In the light of order of the Hon'ble Supreme Court dated 11th September, 2017 it is clear that the stay order granted by Hon'ble Supreme Court on 4th September, 2017 has been vacated. 70. In the writ petition mentioned above, Hon'ble Supreme Court by order dated 21st March, 2018 has further issue direction to IRP "to proceed and finalize the Resolution Plan, but the same shall be implemented after taking leave of this Court." Given the above, the applicant has been conducting the corporate insolvency resolution process of the corporate debtor. The Resolution Professional submitted that by Regulation 39(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process of Corporate Persons) Regulation 2016, he is required to submit to the committee of creditors all details of the transactions, if any which falls under sections 43, 45, 50 an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o locus standi to file the present application, is without any basis. 71. Therefore, contentions raised by the respondent number 15 that the applicant does not have jurisdiction to Act as Resolution Professional deserves to be rejected. Thus the issue number 1 is decided in negative in favour of the applicant Resolution Professional. ISSUE NUMBERS 2, 3 & 4 (taken together for convenience). 72. The JAL contention that the application is only academic & hypothetical so far as its lenders have not enforced the impugned mortgages and no liability has fallen on the Corporate Debtor is completely devoid of merits and untenable in law. The applicant Resolution Professional has filed this application seeking avoidance of the transaction by which mortgages have been created in favour of the lenders of the Jaiprakash Associates Ltd. regarding the unencumbered 858 acres of land of the Corporate Debtor, at a time when the corporate debtor's account was declared NPA by some of its lenders and rather using the said land to raise funds to make its account standard, the Promoters and Directors of the Corporate Debtor created mortgages In favour of the lenders of JAL. 73. It is obvi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....would have provided no objection to creation of mortgage to secure debt of related party as that would have compromised recovery of not only their dues but also the interest of thousands of homebuyers waiting for their flats in which their hard earned money 76. The applicant resolution Professional contends that while performing his duties under the Code, the applicant discovered that, right in the middle of its immense financial crunch, and while continuing to default to homebuyers and financial creditors, and even after it had been declared as NPA, the Directors of the Corporate Debtor, in utter disregard to fiduciary duties and duty of care to the creditors of the Corporate Debtor, Mortgaged 858 acres of unencumbered land owned by the Corporate Debtor to secure the debt of the related party i.e. Jaiprakash Associates Ltd. (hereinafter, "JAL"). The value of the Land Mortgaged by the Corporate Debtor was estimated to be in the range of Rs. 5000 to 6000 crores approximately, as per the valuation report prepared at the time of mortgage of the said land. The mortgage of land was created without any counter guarantee from a related party. That on examination of records of the Co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al assistance borrowed from financial creditors, including fixed deposit holders, Its account was declared as a non-performing account (from now on "NPA") on 30th September 2015 by LIC and on 31st March 2016 by other lenders. The Corporate Debtor was in dire needs of funds during this period and was facing severe liquidity crunch to complete the construction of projects and deliver the flats to homebuyers, as well as honour the payment obligation to financial creditors including the fixed deposit holders. Since the Corporate Debtor itself was in dire need of funds and could have sold/mortgaged unencumbered land to raise funds to complete construction of flats in a timely manner and to fulfil its obligation to its creditors and prevent value deterioration erosion or insolvency is highly questionable. But, it choose to give away the land to secure the debt for a related party. The mortgage was created in complete disregard to the interest of the creditors and stakeholders of the Corporate Debtor. Now JAL has defaulted to its lenders exposing the mortgaged land to the risk of being sold to recover the dues payable by JAL. 79. The sub-section (1) of Section 66 of the Code provides t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f, that is, a belief or a conviction resulting from what one thinks on a particular question. It has placed reliance upon the judgment of the Hon'ble Supreme Court in the case of Dolgovinda Paricha v. Nimai Charan Misra AIR 1959 SC 914. (ii) In the present case, although RP in Para XIII /page 7 of the Application has made an averment that he has examined the records, it is nothing but a mechanical reproduction of the language of section 43(1). The following facts show that he has moved the application without application of mind to the relevant material and the provisions of the law- In Para XXIX/page 15- it is stated that RP sent a letter dated 05.12.201 7 to all lenders of JAL to seek their explanation concerning proposed avoidance of impugned mortgages, but they denied that various sections referred to in the letter were applicable. In their replies sent by lenders to RP, all lenders have explained in detail the reasons that the impugned transactions are not covered by sections 43, 45 etc. From the averments made by RP in Para XXIX of the Application, it is clear that he has not examined the explanation given by the lenders and formed an o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... or an interest thereof of the Corporate Debtor -, for the benefit of a creditor or a surety or a guarantor; for or on account of an antecedent Financial debt or operational debt or other liabilities owed by the corporate debtor; and such transfer has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made under Section 53. iii. Above ingredients of section -43(2) are not satisfied in the present case in as much as - Impugned mortgages have been created by Corporate Debtor on account of financial debts extended by mortgagee/bankers to Jaiprakash Associates Limited and not to the Corporate Debtor; mortgages are not created on account of any antecedent debt or liability owed by the Corporate Debtor; hence, the question of putting the mortgagees in a beneficial position viz-a-viz other creditors of the Corporate Debtor in the event of a distribution of assets does not arise. even otherwise, as clearly mentioned in the N....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and (b) the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with Section 53. (3) For the purposes of sub-section (2), a preference shall not include the following transfers- (a) transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee; (b) any transfer creating a security interest in property acquired by the corporate debtor to the extent that- (i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest and was used by corporate debtor to acquire such property; and (ii) such transfer was regi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....crore as operational creditor's claim in the name of JAL. In the remark column, it is stated that "INR 212 crore is a claim against the invocation of corporate guarantee which is considered as equity contribution and remaining INR 49 crore is to be adjusted against advance to JAL." Moreover, JAL is the principle contractor of Corporate Debtor. Relying on the admission of Jaiprakash Associates Ltd, the holding company of Javnee Infratech Ltd. (JIL) there remains no doubt that the Jaiprakash Associates Ltd. is one of the creditors of the corporate debtor Jaypee Infratech Ltd. By averments in the reply the answering respondent JAL has admitted that it has made substantial sacrifices in favour of the corporate debtor, as its subsidiary, and has been rendering all kinds of assistance both managerial and financial. Therefore, the answering respondent's JAL has admitted that the JAL is also an operational creditor of its subsidiary JIL. Thus, the deeming provision of preferential transactions as provided in section 43 (2) applies for the transactions, i.e. mortgages executed by the corporate debtor thereby creating a security interest in favour of the lenders of Jaiprakash A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iary; 88. On a bare reading of the above provision, it is clear that subsidiary and its holding company is defined as the related party given the provision of section 5(24) of Insolvency and Bankruptcy Code. Admittedly corporate debtor Jaypee Infratech Ltd. JAL is a subsidiary of Jaiprakash Associates Ltd. (JAL.). 89. It is clear that for transactions of a related party look back period is two years preceding the insolvency commencement date. Admittedly, in this case, the insolvency commencement dale is 9th August, 2017. Therefore the two years look back period as provided in the code commences from 10th August, 2015. 90. The learned counsel for the answering respondents emphasized that I & B Code is prospective legislation and various provisions of the Code. IBC and sections 43, 45, 60(5)(a), 66 and 25(2)(i), came into force on or after 01.12.2016 and are not made applicable retrospectively. The transactions which are being questioned in the above Application were undertaken before 01.12.2016, the IBC and the above provisions do not apply to the impugned transactions. The limitation period of 2 years or 1 year, as the case may be, will apply only to transactions made on o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....anner in the ordinary course of business or financial affairs of the corporate debtor. It is further submitted that under the Consortium mortgages and Exclusive Mortgage, the answering respondent is the beneficiary of the interests. The answering respondent i.e. beneficiary of the interest, is a bank, duly authorized by the RBI amongst other things, to carry out the business of commercial lending on a secured basis. It is customary for the answering respondents and other banks to seek credit enhancement on account of outstanding debts by way of creation of security interests by borrowers and their group companies. 95. The argument advanced by the learned counsel is based on the premises of Exclusion Clause of section 43 and on this basis it is contended that the impugned transactions cannot be treated as preferential transactions because the bank is duly authorized by RBI amongst other things to carry out the business of commercial lending on a secured basis. It is further said that for credit enhancement on account of outstanding debts, the creation of security interest by the borrower is in the normal course of business of the bank. Therefore, the impugned transactions cannot ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....orrower. Further, on examination of the records, the applicant has also reason to believe that no shareholders' approval was obtained to mortgage the land of the corporate debtor in favour of the lenders of JAL. It is pertinent to note that when the Mortgage was created, the corporate debtor was already in default to is lenders and it is unlikely that the Lenders of Corporate Debtor would have provided no objection to creation of mortgage to secure debt of related party as that would have compromised recovery of not only their dues but also the interest of thousands of homebuyers waiting for their flats in which their hard earned monies have been invested. The same for fixed deposit holders. 99. The applicant RP contends that the said Transactions of Creation of Mortgage of 858 acres of land to secure the debt of related party is clearly a fraudulent and wrongful transaction under section 66 of the Code as it has been carried on with the intent to defraud the creditors of the Corporate Debtor. 100. Since the Corporate Debtor was facing financial stress and was unable to honour its project completion deadlines and failed in its commitment to deliver possession of flats to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntial loss to the creditors of the corporate debtor, such director shall be liable to make such contribution to the assets of the corporate debtor. 102. Admittedly Directors of the corporate debtor and its related party, i.e. JAL were well aware of the fact that the corporate debtor was in default of the financial creditors, operational creditors, creditors (including home buyers) and other stakeholders. The directors were aware that the account of Corporate Debtor had been declared as NPA by LIC and other creditors. They were defaulting in timely construction, completion and delivery of flats to homebuyers. They were further defaulting payment, to the fixed deposit holders. Therefore, The Directors of the Corporate Debtor were fully aware that they were in the twilight zone and insolvency was imminent. The Corporate Debtor ought to have exercised due diligence in minimizing the potential loss to the financial Creditors, Operational Creditors, creditors (including home buyers) and other stakeholders of the Corporate Debtor. However, evidently, the Directors of the Corporate Debtor despite being fully aware of the said factum of default admittedly failed to exercise due diligence....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itional security for a term loan of Rs. 23,490.75 crores sanctioned by various financial institutions as a consortium, including ICICI Bank limited to JAL. 104. It is also mentioned in the notice to ICICI bank that "as you are aware, the corporate debtor started defaulting on payments of its dues to its financial creditors and was declared as NPA by the Life Insurance Corporation of India in September 2015 and some other lenders in March 2016. The creation of interest by the promoters and Directors of JIL in its immovable property, in favour of financial creditors of a related party, without economic gain, amount to a wrongful transaction by the promoter of JIL. To undertake such transaction when JIL itself was is facing financial distress due to which it is unable to complete construction of flats and honour its commitments to the customers and pay its creditors is a serious matter. 858 acres of land is valued at thousands of crores of rupees and could have been available to raise money to complete construction of project for the benefit of thousands of homebuyers". 105. In another notice sent to Standard Chartered bank the resolution Professional has sought full disclosure,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....S (i) Given in our reply (JAL) para V/Page 13 onwards show that mortgages were not created for the first time after Corporate Debtor started facing the financial problem. The practice was continuing since 2009. From the details as given in Para V, a statement showing Year wise status of Mortgaged Land was placed before this Tribunal, which reveals the total land area mortgaged on different dates as under - 31.03.2015 - 1043.55 Acres 08.08.2015 - 1043.55 31.03.2016 - 893.55 08.08.2016 - 858.37 31.03.2017 - 858.37 08.08.2017 - 858.37 The above figures are quite revealing and in themselves sufficient to demolish the case of fraudulent mortgaging of "land when Corporate Debtor was in the twilight zone, and insolvency of Corporate Debtor became imminent" built by the RP. The figures clearly show that no additional land was mortgaged by Corporate Debtor after 08.08.2015 but on the contrary mortgaged land area was considerably reduced. (ii) Proposals for creation of Mortgages were approved by BOD in meetings held on 27.05.2009, 12.11.2012, 11.02.2013. 12.11.2013, 09.02.2015, 28.05.2015, 06.08.2015, 11.02.2016....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The execution of mortgage deeds is an only administrative function which is not relevant. The BOD has approved the mortgages before the commencement of IBC, i.e. 1.12.2016. Hence the same is not open to scrutiny under IBC as the law is not retrospective. In any case, the mortgages were approved by BOD more than one year before the date of commencement of insolvency process on 09.08.2017. Hence the relief sought in the Application is patently time barred. (vii) DISCLOSURE AND APPROVAL OF TRANSACTIONS - Our Reply Para VI Page 23 - The transactions of mortgages were not made clandestinely, but detailed disclosure was made in each year's published Accounts (copies in Vol. 5 of our Reply) as per details are given in Para VI of our Reply and the same are summarized below: FY Relevant Page of Reply 2009-10- 2092 2010-11 - 3131 2011-12 - 2170 2012-13 - 2213 2013-14 - 2250/2268 2014-15 - 2334/2356 2015-16 - 2431/2454 2016-17 - 2543/2578 The above Accounts were circulated to shareholders, placed in AGM and approved by shareholders, filed with ROC, submitted to all the lenders, placed on the website of C....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ve been merely a paper exercise for self-satisfaction which was not necessary for view of very close and special relationship between Corporate Debtor and JAL. (ix) SALE OF 858 ACRES OF LAND TO RAISE FUNDS WAS NOT NECESSARY- The contention of RP that instead of mortgaging 858 acres of land. Corporate Debtor should have sold it to raise funds to complete the construction of flats, is devoid of any merit. It is submitted that a businessman does not jump to sell its property to meet temporary liquidity problems. Disposal of property is a measure of last resort. In the present case, the need to sell the property was neither contemplated by lenders who were considering the restructuring plan nor was it felt necessary by Corporate Debtor since alternatives were available. It was a commercial decision for which JLF and BOD of Corporate Debtor were capable and competent to take. It does not seem appropriate on the part of RP to tell how they should have worked. If the sale of land was at all required, then Corporate Debtor had 741 acres of unencumbered land which would have been sold. The RP has been incharge of the affairs of Corporate Debtor for almost nine months, and he ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nnexure A-11 which clearly shows that the board of JIL passed resolution to mortgage unencumbered land of JIL in favour of lenders of JAL in spite of the fact that the corporate debtor account was declared as the NPA and in none of the board meetings liquidity crunch of JIL. was even discussed. 113. The JAL in its reply has stated that with a view to overcoming the liquidity problem of the Corporate Debtor a Joint Lenders Forum (JLF) was constituted in the year 2015, which held a number of meetings and the senior is critical of the Corporate Debtor and the lenders have been making hectic efforts since 2015 to work out viable Restructuring Plan for the Corporate Debtor. The JLF was constituted as per RBI circular dated 26 February 2014 read with circular dated 5th May. 2017. The copies of minutes of various meetings of JLF and Core Committee held on different dates during 2016 and 2017, i.e. on 1st March, 2016, 28th March, 2016, 18th April, 2016, 4th June. 2016, 4th February, 2017, 8th March, 2017, 5th May, 2017 and 17th June, 2017 is annexed with the reply as Annexure-R-47. It is also staled that the status of the land and the impugned transactions were duly disclosed to the con....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 250 B- unencumbered 50 A- 196 B- 81 A- 446 B- 131 577 2 Commercial - A-31 A-31 B -Nil 31 Total Mortgaged -250 Unencumbered-50 Mortgaged-227 Unencumbered -81 Mortgaged-477 Unencumbered -131 608 Total 608 acres of land are proposed to be swapped @ Rs. 6.50 crore per acre, and the proceeds of Rs. 3900 crores would be appropriated as under: Towards reduction of debt : Rs. 3500 crores Towards interests Overdues : Rs. 400 crores The said land shall be transferred to a trust to be set up by the company, and the lenders shall be the beneficiaries. The land would be sold within a maximum period of 60 months, and the proceeds will be distributed among the lenders. Any upside over and above the minimum assured return shall be shared in the ratio of 60%-40% between the lenders and the company. The company has assumed minimum land value rate of Rs. nine crores per acre. There was an apprehension among the bankers whether the said rate could be obtained. Shri Gaur mentioned that the land parcels proposed for the swap are strategically located near Yamuna Expressway and Formula F1 track and would app....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 24,109 crores. 2 15 September 2015 Indenture of mortgage for 166.96 acres of land Registered on : serial number 10074 dated 24 September 2015 3 29 December 2016 Release deed for 166.96 acres of land. Registered serial number 11,637 dated 29 December 2016 Released with simultaneous mortgage under a change in facility amount from an aggregate of Rs. 24,109 crores to an aggregate Rs. 23,490.75 Crores 4 29 December 2016 Indenture of mortgage for 166.96 acres of land Registered serial number 11,638 dated 29 December 2016 118. The learned counsel for the respondent contended that the details of a mortgage given at serial numbers 1 and 2 of this table shows that no new mortgage has been created by the impugned transactions. In fact, the land was encumbered before took back period, i.e. two years from the date of commerce of insolvency proceeding and by the said transactions earlier mortgage was released, and on the-same day, fresh mortgage deed has been executed. It is pertinent to mention that at serial numbers 1 and 2 transactions of land measuring 167.23 acres at the LP-5 is given which shows that 167,23 acres of land w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tions, and may take different forms. Generally, the laws specify the rules to identify and classify transaction as preferential or otherwise. However, courts have, time and again, looked for the spirit of these rules. Preference is "favour", preference is "bias". So where a creditor is unduly favoured by the debtor which adversely affects the collective interest of all creditors in a liquidation scenario, it is called a preference. The UNCITRAL Legislative Guide on Law of Insolvency defines "preference" as a transaction which results in a creditor obtaining an advantage or irregular payment. Section 43 of the Code entitles the liquidator or the Resolution Professional to apply to the adjudicating authority for avoidance of 'preferential transactions' entered into by the corporate debtor wherein the corporate debtor has given 'preference' at the 'relevant time' to 'any persons' referred to under the section. As may be inferred from section 43 (2), in order to establish that the transaction is a 'preferential transaction', it is important to bring the following to the fore- (i) There is "a property or an interest in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....terest As Preferential Transfer Whether creation of security interest or collateral may come within the purview of 'preferential transaction is to be observed'. It is an undisputed fact, that a secured creditor is better placed than an unsecured creditor in insolvency/liquidation proceedings. Therefore, when a security is being offered to a creditor, he is being placed in a better position than other creditors. However, that does not necessarily result in preference. Grant of security interest, per se. is not preference, but may be proved to be a preference on fulfilment of conditions as above. The rationale has been aptly explained in UNCITRAL Legislative Guide on Law of Insolvency (Part II: Treatment of assets on commencement of insolvency proceedings), as follows - "... they (security interests) may nevertheless be avoidable in insolvency proceedings on the same grounds that any other transaction might he challenged and avoided. The purpose of such an approach is to prevent a debtor that is not able to pay its debts from encumbering assets, unless the security interest provided is in consideration of new funds being advanced. Otherwise, the encumbered asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g called as preferences. Sub-section (3) of section 43 carves out an exception as to the corporate debtor acquiring "new value" as a result of the security interest, in which case, the transfer (i.e. the means by which security interest was created) shall not be categorized into 'preferential transaction'. 120. In this case, it is undisputed that after the release of earlier mortgage deeds, fresh deed has been executed in favour of the creditors of JAL, which happens lo be holding company of the corporate debtor. Holding company and subsidiary company are separate legal entities. After the release of earlier mortgage and creation of fresh mortgage cannot be treated as a continuation of the earlier mortgage. It is found that in two transactions after the creation of a fresh mortgage, additional facility worth Rs. 41.718 crores has been granted in favour of JAL in spite of the fact that corporate debtor was itself facing liquidity crunch and its account was declared as NPA and Joint Lenders Forum was formed to meet the situation. But without any prior approval of JLF, the Corporate Debtor has mortgaged its unencumbered land in favour of lenders of JAL and that too without ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Debtor is very special - Kindly refer to Para VII page 36 of our Reply. As highlighted in this para, the Corporate Debtor is subsidiary of JAL, and in that capacity, JAT. has been extending support to Corporate Debtor from time to time which in term of value amounted to thousands of crores. Impugned mortgages created by JIL as collateral security were not unusual but merely reciprocal and cannot be 'termed 'without consideration". • Under sub-section (11) of section 186 of the Companies Act, 2013, the creation of security interests by an infrastructure company for securing the debt extended to other companies including a holding company, are exempted from the provisions of the section. Corporate Debtor is an infrastructure company as defined in Schedule VI to the Companies Act, 2013. Hence, the transactions are not prohibited under law. 125. In this case, we have found that impugned transactions are covered under preferential transactions as defined in section 43(2)(a) of the Code. Therefore, it cannot be said that section 45 does not apply for these transactions. 126. The impugned mortgage of unencumbered land parcels of the Corporate Debtor in favour ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as preferential, undervalued and fraudulent, therefore, we pass the order for release and discharge of the security interest created by the Corporate Debtor in favour of lenders of the Jaiprakash Associates Ltd. under the provision of Section 44(c) of the Insolvency and Bankruptcy Code 2016. We also pass an order under Section 48(a) of the Code that the properties mortgaged by way of preferential and undervalued transactions shall from now on be deemed to be vested in the Corporate Debtor. Schedule of property (preferential, undervalued and fraudulent) :- S.N. Consortium of Banks & Financial Institutions as per the list attached i. Mortgage deed dated 29.12.2016 for 167.229 acres of land situated at Village Chhalesar and Chaugan, Tehsil Etmadpur, District Agra, U.P, executed by the Corporate Debtor in favour of Axis Trustee Services Ltd to provide an additional security for term loans of Rs. 21081.5 crores sanctioned as a consortium to JAL. ii. Mortgage deed dated 29,12.2016 for 167.9615 acres of land situated at Village Tappal, Kansera & Jahangarh, Tehsil Khair, District Aligarh, UP executed by the Corporate Debtor in favour of Axis Trustee Services Ltd to pr....