TaxTMI 
TaxTMI 
2020 (7) TMI 58
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....nd Seventy Eight) including the interest @ 18% per annum. 2. Brief facts of the case, as mentioned in the Company Petition, and the written submissions which are relevant to the issue, are as under. Both are merged to avoid duplication and repetition: (1) Mr. M.G Mohan Kumar and Others (hereinafter referred to as 'Petitioners/Financial Creditors') are the Financial Creditors, whereas M/s. American Road Technology & Solutions Private Limited (hereinafter referred to as 'Respondent/Corporate Debtor') is a Private Limited Company incorporated on 7-5-2012 with Authorised Capital of Rs. 2,50,00,000/- and Paid-up Share Capital is Rs. 2,09,00,000/- and having main objects of inter alia carrying on the business of Road repairs and Maintenance using state-of-the-art equipment, is the Corporate Debtor. (2) It is stated that along with Mr. B K Purushothama, Financial Creditor 1, Mr. M.G Mohan Kumar was named as director of the Company and subscriber to the MOA. Various Departments were approached to sell the new Technology for road repairs. He supported the Corporate Debtor to set-up its business, along with Mr. G.V. Sudhindra who was appointed as Vice Pre....
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.....a. from the due dates amounting to Rs. 9,64,917/-, till August 2017. The total amount due to the Financial Creditor No. 1 from the Corporate Debtor is Rs. 40,03,197. (6) The Petitioner submits that the Corporate Debtor approached Canara Bank, Cantonment Branch, Bangalore for a term loan of Rs. 3,00,00,000 for funding two more equipment of Python 5000 and this sanction was done on 25-7-2014. To meet the various compliances of this Term Loan, Financial Creditor No. 2, namely Brindavan Beverage Private Limited was requested to support with temporary funding. It is contended that a total amount of Rs. 2,05,00,000/- was given as loan by the Financial Creditor 2, as follows: 2-9-2014 - Rs. 40,00,000/-; 26-9-2014 - Rs. 20,00,000/- and two payments on 2-1-2015 aggregating to Rs. 45,00,000/-. That is a total of Rs. 1,05,00,000/-. These were returned as follows: on 8-9-2014 - Rs. 20,00,000/-; on 23-9-2014 - Rs. 20,00,000/-; on 27-1-2015 - Rs. 20,00,000/-, i.e. returned Rs. 60,00,000/-, leaving an unpaid balance of Rs. 45,00,000/-. The Financial Creditor No. 2 again advanced a sum of Rs. 1,00,00,000/-to Vanijya Advisory Services Private Limited at the rate of 21% p.a. compounded and....
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....17. Hence, the total outstanding is Rs. 7,09,238. As regards Ms. Sapna Harishchandra Naik, out of the amount of Rs. 15,00,000/- financed, an amount of Rs. 7,00,000/- has been repaid on 16-6-2014 and 10-10-2014. The balance amount of Rs. 8,50,000 and interest @ 12% p.a. compounded on monthly basis works out to Rs. 4,61,493/- till August 2017, totalling to Rs. 13,11,493/-. The total sum outstanding from the Corporate Debtor towards both the Financial Creditors No. 3 is Rs. 20,20,731/- (Rs. 7,09,238/- plus Rs. 13,11,493/-). In conclusion, the cumulative amount of claim outstanding from the Corporate Debtor in favour of all the Financial Creditors is Rs. 2,94,05,178/- which comprises of both the principal amount and interest calculated up to August 2017. (10) The Petitioners stated that there is an admitted debt which fell due on the Corporate Debtor and that this debt falls well within the definition of a 'Financial Debt' under section 5(8) of the l&B Code, 2016. It is further the case of the Financial Creditors that there has been a default in payment of such aforesaid debt by the Corporate Debtor and in view of the same the instant petition ought to be admitted. ....
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....taken with board or shareholder approval and none of the transactions were recorded and approved via resolutions. On return from the US, Ms. Hebbar revoked the cheque signing authority of the Petitioner No. 1. These material facts have been suppressed as these facts would reveal that no financial debt has been created against the Company. Up to 17 April 2015, the Petitioner No. 1 had a free rein in running the Company, and several close acquaintances were hired as key employees of the Company. She ordered a forensic investigation of the Company by an independent entity to determine the nature of cash flows within and without the Company from the date of incorporation till 31 May 2015. Petitioner No. 1 refused to assist in this investigation and resigned from the Directorship of the Company, though he is yet to surrender the original share certificates to the office of the Company. (4) It is contended that the forensic investigation, conducted by V. Raghavan and Co., Chartered Accountants revealed that: Records and documentation of the Company had not been maintained properly, payments were made in cash, Bills/Vouchers/lnvoices and Receipts were missing, raw materials stock....
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....e No. 87/2017. Petitioner No. 1 and the other Accused moved the Hon'ble City Civil and Sessions Court, Bengaluru under section 438 of the Code of Criminal Procedure, 1972 seeking anticipatory bail in the event of their arrest in connection with Crime No. 87/2017. After taking on record objections by the Ld. Public Prosecutor the Hon'ble Sessions Court was pleased to pass an order dated 19 October 2017 rejecting the petition for anticipatory bail filed by the Petitioner No. 1 and his co-accused by concluding that "On careful perusal of the entire complaint, the complainant has made some serious allegations of cheating and misappropriation of funds to the tune of several crores, with regard to sudden increase of salary of petitioner no. 2, foreign travelling expenses of petitioner no. 1, purchase of consumables and amount due from BBMP etc. When the entire allegations are observed, there are serious allegations of misappropriation and cheating to the tune of crores of rupees. I am of the opinion that, since complaint is based upon the audit report, furnished by the auditors and there are serious allegations of cheating and misappropriation, the police need the ....
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....rency and to show the falsity of the claims made by the Petitioners, the Company is producing the relevant public documents herewith as follows: Auditors' report of the Company for the years 2013-14 and 2014-15 along with accompanying financial statements. (7) The balance sheets (which were prepared and signed off on by the Petitioner No. 1) do not adequately disclose the alleged financial debts claimed in the present petition. While the above documents do disclose unsecured loans and credits availed from both related parties and directors, the said loans and credits are shown as a whole. There is no breakup as to the extent of borrowings and explanation of who the borrowings are from. Further, nowhere in any of the auditors' reports has there been any mention of the details of the loans disclosed in the financial statements. No such break-up can be inferred in favour of the Petitioners, when Petitioner No. 1 is under investigation for criminal actions. (8) It is stated that the Petitioners have also suppressed earlier Legal Notices issued by them to the Company and Ms. Hebbar, such as of 10 April 2017, issued under section 271(2)(A)of the Companies Act 19....
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....er trail. (11) The Respondent has mentioned provisions contained under section 166 of the Companies Act, 2013, which impose certain minimum duties and obligations on the directors of a company, and states Petitioner No. 1 has demonstrably failed to discharge these duties and has achieved undue gain to himself at the cost of the Company. Further, the Petitioner No. 1 also has failed to comply with his obligations cast upon him under various sections of the Companies Act, 2013) such as: section 134; section 179(1); section 179(3); section 180; section 188(1); section 188(2); and section 184 read with section 189. Hence, the acts of Petitioner No. 1 cannot create binding obligations on the Company and even if any such alleged debts have been created, as per section 166, the liability to repay them rests entirely on the Petitioner No. 1 (and his associates in his criminal activities). As regards the debt of Rs. 40,03,197/-, it is submitted that the purported calculation sheets produced along with the petition are not authentic and are fabricated documents. They also do not add up to the claim sought to be raised by the Petitioner No. 1. As per Part IV of the petition and the W....
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.... also cannot be said to prove the existence of a financial debt owed by the Company to the Petitioner No. 1. A mere unilateral transfer of money without any supporting Board Resolution, resolution in general meeting, agreement or any other similar document evidencing offera/id acceptance of loan cannot, even remotely, amount to the creation of a legally enforceable debt under any provision of law. A statement of account of the Petitioner No. 1 with Bajaj Finserve Ltd. showing that the Petitioner No. 1 has taken a loan of INR 20,54,000 from Bajaj Finserve Ltd. at Annexure D to the instant application; and some E-mails at Annexure F. These documents do not satisfy the evidentiary requirements of proving a debt, and do not show why the same was required by the Company. They do not disclose any the terms of the loan nor any binding obligation, so as to prove the existence of either a financial debt or the existence of any default by the Company. (13) As stated above Mr. K. Rajendra is the co-accused of the Petitioner No. 1 in Crime No. 87/2017 for alleged offences under sections 406, 402, 465, 468, 477A and 120(B) of the IPC for misappropriation of Company funds to the tune of....
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..... Ltd. and not to the Corporate Debtor. Even if Vanijya further loaned this sum to the Company, the former would then be the Financial Creditor and not Petitioner No. 2. It is also important to note that the Petitioner No. 1 was a director of Vanijya at the relevant time which would make this transaction fall foul of section 185 of the Companies Act 2013. Without prejudice to the above objections, it is submitted that since both the Petitioner No. 2 and the Company are unrelated corporate entities, this would be an inter-corporate loan u/s. 186 of the Companies Act, 2013, and as per sub-section (4) the Company was required to disclose to the members in the financial statement the full particulars of the loans etc. given, and the purpose of the same. It is submitted that the Petitioners have failed to produce the audited balance sheets of Petitioner No. 2 that disclose any such inter-corporate loan. Also, the 'Standalone Financial Statements' of the Petitioner No. 2 for the Financial Year 01 April 2014 to 31 March 2015, as available publicly on the website of the Ministry of Corporate Affairs, does not disclose any such loan by the Petitioner No. 2 to any unrelated entity as....
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....rms of loan set out in the said letter. The very existence of this letter, having been created by two of the petitioners in the instant application, with no supporting documents or specifics as to terms of loan cannot bind the Company to a financial debt. (18) The Bank/Cash Vouchers produced at Annexure L purport to show the existence of a disbursement of a total of Rs. 45,00,000 as loan do not contain the 'Company Seal' of either the Petitioner No. 1 or the Company (a sine qua non of loan agreements between companies). As a result there is no method by which to verify the signatures affixed on them. In any event, the said Bank Vouchers find no mention in any of the official public declarations by either the Petitioner No. 1 or the Company nor do they contain the terms of anything remotely close to a loan agreement. At best they constitute a unilateral transfer of funds from Petitioner No. 2 to the Company which the Company cannot be held liable for not returning as the Petitioner No. 1 had full control of the Company at this point in time and is likely to have embezzled these funds. The existence of a financial debt is thus disproved by the documents at Annexure N....
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.... three in number. (21) The tranche of Rs. 20,00,000 alleged to have been disbursed on 26 September 2014 (as stated in Part IV of the instant application) contains no supporting documents whatsoever and finds no mention in any of the Annexures produced along with the petition. It is evident, by this material contradiction, that the Petitioners have no means to substantiate the debt they have claimed in Form I. (22) Further, another technical defect is the non-production of letter dated 30 December 2014 even though the ledger entry produced at Annexure P when making mention of two alleged loans of Rs. 20,00,000/- and Rs. 25,00,000/- each cites a 'letter dated 30 December 2014'. It is therefore submitted that the two alleged aforesaid loans are non-existent loans. As regards the debt allegedly owed by the Corporate Debtor to Petitioner Nos.3 and 4, it is sated that these sums were allegedly advanced towards equity subscription by Petitioner Nos.3 and 4. Of the sums advanced, it is alleged that a balance of INR 4,50,000/-is owed to Petitioner No. 3 and INR 8,50,000/- owed to Petitioner No. 2. Section 5(8) of the Code defines a "financial debt". Monies paid to ....
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....re no conditions as to interest and no conditions as to default. It is well established that default of any debt can only occur upon the triggering of a foreseen event that forms part of any agreement that gave rise to a debt. In the absence of any case made out for any default, the Petition needs to be dismissed. (25) It is submitted that the Respondent Company is a Going Concern, is solvent and is able to pay its debts, for example Canara Bank, issued a SARFAESI Notice to the Company in July 2016 but the same Canara Bank proceeded to renew the terms of the loan arrangement it had with the Company vide loan extension letter, produced as Annexure R29. This proves the Bank's confidence in the Company's solvency. Work Orders placed on the Company by BBMP are produced herewith as Annexure R30 series to show that the Company's business is booming and that it is a more than viable going concern. 4. The Financial Creditors have filed para wise rejoinder 24-11-2017 for the statement of objections dated 7-11-2017 by inter alia contending as follows: (1) In para 4, adequate proof for the existence of the debt has been provided by the Applicants. The audited ....
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....nts for the year ended 31-3-2016 do not indicate any such misappropriation or embezzlement. In the audited statement of accounts for 31-3-2016, Cash-flow statement which is mandatory is not provided and Fixed Assets Schedule is missing. (6) In para 16, the Petitioner No. 1 is apprehending that Ms. Bhanu and the other present Director have destroyed all the evidences including the minutes books and statutory records, etc. Criminal complaints are filed to avoid the recovery of legitimate money due to various people including the Petitioner. (7) In para 19, the liquidity crunch was mainly because the BBMP had not released payments towards contracts executed and Mrs. Bhanu had agreed to stop gap arrangements. (8) In para 21, V. Raghavan and Co's report is not acceptable and there are many wrong and mis-statements. The report at two places in para "(IX) Observations on Payments/Expenditure" says that "hence there is scope of misappropriation of funds". Therefore, this is not confirmation of mis-appropriation. Further, the Annexures 1 to 4 mentioned in the Report is not provided. In para "(XI) Other Observations" there is a comment that advance for capital ....
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.... statement of accounts without attaching all the report of the Board of Directors and report of Auditors and relevant Notes to the Account is violation of Section 134(7) of the Companies Act, 2013. (11) In para 37, Audited Accounts for 31-3-2014 mentions an amount of Rs. 27,10,000/- from related parties which includes the amount provided by Petitioner 1 of Rs. 20,54,000/- before 31-3-2014. Amount from Brindavan Beverages (P.) Ltd. was borrowed during 2014-15. As mentioned above audited accounts of 31-3-2015 is not complete therefore, it is difficult to identify the amount in the provided statement of accounts as far as Brindavan Beverages Private Limited is concerned. However, audited accounts for 31-3-2016 is available in MCA website. The Previous year's figures in this audited statement of accounts, the break-up of figures for long term borrowings of Rs. 5,57,09,640/- is available in Note 5. In this note, under Unsecured Loans from Others an amount of Rs. 1,47,00,000/- is shown, out of which Rs. 1,45,00,000/- is pertaining the Brindavan Beverages P. Ltd. and Rs. 2,00,000/- is from Bonanza Investments Ltd. (12) In paras 39 to 47, the requirement of I&BC 2016 ....
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....taken exposure as Mr. A. V. Balasubramanya has provided a valuable collateral security which was valued at Rs. 2.73 Cr. and also given personal guarantee to the Bank. a. The Petitioners have cited the following cases in support of their various contentions: Innoventive Industries Ltd. v. ICICI Bank Ltd. [2017] 84 taxmann.com 320/143 SCL 625 (SC) ;BNY Corporate Trustee Services Ltd. v. Eurosail UK 2007-BBL Plc. [2013] 1 UK SC 28 Madhusdan Gordhandas & Co. v. Madhu Woollen Industries (P.) Ltd. [1971] 3 SCC 632 Bombay High Cour in Re: Focus Advertising (P.) Ltd. [1974] 44 Comp. Cas. 567 Punjab National Bank v. James Hotels Ltd. [2018] 100 taxmann.com 359 (NCLT - Chd.) Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd. [2019] 101 taxmann.com 451/152 SCL 145 (SC) Machindranath Kernath Kasar v. D.S. Mylarappa [2008] 13 SCC 198 V.K. Jain v. Richa Laboratories (P.) Ltd. [1993] 78 Comp. Cas. 283 (Delhi) Central Bank of India v. Sukhani Mining & Engineering Industries (P.) Ltd. [1977] 47 Comp. Cas. 1 (Patna) Nisar Ali v. State of Uttar Pradesh [1957] Cri LJ 550 (SC) Surjit Singh v. State of Punjab AIR 1996 SC 1388 Kishan Singh v. Gurpal Singh [2010] 8 SCC 775 Govind Rubbe....
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....16 is not intended to be a substitute to a recovery forum and cannot be used to jeopardize the financial health of an otherwise solvent company by pushing it into insolvency. The Hon'ble Supreme Court in the case of K. Kishan v. Vijay Nirman Company (P.) Ltd. [2018] 97 taxmann.com 495/150 SCL 110 clarified that the Petitioners cannot use IBC either prematurely or for extraneous considerations or as substitute for debt enforcement procedures. In Transmission Corporation of A.P. Ltd. v. Equipment Conductors & Cables Ltd., [2018] 98 taxmann.com 375/150 SCL 447 Hon'ble Supreme Court of India has inter alia held that existence of an undisputed debt is sine qua non of initiating CIRP. 8. Before proceeding, we may briefly touch upon the facts of the case and its surrounding circumstances. Since the Company was incorporated on 7 May 2012 till the return of the Promoter Director in April 2015, the Financial Creditor No. 1, Mr. M G Mohan Kumar, along with other close associates was fully in charge of all business matters of the Company. He has stated that he worked diligently for the company and because of the meagre cash flow, on account of non-receipt of payments by BBMP and non....
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....tors, in this very Petition. 10. At this point we may mention that in CP. No. 43/BB/2018 we dealt with a petition filed under section 131 of the Companies Act 2013, wherein the Corporate Debtor had sought this Tribunal's approval for revision of its Financial Statements and Board Reports for the FYs 2012-2013 to 2014-15. The revision was sought on the basis of the same Independent Auditor's report as is mentioned in the preceding paras, and which had led to the filing of Criminal cases against the Petitioner and other co-accused. This Bench allowed the Petition permitting the revision of accounts for the FYs 2012-13 to 2014-15. Apart from the legal issues in the matter, detailed reference was also made to the criminal cases filed by the Corporate Debtor against Mr. MG Mohan Kumar and others. In the interest of justice, this Bench had allowed Mr. MG Mohan Kumar to implead himself, and his objections were considered, even though the same was unnecessary considering that a corporate entity which had detected errors in its financial statements had sought revision of the same, and no one should ordinarily have any objection to the same. Apart from the accounting deficiencies,....
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....r, as regards the meaning of the terms "time value of money", in Nikhil Mehta & Sons (HUF) v. AMR Infrastructure Ltd. [2017] 84 taxmann.com 163/143 SCL 278 Hon'ble NCLAT it was held that: 1. "the first essential requirement of financial debt has to be met viz. that the debt is disbursed against the consideration for the time value of money and which may include the events enumerated in various sub-clause... The key feature of financial transaction as postulated by section 5(8) is its consideration for time value of money. In other words, the legislature has included such financial transactions in the definition of 'Financial debt' which are usually for a sum of money received today to be paid for over a period of time in a single or series of payments in future. It may also be a sum of money invested today to be repaid over a period of time in a single or series of instalments to be paid in future. In Black's law - Dictionary (9th edition) the expression 'Time Value' has been defined to mean 'the price associated with the length of time that an investor must wait until an investment matures or the related income is earned.' 2. In ot....
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....5,000 term loan of instalment to Karnataka Bank. These are only references of loans stated to be taken for the Company, by the Financial Creditor 1 or by the Manager Finance. There is nothing on record to show if any such decision was taken in the Board or Resolution passed to raise the above alleged loans. There is nothing to show that these amounts were given to the Corporate Debtor by the Financial Creditor No. 1, which could be termed as "disbursement of an amount for the time value for money", as required by section 5(8) of the Code. In the absence of any such decision, Resolution or agreement that shows that the amounts were given by the Financial Creditor to benefit by way of interest etc., on a later date, or agreement which could create a right to payment, i.e. a claim in the hands of the Financial Creditor, the amounts even if they were taken would not be termed as a "financial debt" as per the definition in the Code. Even If EMIs were fixed and interest paid therewith in some instalments, they would not acquire the meaning of financial debt in the absence of any agreement between the financial creditor and the Corporate Debtor or Board approval or Board Resolution to tha....
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....rom BBPL. There is no mention in the letter that the same was taken for and on behalf of the Corporate Debtor except an undated handwritten note suggesting that the same was given to it at the behest of Mr. MG Mohan Kumar, Petitioner 1. Also Form MGT 8 for the FY. 2014-15 attached to Form 7 does not disclose any such loan. With these evidences on record we are unable to give a finding that the amount of Rs. 2,33,81,250 amounts to a financial debt as per the Code. Here again, there are no Board Resolutions or agreement entered into between the BBPL or even Vanijya with the Corporate Debtor for this transaction, let alone the purpose of the same and terms of the same, such that it could be termed as a financial debt that was given for time value of money. The Accounts submitted by the Corporate Debtor too do not reflect any such credit entry. In view of this position, we are unable to come to a conclusion that there was a financial debt of Rs. 2,33,81,250 owed by the Corporate Debtor to the Financial Creditor No. 2, i.e. BBPL within the meaning of the Code, even if some payments were made directly or indirectly through Vanijya. 18. The Financial Creditor has mentioned that the Bal....
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....as per the Code, for the reasons cited in respect of the earlier amounts dealt with above, even if some amount is otherwise due. 21. We may also add that these proceedings would have no bearing on any other matter before any other Court and are strictly limited to and independent proceedings under the Code and have been examined as such, with regard to the material brought on record. 22. Even as we discuss the above transactions in cursory manner, as the Code does not allow for detailed investigation, the same have to be considered strictly as per the IBC only and as to whether they fall within the definitions incorporated in the Code itself. We find that the Corporate Debtor had sought re-audit vide IA No. 312/2019 in the instant CP. The same had to be dismissed as infructuous as its petition in CP No. 43 was before us, seeking revision of accounts, and which was allowed by us vide order dated 31-12-2019. Hence, if in the process of such recasting and revising of accounts it is noticed that any dues exist, these proceedings will not come in the way of any such exercise conducted by the Corporate Debtor and the dues if any, to be appropriately dealt with. 23. We may also m....