TaxTMI 
TaxTMI 
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2020 (7) TMI 58
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....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 President (Operations). They approached various departments li....
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....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 payable on monthly basis, which in turn was transferred to the Corporate Debtor. Thus ....
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.... 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. (11) It is further stated that the Corporate Debtor has raised a frivolous contention that the Financial Creditor No....
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....ar 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/inventory register was not maintained during the period between 12 May 2012 and 31 December 2014; Standard accounting policies had not been adhered to,....
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....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 accused for interrogation in this case. The advocate for Petitioners have vehemently canvassed his arguments that, the petitioner no. 1 is reputed chartered accountan....
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....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 1956 demanding repayment of debts allegedly owed by the Company to them. The Company has replied to these demand notices separately, and has clearly highlighted the absurdity of the claims ....
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....tates 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 Working Sheet I produced by the Petitioners the unpaid amount of Rs. 18,77,538/- with interest @ 18% (compounded monthly) adds up to Rs. 23,09,854/-. Similarly, as per Working Sheet No. II and the averments in....
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...., 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 INR 3,76,18,983. Hence a letter issued by him cannot be relied upon as evidence of creation of a financial debt owed by the Company. Similarly, the Statement of Account at Annexure D, being a statement of account between ....
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....tor 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 per section 186 of the Companies Act, 2013. (16) It is also submitted that Form MGT-8 {Report prepared by Company Secretary) for the year 2014-15 that was attached to Form MGT-7 of the Petitioner No. 2 contains no disclosures of any ....
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....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. The documents produced at Annexure O suffers from the same defects as the letter produced at Annexure L. The letters at Annexure O by the Petitioner No. 1 are without any valid authorization by the Company. There are no reasons mentioned as to why the loa....
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....tition. 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 a company for any allotment/subscription of shares does not qualify as a "financial debt". As such, it is not open for the Petitioner Nos. 2 and 3 to approach this Hon'ble Tribunal under section 7. Reference has been made to sections 62 and 63 of the Companies Act, 2013 to say tha....
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....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 Balance sheet as at 31-3-2016 which is available in public domain on the MCA site, shows the corporate loan of Rs. 1.45 crore from Brindavan Beverages Private Limited. (2) In para 6, this is not the correct position of law. As per Explanation to section 7(1), the default to even other Creditors who are not appli....
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....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 equipment was made much in advance and there is huge time gap between the making of the advance and the arrival of the equipment. In this context, it should be noted that, the advance was made by Ms. Bhanu directly to the Vendor from her foreign account and the Petitioner 1 is not involved in this. Customs clearance was delayed as the benefit of exemption notifi....
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....efore 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 is satisfied and the application is maintainable. Further, necessary approvals to borrow the money, etc., has been done as and when required. Applicants strongly feel that the Corporate Debtor has tampered with the evidences in favour of the Applicants as the Corporate Debtor was in management of the Company since April 2015. Three more directors namely Mr. Ventarathnam Adhikari Naidu, Mr.....
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....3] 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 Rubber Ltd. v. Louis Dreyfus Commodities Asia (P.) Ltd. [2015] 13 SCC 477 Royal Britihs Bank v. Turqunand [1956] 119 ER. 886 Ram Baram Singh v. Mufassli Bank Ltd. AIR 1925 All. 206 T.R. Pratt Ltd. v. E.D. Sasoon & Co. Ltd. [O.C.J. Appeal No. 36 of 1934, dated 18-9-1935] S. Premalatha v. Mysore Minerals Ltd. [1993] 78 Com. Cas. 96 (Ker.) Iba Health (I)(P.) Ltd. v. Info-Drive Systems Sdn. Bhd. [2010] 8 taxmann.com 1/104 SCL 367 (S....
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....ment 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-infusion of required funds by the promoters, he had to use his own contacts with other Companies, banks, individuals etc. to raise funds for the company (as we shall discuss later) to keep it going and for getting new contracts. On the other hand the Promoter Director has stated that on return to India she found that the Petitioner No. 1 had indulged in embezzlement, had failed to repay loans and maintain company books and had def....
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....eding 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, the alleged acts of misappropriation etc., as agitated before other forums, and referred to above, were also considered, as in CP Nos. 116 and 117 of 2017. 11. Debt, as defined under the Code in section 3(11) means a liability or obligation in respect of a claim which is due from any person, and includes a financial debt or an operational debt. Such a debt would arise from a claim, as defined in section 3(6), i.e. from a right to pay....
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....s 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 other cases too, the concept of time value of money has been examined. Most notably, in Uttam Galva, the NCLT clarified that 'business always runs keeping in mind the time value for money... transaction will be operational if payment is to goods or services, transaction is financial if money is lent in contemplation of returns in the form of interest.' Thus, merely because an operational creditor claims interest for a delayed payment does not mean the claim becom....
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....e 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 that effect clearly laying down the terms and conditions of such a debt, if any, as also held in the cases cited supra. Further, in the background of accusations of misappropriation etc. levelled against the Financial Creditor No 1, which have also been dealt with in CP (IB) No. 116/BB/2017, it is difficult to rely upon oral agreements or communications made by him or his associates for raising funds without any reference to decisions taken in the Board or Resolutions passed to....
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....re 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 Balance Sheet for the YE 31-3-2015 of the Corporate Debtor shows the existence of the debt at Note 5. We have perused the same. It is seen from the Balance Sheet for the YE 31-3-2015 that at Note 5 Long Term Borrowings are mentioned. Borrowings of Rs. 1,20,25,063 from Karnataka Bank and Rs. 2,40,00,000 from Canara Bank are mentioned therein. Unsecured Loans are mentioned at Rs. 1,47,00,000. However, while in the Foot Notes 1 and 2, details of the Bank Loans are given, there is no men....
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....iled 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 mention that as far as these proceedings are concerned, the Petitioners' claim, debt and default relate to FY. 2012-13 onwards. The Code came into effect in 2016 and this Petition was filed on 25-10-2017. As per our findings above, the financial debt does not exist, as per the provisions of the Code and is also not borne out of the Financial Statements of the Corporate Debtor. Defaults 3 years prior to the Demand Notice are therefore barred by limitation. In fact part of the alleged debt....