TaxTMI 
TaxTMI 
2021 (5) TMI 944
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....sidiaries, an associate company of the Corporate Debtor. 2. CM 140/2019 (Dairy Number: 0710102094832019) is filed u/s. 19 of Insolvency and Bankruptcy Code (the Code) against the Promoter-Director Jasjit Singh Sawhney (Sawhney) because Mr. Sawhney and Mr. Sumit Gupta failed to provide information to the RP for discharging his functions during the CIRP. 3. CA 1756/2019 is filed u/s. 43 (Preferential transactions), 45 (Avoidance of undervalued transactions), 49 (Transactions defrauding creditors), 66 (Fraudulent trading or wrongful trading) of the Code for avoidance of preferential transactions, undervalued transactions and fraudulent and wrongful trading and diversion of the business of the Corporate Debtor by Jasjit Singh Sawhney (R1) for the benefit of R1, R2 and R4. Modus Operandi of the corporate debtor business: 4. Net4 India is a leading Data Centre dealing with Cloud Hosting and Network Services Provider; focuses on providing services to businesses (small, medium and large) and its offerings include Data Centre & Cloud Hosting Solutions, Enterprise Internet Services, VoIP Solutions, Enterprise Messaging & Hosting Solutions and Domain name registration. 5. Until....
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....ant can renew or extend the registration. Registrar sells domain names that provide registration service and offer other value-added services applicable to domains. 8. In this case, ICANN and other organizations like ICANN have registered domain licence with Net4 India/Corporate Debtor acting as Registrar. Since this registration remains for a specified period, as and when the specified period expires, the Registrar shall renew its registration, if that registration is not renewed, then the registrant who in turn receives this domain services from the registrars will be put to inconvenience. 9. If any interruption comes to the services the customers getting from the registrars such as Net4 India, the end user i.e. public getting services from the registrants will be put to sufferance. Functioning of registrants is always dependent upon the functioning of registrars, such as Net4 India. Nowadays, public browses these web sites, avail internet services, making online payments and getting services, and access to various Government Service Providers. Net access has become inevitable part of the life of human being. At times directly, at times indirectly, but without which, the pe....
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....rmation, but whereas Mr. Sumit Gupta wrote back on 13.05.2019 seeking time to provide pending documents as Mr. Sawhney was not feeling well. In this application, R1 has filed reply for the first time disclosing that the shares of Pipetel Communications Private Limited (Pipetel) and Net4 Network Services Limited (Net4 Network) held by the CD were transferred to Trak Online Net India Private Limited (Trak Online), the business of the CD was transferred to Net4 Network through Master Reseller Agreement (MSA) and Trade Marks of the CD were assigned to the promoter director Mr. Sawhney. 13. For this applicant has filed this application, this Bench also directed Mr. Sawhney to provide information on passing various orders 03.07.2019, 22.07.2019, 02.09.2019, 27.10.2019 and 20.12.2019, but till date no progress, except providing piece meal information, which is not enough to figure out the transactions of the Corporate Debtor. The information to initiate proper course of action has not been provided by the Respondents, which is as follows: a. Minutes of all the Board/Committee/Shareholder meetings; b. Respondents submitted all information related to current and past bu....
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....ctors especially Mr. Sawhney to prove that transfer of shareholdings, issual of preference shares, diversion of the corporate debtor business to Net4 Network Services Limited, assignment of trade marks to Mr. Sawhney himself are not hit by the provisions dealing with avoidance transactions, undervalued transactions and fraudulent transactions. For which, the RP has asked for the originals of them, but they are so far not provided. In view thereof, the Applicant, based on the photo copies the Promoter-Directors relied upon, has filed CA1756/2019 against the parties involved in the purported transactions to say that all these transactions led to infer that the Promoter Directors wantonly set up these transactions and diverted the wealth of the corporate debtor so that they could conveniently avoid payments to the creditors of the corporate debtor. 15. The Respondents in this case are - R1 is Mr. Jasjit Singh Sawhney (Promoter Director of the Corporate Debtor). He is also a director of Net4 Network, Trak Online and Pipetel; R2 is Net4 Network; R3 is Mr. Sumit Gupta (an employee of the Corporate Debtor); R4 is Trak Online; R5 is Madison India Capital HC (Madison); R6 is Mr. Surya Ch....
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....set up transfer of customer database to Net4.COM from the website Net4.IN. To set up a foundation for transfer of shareholding of the corporate debtor in Pipetel and Net4 Network, it was stated that the corporate debtor was indebted to Trak Online. 20. Indeed the Corporate Debtor had 51% of Pipetel shareholding, out of that shareholding; it is shown as the CD on 01.04.2017 transferred 38000 shares to R4 in consideration of certain antecedent liabilities alleged to be owed by the Corporate Debtor to R4. 21. As per the version of R1, the RP Counsel says, the shareholding of the Corporate Debtor in Pipetel has been reduced to 17.98% from 51%. Though transfer is recorded in the ledger of the Corporate Debtor on 01.04.2017, no share transfer forms have been provided by R1 to show that the shares have been transferred in the name of R4. 22. The RP counsel submits that R2 was a wholly owned subsidiary of the Corporate Debtor, as per the ledger of R4 provided by the Corporate Debtor, on 25.01.2018, 35000 shares of R2 were shown as transferred by the Corporate Debtor to R4 in consideration of certain of antecedent liability allegedly owed by the Corporate Debtor to R4. Though the l....
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....s thus estimated the diversion based on the past performance of the Corporate Debtor, which in all fairness is the minimum opportunity loss to the CD. 28. As per the purported Master Reseller Agreement, R2 was to incur all costs and to share 25% of profits from the business with the Corporate Debtor. However, from the books of the accounts, it is observed that the Corporate Debtor made payments for domain purchases. Further the books of the accounts reflect an amount of Rs. 3.48 Crore was payable to R2 in Apr'2017 and it was increased to Rs. 8.45 Crore on CIRP commencement date, therefore instead of the Corporate Debtor receiving the profits as mentioned in the alleged Reseller Agreement, the Corporate Debtor is shown as indebted to R2. Respondents side averments: 29. As against the submissions of the Applicant, the Respondents side submits that Pipetel not being made as a party to the proceedings, the relief seeking cancellation of shareholding Trak Online (R4) acquired in Pipetel shall be dismissed. The Respondents side says the transactions entered into by the Corporate Debtor with R4 are all part of ordinary course of business because R1 owed an amount of Rs. 4.67 ....
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....ed only Rs. 50 Lakhs. With regard to the remaining amount, the Resolution Applicant has proposed to raise the debt for the Resolution Plan. From one side, the RP says that the estimated revenue generation is around Rs. 78 Crore since 2016, then how the CD could be sold to the Resolution Applicant for only Rs. 2.5 Crore. The respondents' side says that it is nothing but reflecting that the RP in connivance with the Resolution Applicant decimated the value of the CD. When Net.4 Network (R2) has taken over the business of the Corporate Debtor, the Corporate Debtor was financially in bad shape, and its infrastructure was 7 to 10 years old, its employees already left the company. The Authority had sealed its Bank Account. After Master Reseller Agreement was executed in favour of R2, R4 has set up new infrastructure, hired new people, developed new modern software to keep the business running. Discussion over the issues in between the parties Trade mark Issue 34. As per the version of the Respondents, it appears that R1 entered into Right to Use Trademark and Domain Names Agreement with the Corporate Debtor on 01.09.2000, by which, the Corporate Debtor was using the Trademar....
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....hat this trademark was earlier owned by R1. e) When this Assignment Deed dated 10.01.2017 is examined, it appears that it is evident that R1's father Mr. Amarjith Sawhney (related party) executed this Assignment Deed in favour of R1 on behalf of the Corporate Debtor. f) No Board Resolution of the Corporate Debtor has been annexed to show that Board approved transfer of this trademark or assignment of this trademark to R1. There is no proof reflecting that his father is permitted to execute the Assignment Deed in favour of R1. Now his father is no more, even if execution of the assignment deed executed on behalf of the Board is taken as genuine document, it is not supported by a Board Resolution. g) For the stamp paper used is showing as issued on 02.02.2016 with a description of document as "Article Others" with zero consideration, it is doubtful whether the certified stamp paper was taken for this purpose or for some other purpose. h) The original of Right to Use Trademark and Domain Names Agreement dated 01.09.2000 has not been provided. i) The original Assignment Deed has also not been provided. 36. It is the assertion of R1 th....
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....management indulged in avoidable transactions, undervalued transactions and fraudulent transactions, he shall adduce evidence to that effect. It is true if the RP is part of any of the transactions, and he is in know of any of the facts aforementioned, it is understandable that duty is cast upon him to prove his case. But that is not the case here. RP is a person authorised to set the record in place and correlate the information provided, and to draw inferences, and accordingly from one side to run the company, from other side to take necessary actions against the pitfalls evident from the presence of record or absence of record. But when no information is available to correlate actions set forth before him, and when it is showing that company record is not available, when the management thrust some actions upon the company which led to emptying out the assets, business and even shareholding it has in other companies, he can only report that such actions will fall under the section of law mentioned in the Code. It cannot be expected that RP is required to prove all those actions. The reason is simple, he is not a party to those actions, and he is only an authority to report the ac....
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....having failed to make payment as per the agreement dated 26.05.2016, R1 says, the CD entered into another agreement dated 20.09.2016 with Trak Online to clear its dues of Rs. 1 crore by transferring its 35,000 shares of Rs. 10 each of Net4 Network (R2) to Trak Online. And with regard to the balance amount of Rs. 1.67 crore, the respondents' side says, it was to be paid in monthly installments. After these two share transfers, the CD shareholding in Net4 Network was reduced from 100% to 18.40% and the shareholding of the CD in Pipetel was reduced to 17.98% from 51%. 40. The Respondents side says that in view of the Hon'ble Supreme Court judgment in Anuj Jain, IRP for JP Infratec v. Axis Bank, Pipetel shall be made as necessary party to this application, Pipetel has not been joined as respondent in this application. He further says notwithstanding as to whether this transaction falls within the ambit Section 43 and 44 of the Code, the RP shall ask for declaration requiring rectification of the records of R2 and Pipetel under Section 59 of the Companies Act, 2013. R1 says that this transaction will not fall within the look back period of two years preceding admission, apart....
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....for Board meeting was sent to it after December, 2015, therefore even if the shareholding the CD held in its subsidiaries is transferred to any related party or any other person without compliance under Article 82A (k), it is void ab initio. 44. As per Section 56 of the Companies Act, 2013, no transfer of shares shall be registered unless proper instrument of transfer Form SH4 duly stamped and executed by or on behalf of the transferor or transferor has been delivered to company together with the share certificates. In the present case, only copy of the share agreements have been provided, Form SH4 has not been provided reflecting transfer of shares. The only evidence present in the CD books is the ledger entries of Trak Online which were provided to the RP by the Promoter himself. 45. Since the CD is a listed company, as per Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR), every listed company shall make a disclosure of material events of the listed company to SEBI. Here in this case, the CD has not given any intimation to SEBI regarding the alleged transfer of shares. 46. Under Section 174 (1) of the Companies Act....
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.... the relevant point of time and timely reporting has been done and the transaction is transparent and it is for the benefit of the corporate debtor and its creditors. Let us see what the directors of the Corporate Debtors have done. 50. The CD entering into Master Reseller Agreement with Net4 Network is a related party transaction, as per Section 188 of the Companies Act, 2013, the CD was required to take Board approval before entering into such agreement, besides this, it requires unanimous approval of the Board to enter into such transaction, but that has not been done. 51. The reason is not known for not providing the original of the Master Reseller Agreement (MSA) to the RP till date. These Respondents have so far not provided the Board Resolution of the Corporate Debtor as contemplated under the Companies Act 2013. We shall not forget that Net4 Network was originally wholly owned subsidiary of the Corporate Debtor. Net4 Network was calculatedly taken out from the hold of the corporate debtor and then MSA was executed devolving the business of the CD to Net4 Network. The interest of the creditors of the corporate debtor is paramount consideration when a company is likely ....
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....the corporate debtor in the year 2016, the turnover of products or service category was about Rs. 32.18 Crore. As on 31.03.2016, Net4 Network was loss making company. Now the point for determination is as to whether or not this transfer of shareholding, transfers of the business of the CD through Master Reseller Agreement and assignment of trademark to R1 have taken place in the ordinary course of business and to defraud the creditors of the CD. 55. For determination of given facts in issue, they shall be supported by proof, if the facts and the assertions made by the parties are proved by adducing documentary evidence, then a conclusion can be arrived at by the adjudicator. If we read section 3 of Indian Evidence Act, it could be figured out that "court" includes all judges and Magistrates and all persons except arbitrators, legally authorised to take evidence. It need not be said separately that this Tribunal has all the trappings of the Court so as to give a definitive judgment over the facts in issue pending before this Tribunal. The bar present in section 3 is arbitral tribunals cannot be construed as courts. But as to persons legally authorised to take evidence can be c....
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....t transfer of its trademarks, the burden of proof shifts upon R1 and other answering respondents that such transfer happened during the ordinary the course of business, as per the procedure laid down under Companies Act, 2013 and it has been done beyond the prescribed period mentioned under Section 43 & 47 of the Code and also to prove that all these acts are not intended to defraud the Creditors of the CD. We must also mention that R1 has been asserting transfer of shareholding, execution of Master Reseller Agreement, Assignment of Trademark, as per Section 103 of Indian Evidence Act, burden of proof with regard to those particular facts lie upon R1 and other answering respondents. Since disclosure has come from R1 and he has relied upon those facts to say that those actions will not fall within the ambit of Section 43, 47, 49 and 66 of the Code, R1 has to prove that those actions are not hit by those sections. As to all these transactional facts, since they are within the special knowledge of the respondents alone as stated under Section 106 of the Indian Evidence Act, if at all they failed to prove their assertions that the CD is liable to pay money to Trak Online, that these tr....
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....lution is stated to have been passed nor any such resolution is notified to the ROC reflecting transfer of business of the Corporate Debtor to Net4 Network. Based on the failure of R1 and answering respondents to prove existence of facts as stated by them, it is to be construed they failed to prove transfer of shareholding of Net4 Network and Pipetel to Trak Online. 62. Since Company records are structured in such a way that every transaction that happens in the Company is recorded not only in the Company records but also with various regulating authorities on accrual basis as stated under the Companies Act, those transactions are to be presumed as true, unless they are rebutted. Such being the structuring of recording of facts, every fact need not be insisted upon to be proved by adducing oral evidence because records are available for ascertaining as to whether such fact has happened or not. In view thereof, when there is no record of accrual of any fact asserted by a party, those facts need not be treated as in existence. Here transfer of shareholding is not shown as recorded anywhere in the records, execution of Master Reseller Agreement is not shown as recorded anywhere in ....
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.... as a party to this proceeding will not have any adverse effect over Pipetel. 66. As to assignment of trade name, since this assignment is in relation to an action falling within the ambit of IBC to cancel the assignment of trademark in the name of R1, this issue need not be taken to trademark authority for such cancellation, only requirement is the applicant shall place this order before Trade Mark Authority to rectify the records. 67. The transactions afore mentioned will not be called as transfers made in the ordinary course of business, as to the business of the CD, providing domain service and collection of license fees will fall within the perspective of ordinary course of business. Reliefs 68. On having discussed various transactions, it is evident that the directors fraudulently transferred the shareholding of the Corporate Debtor in their subsidiary companies to Trak Online to take out the holding of the corporate debtor over Net4 Network so that the corporate debtor will not have any right over the business of the corporate debtor subsequently transferred to Net4 Network, that the Corporate Debtor entered into undervalued and fraudulent transactions such as ex....