TaxTMI 
TaxTMI 
2022 (4) TMI 374
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....Kolkata Bench, Kolkata) in I.A. No. 742/KB/2020 in CP (IB) No. 518/KB/2018 by which Order, I.A. No. 742/2020 filed by the Resolution Professional has been rejected. 2. Brief facts of the case and sequence of the events necessary to be noted for deciding this Appeal are: * An Application being CP(IB) No. 518/KB/2018 filed by the Bank of India under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the 'Code') was admitted and 'Corporate Insolvency Resolution Process' (hereinafter referred to as 'CIRP') was initiated vide Order dated 18.10.2019 of the Adjudicating Authority against the Corporate Debtor M/s. Sri Balaji Forest Products Private Limited. * Resolution Professional published the Form-A and constituted the 'Committee of Creditors' (Hereinafter referred to as 'CoC'). On numerous requests and reminders issued by the Appellant, Ex-Director of the Corporate Debtor did not extend any cooperation nor provided the relevant documents pertaining to the Corporate Debtor. An application under Section 19(2) of the Code was filed in which by Order dated 09.12.2019, the Adjudicating Authority directed suspended directors of the Corporate Debtor to ext....
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.... timeline prescribed under Regulation 35A. Mr. Sinha submits that the Adjudicating Authority again committed error in relying on Section 46 for rejecting the Application holding that Lease Deed which was claimed by Appellant to be fraudulent transaction was executed 2 years earlier from the CIRP commencement date. It is further submitted that the time period prescribed under Section 46 is only for avoiding an undervalued transaction which provision does not cover a fraudulent transaction as referred to in Section 66 of the Code. Transaction of Lease by which all assets, plant and machinery have been given to related party of the Corporate Debtor on meagre amount was fraudulent transaction undertaken with intent to defraud the creditors and the Adjudicating Authority erred in law in refusing to consider the Application on the ground that such transaction was beyond two years period. It is submitted that there were clear allegations of other transactions entered with related parties within the period of two years which was also not considered on merits on the ground that specific date has not been given by the Appellant. Mr. Sinha submits that there was substantial pleadings of fraud....
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....nd Bank has classified the dues of the Company as 'NPA'. Respondent No. 1 has also filed an Appeal vide diary No. 16919/2019 challenging the Order dated 18.10.2019 which Appeal is still pending. It is further submitted that Resolution Professional has failed to comply the requirement of Regulation 35A of the CIRP Regulations, 2016 and Section 46 of the Code hence the Application was rightly rejected by the Adjudicating Authority. Specific Pleading of fraud is necessary which is wanting in the Application filed by the Appellant, there being no specific pleading of fraud Adjudicating Authority has righty rejected the Application of the Appellant. 6. Learned Counsel appearing for the Respondent No. 2 submits that Respondent No. 2 does not belong to family of Respondent No. 1 and there are no allegations against the Respondent No. 2 in the Application filed by the Resolution Professional. There is no specific pleading of any fraud in the I.A. filed by the RP. 7. Learned Counsel appearing for Respondent Nos. 3, 4 and 5 submits that the Respondent No. 3 to whom the land, machinery tools and furniture have been leased out is not related party to the Corporate Debtor. Respondent No. 3 is....
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.... the Corporate Debtor. The lease transaction is required to be declared as fraudulent and cancelled and the land and factory of the Corporate Debtor be permitted to hand over to the Resolution Professional. 9. We have considered the submissions of Learned Counsel for the parties and perused the record. 10. From the submissions of Learned Counsel for the parties, following are the questions which are arising for consideration in this Appeal: i. Whether an Application by the Resolution Professional relating to a Transaction covered under Section 43, 45, 49 and 66 is mandatory to be filed within the period of 135th Day of the Insolvency Commencement Date and in event the Application is filed beyond such period, the same is liable to be rejected due to non-compliance of Regulation 35A of CIRP Regulations, 2016? ii. Whether time period prescribed under Regulation 35A of the CIRP Regulations, 2016 is mandatory or directory? iii. Whether Transaction claimed to be defrauding the Creditor under section 49 and fraudulent trading or wrongful trading within meaning of Section 66 can be questioned only within time period as prescribed under Section 46 i.e. one year or 2 years respective....
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....to the value of the property under Section 46(2) of the I&B Code; d. Direct Imax Infrastructure Pvt. Ltd. to forthwith make the differential lease consideration payment after determination of market value of annual lease consideration of the premises in accordance with prayer (c) hereinabove along with interest; e. Pass appropriate orders in terms of Section 66 of the Code, 2016; f. Direct M/s. Shree Ram Saw Mill Pvt. Ltd. to forthwith make the payment amounting to Rs. 11,10,009/- (Rupees Eleven Lakh and Ten Thousand only) along with interest to the corporate debtor with respect to the preferential related party payments; g. Direct M/s. Shova Properties Pvt. Ltd. to forthwith make the payment amounting to Rs. 5,50,000/- (Rupees Five Lakh and Fifty Thousand only) along with interest to the corporate debtor with respect to the preferential related party payments; h. Restrain Respondent Nos. 3 to 5 from using the Brand Name "AEON" of the corporate debtor for sale of the goods; i. Direct seizure of the infringing goods of Respondent No. 3; j. Direct the Respondent Nos. 3 to 5 to furnish a list of inventories of the infringing goods and the sale register of the infringing ....
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....g has been observed by the Adjudicating Authority: "30. The facts and circumstances of the present application do not inspire our confidence that it is maintainable ex facie. The application is first hit by regulation 35A of the CIRP Regulations and then by Section 46 of the Code. We are also not satisfied that the lease deed was entered into to defraud the creditors of the Corporate Debtor." v. What is intend and purpose of using the expression "shall" in Regulation 35A of the CIRP Regulations has to be looked into for coming to a conclusion as to whether non-compliance of time period prescribed in Regulation 35A of the CIRP Regulations vitiates all actions taken by Resolution Professional. In the present case, the case of the Appellant is that he came to know about the fraudulent transaction i.e. lease deed dated 30th November, 2016 only on 15th January, 2020 when Respondent No. 1 shared lease deed with the Resolution Professional and thereafter the Application I.A. 742/2020 was filed. The Application filed being I.A. No. 742/2020 was obviously filed beyond the period of 135th Day of Insolvency Commencement Date. The rules of statutory interpretation for finding out true natur....
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....' wherein paragraph 106 following has been held: "106. As noticed hereinabove, it is affirmatively acknowledged as well that where provisions of a statute relate to the performance of a public duty and where the invalidation of acts done in neglect of these have the potential of resulting in serious general inconvenience or injustice to persons who have no control over those entrusted with the duty and at the same time would not promote the main object of the legislature, such prescriptions are generally understood as mere instructions of the guidance of those on which the duty is imposed and are regarded as directory. It has been the practice to hold such provisions to be directory only, neglect of those, though punishable, would not, however, affect the validity of the acts done. At the same time where however, a power or authority is conferred with a direction that certain regulation or formality shall be complied with, it would neither be unjust nor incorrect to exact a rigorous observance of it as essential to the acquisition of the right of authority." viii. Regulation 35A of the CIRP Regulations imposes a duty on the Resolution Professional to take measure within the time....
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....Hon'ble Apex Court in the above case had occasion to consider the provisions of Section 7 of the Code, Section 9(5) proviso and Section 7(5) proviso and Section 10(4) proviso. Under Section 9 (5) a period of 14 days have been given by the statute to the Adjudicating Authority to take a decision to admit or reject the Application which was held to be directory and the decision taken by the NCLT holding the provision directory was approved by the Hon'ble Supreme Court. Similarly other provisions which came for consideration Proviso Section 7(5) and Proviso Section 9(5) and Proviso Section 10(4) to remove the defects within seven days was held to be mandatory by this Appellate Tribunal against which the Appeal was allowed by the Hon'ble Supreme Court and Judgment of this Tribunal was reversed holding the period of 7 days to remove the defects is directory. The Hon'ble Supreme Court has quoted with approval the reasons given by the Appellate Tribunal for holding the provisions of Section 9(5) directory, Section 9(5) provides: "Section 9(5) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order- (i). admit the appl....
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....he NCLAT itself in this behalf: "32. In P.T. Rajan Vs. T.P.M. Sahir and Ors. (2003) 8 SCC 498, the Hon'ble Supreme Court observed that where Adjudicating Authority has to perform a statutory function like admitting or rejecting an application within a time period prescribed, the time period would have to held to be directory and not mandatory. In the said case, Hon'ble Apex Court observed: "48. It is well-settled principle of law that where a statutory functionary is asked to perform a statutory duty within the time prescribed therefor, the same would be directory and not mandatory. (See Shiveshwar Prasad Sinha v. The District Magistrate of Monghur & Anr. AIR (1966) Patna 144, Nomita Chowdhury v. The State of West Bengal & Ors. (1999) CLJ 21 and Garbari Union Co-operative Agricultural Credit Society Limited & Anr. V. Swapan Kumar Jana & Ors. (1997) 1 CHN 189). 49. Furthermore, a provision in a statute which is procedural in nature although employs the word "shall" may not be held to be mandatory if thereby no prejudice is caused." 33. That the Hon'ble Apex Court has on numerous occasions interpreted the word 'shall' to mean 'may'.An analogous position can be found in the co....
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.... court helpless to meet extraordinary situations in the ends of justice. 11. The mortality of justice at the hands of law troubles a judge's conscience and points an angry interrogation at the law reformer. 12. The processual law so dominates in certain systems as to overpower substantive rights and substantial justice. The humanist rule that procedure should be the handmaid, not the mistress, of legal justice compels consideration of vesting a residuary power in the judges to act ex debito justitiae where the tragic sequel otherwise would be wholly inequitable. Justice is the goal of jurisprudence, processual, as much as substantive. (See Sushil Kumar Sen v. State of Bihar [(1975) 1 SCC 774] .) 13. No person has a vested right in any course of procedure. He has only the right of prosecution or defence in the manner for the time being by or for the court in which the case is pending, and if, by an Act of Parliament the mode of procedure is altered, he has no other right than to proceed according to the altered mode. (See Blyth v. Blyth [(1966) 1 All ER 524 :966 AC 643 : (1966) 2 WLR 634 (HL)] .) A procedural law should not ordinarily be construed as mandatory; the procedural ....
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....ything by not removing the objections inasmuch as till the objections are removed, such an application would not be entertained. Therefore, it is in the interest of the applicant to remove the defects as early as possible." xiii. The Law laid down by the Hon'ble Supreme Court in the above judgment which deals with the interpretation of provisions of the Code itself are applicable to interpretation of Regulation 35A of CIRP Regulations and following the above judgment we hold that timeline prescribed in Regulation 35A of CIRP Regulations is directory and not mandatory. 12. Question III i. Now we come to question whether the time period prescribed under Section 46 for avoiding undervalued transactions are also to be applied for judging of fraudulent transaction. We need to first notice Section 45 and 46 which is to the following effect: "45. Avoidance of undervalued transaction.- (1) If the liquidator or the resolution professional, as the case may be, on an examination of the transactions of the corporate debtor referred to in sub-section (2) of section 43 determines that certain transactions were made during the relevant period under section 46, which were undervalued, he shal....
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....as no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and (b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor. (3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10A. Explanation.-For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor." iii. Section 66 contemplates that during the corporate insolvency resolution process or liquidation process it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority m....
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....transactions: Provided that an order under this section- (a) shall not affect any interest in property which was acquired from a person other than the corporate debtor and was acquired in good faith, for value and without notice of the relevant circumstances, or affect any interest deriving from such an interest, and (b) shall not require a person who received a benefit from the transaction in good faith, for value and without notice of the relevant circumstances to pay any sum unless he was a party to the transaction." v. Section 49 does not contain a time period during which the Application has to be filed. Hence Section 46 is not to be applied to the transactions which have been made to defraud the creditors. We may notice one more provisions of the Code i.e. Section 69 which deals with punishment for transactions defrauding creditors. Section 69 is to the following effect: "69. Punishment for transactions defrauding creditors.- If an officer of the corporate debtor or the corporate debtor- (a) has made or caused to be made any gift or transfer of, or charge on, or has caused or connived in the execution of a decree or order against, the property of the corporate debt....
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....y mentioned. There were pleadings also in the Application that transaction made by the Corporate Debtor was with intent to defraud the creditors and fraudulent transactions. Paragraphs xv and xvi at Page 145 and 146 is relevant to be noticed in this context: "xv. Based on the aforesaid fact and documents made available to the Resolution Professional, the Resolution Professional has formed the following opinion: 1. The Lease agreement and its transaction clearly tantamount to be preferential transaction and undervalued transactions u/s 43,45 and also to carried out to defraud the creditors under section 49 and section 66 of the Code, 2016. 2. The payments made to the following two related parties, when the Corporate Debtor did not had any business transactions since last few years, and when huge sums are payable to financial creditors and operational creditors are completely preferential transactions u/s 43 of the I& B Code. The brief details of the related party payments are explained hereunder in the following table: Payments made to related party for the period 01.04.2017 to 18.10.2019 Name of Related Party Amount (in INR) Shree RamSaw Mill Pvt Ltd 11,10,000.00 Shova ....
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....und that Application has been filed beyond the period prescribed under Section 46 of the Code. The timeline prescribed for transactions under Section 46 does not cover the transactions covered by Section 49 and 66 of the Code. Answer IV & V Learned Counsel for the Respondent No. 1 emphatically submitted that there were no pleading in the Application filed by the RP of fraud or any fraudulent transaction. Learned Adjudicating Authority also in paragraph 30 of the Impugned Order as noted above, has observed that RP has not substantiated his allegation that execution of Lease deed amount to fraudulent transaction. Whether in the Application filed by the RP, there were sufficient pleadings to the effect that the transaction under Section 49 and 66 are to be found out from the pleadings in the Application. The Application filed by the RP I.A. No. 742/2020 is on the record of the Appeal. We have also extracted Paragraph xv of the Application where there was specific pleading that the lease transaction was carried out to defraud the creditors under Section 49 and 66 of the Code. The Application filed by the RP also pleaded that schedule of lease property has been hypothecated to the Bank....
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....e consideration of the premises and it is most humbly submitted that there is a continuous cause of action for execution of such undervalued transaction. It is further submitted that the said lease deed was mischievously executed for a period of 29 years for keeping assets of the corporate debtor beyond the reach of the financial creditor and further to adversely affect the interests of all the creditors of the corporate debtor, as stipulated under Section 49 of the I & B Code." The averments made in Paragraphs as extracted above clearly indicate that Application contains substantial pleadings within the meaning of Section 49 and 66 regarding the lease transaction. The Lease Deed and all other relevant materials were part of the Application. There is one more very important aspect of the matter which although has been noticed by the Adjudicating Authority but has not been given due consideration. In the Application filed by the RP being I.A. No. 742 of 2020, the notices were issued by the Adjudicating Authority to the Respondent Nos. 1 to 7 but none of the Respondent have chosen to either appear or file their any say in the matter which fact has been clearly stated by the Adjudic....
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....ed that Plaintiff acquired the right and interest over the property and is entitled to get profit of its lawful rights. Defendant Nos. 1, 2 and 3 of the suit had admitted and pleaded that they have never raised any objection in peaceful running of the business of the Plaintiff. The Interim Injunction passed is as follows: "..... After having heard and perusal of the materials available on record it appears to me at this stage the order of ad interim injunction needs to be allowed till the disposal of the instant suit. More so, the defendants have also stated that they have never raised any objection in peaceful running of the business of the plaintiff and/or the peaceful possession of the plaintiff. Accordingly, if, at this stage, the order of ad interim injunction is allowed till the disposal of the instant suit then nobody will be prejudiced in any manner whatsoever, rather it will facilitate the proper adjudication of the instant suit at hand. Hence, it is ORDERED, That the defendants are hereby restrained from making any obstruction, hindrances and/or any kind of objection of any manner in respect of the lawful and smooth running of the business of the plaintiff from ....