TaxTMI 
TaxTMI 
2022 (4) TMI 374
X X X X Extracts X X X X
X X X X Extracts X X X X
....dicating Authority (National Company Law Tribunal, 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 Au....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er Regulation 35A was not liable to be rejected on the ground that it has not been filed within the 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 h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....espondent No. 1 has made several requests for restructuring of their Account which was not accepted and 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ebtor is established would be transferred to the Intervenor to enable him to continue to run the factory of 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 withi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction 49 of the prior to the transfer of the said land through the illegal lease transaction; c. Appointment of an independent expert to assess evidence relating 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 go....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Application deserves to be dismissed? iv. In the present case, the Adjudicating Authority has taken a view that Appellant Resolution Professional has not complied Regulation 35A in filing the I.A. No. 742 of 2020. In paragraph 30 of the Impugned Order, following 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ture, it has been the practice to hold such provisions to be directory only." vii. The above preposition of the Privy Council was quoted with approval by Hon'ble Supreme Court. The same preposition was reiterated by Hon'ble Apex Court in (2016) 11 SCC 31 in 'Lalaram Vs. Jaipur Development Authority' 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Application was filed. x. The view which we are taking with regard to the interpretation of Regulation 35A of the CIRP Regulations fully finds support from the Judgment of the Hon'ble Supreme Court in (2017) 16 SCC 143 in 'Surendra Trading Company Vs. Juggilal Kamlapat Jute Mills Company Limited and Ors.'. The 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t behind the Code, the NCLAT has concluded that as far as fourteen days time provided to the adjudicating authority for admitting or rejecting the application for initiation of insolvency resolution process is concerned, this period is not mandatory. For arriving at such a conclusion, the NCLAT has discussed the law laid down by this Court in some judgments. Therefore, we deem it proper to reproduce the discussion of the 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 Garb....
X X X X Extracts X X X X
X X X X Extracts X X X X
....raftsman of processual law may be liberal or stringent, but the fact remains that the object of prescribing procedure is to advance the cause of justice. In an adversarial system, no party should ordinarily be denied the opportunity of participating in the process of justice dispensation. Unless compelled by express and specific language of the statute, the provisions of CPC or any other procedural enactment ought not to be construed in a manner which would leave the 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] .) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....period as mandatory was reversed by the Hon'ble Supreme Court and following was laid down in Paragraph 24: "Further, we are of the view that the judgments cited by NCLAT and the principle contained therein applied while deciding that period of fourteen days within which the adjudicating authority has to pass the order is not mandatory but directory in nature would equally apply while interpreting the proviso to sub-section 5 of Section 7, Section 9 of sub-Section 4 of Section 10 as well. After all, the applicant does not gain anything 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 presc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit. (2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if- (a) before the insolvency commencement date, such director or partner knew or ought to have known that the there was 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. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to an undervalued transaction as referred to in sub-section (2) of section 45 and the Adjudicating Authority is satisfied that such transaction was deliberately entered into by such corporate debtor- (a) for keeping assets of the corporate debtor beyond the reach of any person who is entitled to make a claim against the corporate debtor; or (b) in order to adversely affect the interests of such a person in relation to the claim, the Adjudicating Authority shall make an order- (i) restoring the position as it existed before such transaction as if the transaction had not been entered into; and (ii) protecting the interests of persons who are victims of such 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 circumstan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....scribed under Section 46 is not applicable and the Adjudicating Authority erred in holding the Application No. 742/2020 not maintainable as hit by Section 46(2) which opinion of the Adjudicating Authority is not in accordance with the statutory scheme of the Code. Now we need to notice other transaction which were alleged to be questioned in I.A. No. 742/2020. The Application which is filed by the RP contained following heading at page 119 of the Appeal Paper Book: "Application under Section 43, Section 45 read with Section 49, Section 66 and Section 60(5) of the Insolvency and Bankruptcy Code, 2016 along with other relevant provisions" vii. Thus Application filed by the RP was not only under Section 43, 45 but also Section 49 and 66 which were specifically 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ons 66 and 60(5) of the Code is not to be rejected filed beyond the period of 135th Day of Insolvency Commencement Date only on the ground of non-compliance of Regulation 35 A of the CIRP Regulations, 2016. It shall depend on the facts of each case as to whether there are genuine reasons to consider the Application on merits even filed beyond 135th day. Answer II The expression "shall" in regulation 35A (1), 35A(2) and 35A(3) is not mandatory and requirement of "forming an opinion" under Section 35A(1) "make a determination" under Section 35A(2) and "shall apply to the Adjudicating Authority for appropriate relief on or before 135th day of the Insolvency Commencement Date" are only directory. Answer III Application questioning the transactions covered by Section 49 and 66 of the Code are not to be rejected on the ground 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 th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....under: Name of the Related party Relation Transaction from 01.04.2017 to 31.12.2019 Shree Ram Saw Mill Pvt Ltd Om Prakash Pandey is the common Director Opening - Rs. 6,69.481.00 Receipt - Rs. 3,02,944.00 Payments - Rs. 11,10,000.00 Closing- Rs. 14,76,537.00 Shova Properties Pvt Ltd Om Prakash Pandey is the common Director Opening - Rs. 85,985.21 Payments - Rs. 5,50,00 Closing- Rs. 6,35,985.21 Dr. Bal. Total of Related Party Transactions Payments Total - Rs. 16,60,000/- xvi. It is most humbly submitted that on a bare perusal of the lease deed dated 30th November, 2016 it becomes apparent that the corporate debtor entered into a transaction with respondent No. 3with respect to the transfer of leasehold rights over the assets owned by the corporate debtor for a consideration, the value of which is significantly less than the market value 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 beyon....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the Appellant has concealed the Civil Court Proceedings which are pending with regard to the Lease in question. It is relevant to note that no efforts were made on behalf of Respondents who were party to the Civil Proceedings to bring the Orders on record either before the Adjudicating Authority or before this Court. 15. Learned Counsel for Respondent No. 3 has referred to the Injunction Order dated 12th July, 2019 of the Civil Court. We had directed the Learned Counsel for the Respondent No. 3 to place the Order on record. Learned Counsel for the Respondent Nos. 3, 4 and 5 has placed on record the Copy of the Interim Injunction dated 12th July, 2019 passed in T.S. No. 97/2017 along with the written submissions. The suit TS No. 97/2017 was filed by the Respondent No. 3 against Om Prakash Pandey and others. The Plaintiff filed the suit on the basis of Lease Deed dated 30th November, 2016 and claimed 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 Int....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd concealment of proceeding when he is party to the said proceeding and does not disclose it. The Respondent Nos. 1,3,4 and 5 were parties to the proceeding and if they wanted to rely on any Order passed in the Civil Proceeding it was incumbent on them to bring on record. The Respondent Nos. 1, 3, 4 and 5 chose not to file any Reply either before the Adjudicating Authority or before this Appellate Tribunal and on other hand they are making reckless allegations against the RP that RP had concealed the Civil Proceeding. We are of the considered opinion that the Proceeding in Civil Suit i.e. T.S. No. 97/2017 has no bearing on the application filed by the RP under Section 49 and 66 of the Code. 18. We are further of the view that with regard to the proceedings under Sections 49 and 66, the Civil Proceeding in question can not create any prohibition from consideration of the issues by the Adjudicating Authority which is competent under the Code to take decision on such transaction. The I & B Code, 2016 specifically empowers the Adjudicating Authority to take decision regarding transaction to maximise the assets of the Corporate Debtor and those assets which are subject to undervalue....