Preferential, Fraudulent Or Avoidable Transaction, Material Facts To Be Pleaded : NCLT Kolkata

Background Facts

Advance Multisystem Broadband Communications Limited (AMBC/Corporate Debtor) was admitted into Corporate Insolvency Resolution Process ("CIRP") vide an order dated 30.09.2019 passed by NCLT Kolkata ("Adjudicating Authority"). Shri Kuldeep Verma ("Applicant/Resolution Professional") was appointed as Interim Resolution Professional and later confirmed as the Resolution Professional.

Induslnd Media and Communications Limited (IMCL) through a Shareholder's Agreement dated 18.05.2012 had invested in AMBC, and consequently held 59.61% of the paid up and issued share capital of AMBC. The remaining 40.39% share capital was held by the operating shareholders (Local cable Operators). When the business of the Corporate Debtor was transferred to a competitor in an allegedly fraudulent manner, IMCL sold its shareholding.

The Resolution Professional filed an application under Section 60(5) and Section 25(2)(j) of the IBC bearing I.A. No. 841 of 2020, against IMCL and others, seeking imposition of the vicarious liability on the IMCL; piercing of corporate veil of IMCL; declaring the share transfer by IMCL as preferential, undervalued, fraudulent and void ab intio; directions for forensic audit of the IMCL and the Corporate Debtor; and initiation of investigation for money laundering et al.

In a previous progress report the Resolution Professional had submitted before the Adjudicating Authority that the Corporate Debtor does not have any assets apart from the shares which stood transferred by IMCL.

Contentions Of The Applicant

The Applicant/Resolution Professional submitted that the Corporate Debtor had availed credit facilities from Allahabad Bank and a Sanction Letter dated 16.11.2017 was accordingly issued. The Sanction Letter had a condition that the shares of the Corporate Debtor would not be transferred without the consent of the Bank. The Resolution Professional contended that IMCL is a promoter and holding company of the Corporate Debtor and IMCL had sold its shareholding in the Corporate Debtor, which violated the terms and conditions of the Sanction Letter. The Resolution Professional regarded the share transfer as preferential, undervalued and fraudulent.

Contentions Of The Respondents

IMCL submitted that there was no restriction on the sale of shares held by it in the Corporate Debtor, as those shares were not the property of the Corporate Debtor. Hence, there could be no question of transfer of property at undervalued, preferential or fraudulent manner. IMCL denied being the promoter of the Corporate Debtor as it was never in control or the Board of the Corporate Debtor, which was evident from the annual returns and the Share Subscription Agreement dated 18.05.2012. Also, IMCL itself had filed a complaint before the Registrar of Companies against the illegalities committed by the promoters and directors of the Corporate Debtor, which was the reason behind selling of shares.

IMCL contended that shares are separate and distinct from the assets of the company, and transfer of shares cannot be construed as transfer of assets of the company. Therefore, the selling of shares held by IMCL were not subject to the conditions laid down in Sanction Letter dated 16.11.2017.

Observations Of The Adjudicating Authority

The Bench observed that Resolution Professional himself was not sure as to whether the transactions impugned were wrong as alleged, as he had sought a Forensic Audit in prayer. The Bench opined that Resolution Professional can file an application under Section 25(2) (j) of the IBC only after being satisfied about the particular transactions being avoidable, fraudulent or undervalued. It was incumbent upon the Resolution Professional to seek assistance of the Forensic Audit if so required, to engage the services of accountants, legal or other professionals with a view to satisfy himself about the transactions being avoidable. Without meeting the aforesaid requirements, the Resolution Professional could not have directly approached the Adjudicating Authority for the relief sought by him. Reliance was placed on the Supreme Court judgment in Anuj Jain v Axis Bank Limited and others, Civil Appeal Nos. 8512/2019, wherein it was held that:

"As noticed, the question of intent is not involved in Section 43 and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time. However, whether a transaction is undervalued requires a different enquiry as per Sections 45 and 46 of the Code and significantly, such application can also be made by the creditor under Section 47 of the Code. The consequences of undervaluation are contained in Sections 48 and 49. Per Section 49, if the undervalued transaction is referable to sub-section (2) of Section 45, the Adjudicating Authority may look at the intent to examine if such undervaluation was to defraud the creditors. On the other hand, the provisions of Section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons responsible therefore."

"Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. As noticed, the scope of enquiry in relation to the questions as to whether a transaction is of giving preference at a relevant time, is entirely different Hence, it would be expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority."

The Bench observed that the Resolution Professional had not met the requirements set out in Anuj Jain case as a composite application had been made without conducting enquiry or stating specific material facts for the transactions to be covered under Sections 45, 46, 47 or 66 of the IBC. It was observed that the Resolution Professional had vaguely and unmindfully asserted the allegations against IMCL and suspended Board of Directors of the Corporate Debtor.

The Bench held that there was no illegal or fraudulent transaction done by the Respondents. "When according to the applicant himself there was no asset of the corporate debtor, and the company had gone into losses and was left with no debtors, the applicant should have performed his duties assigned to him in the Code instead of flogging a dead horse."

The application was dismissed by the Bench.

Case Title: Star India Private Limited v Advance Multisystem Broadband Communications Limited, C.P. (IB) No. 1510/KB/2018

Counsel for Resolution Professional: Mr. Jatinder Singh Dhatt, Advocate.

Counsel for Respondents: Mr. Kuldip Mallik, Ms.Labanyasree Sinha, Mr. Jitendra Patnaik, Advocates.

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