2022 (6) TMI 493 - Tri - Insolvency and Bankruptcy

CIRP - Application by the RP to protect the assets of Corporate Debtor - Separate Identity of Corporate Debtor - imposing vicarious liability of respondents - piercing of corporate veil by disregarding the false description of corporate debtor created by the holding company - validity of transactions including illegal inter-se sale of shares of the corporate debtor among respondents by the holding company - preferential, undervalued, fraudulent transactions or not - HELD THAT - There is no illegal or fraudulent transaction done by the said 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. When the applicant had sought Police assistance, this Adjudicating authority had issued directions, but in spite of that the RP was not diligent enough to make use of it. Application dismissed.

Issues Involved:
1. Imposition of vicarious liability and piercing the corporate veil.
2. Declaration of transactions as preferential, undervalued, fraudulent, non-est, and void ab initio.
3. Direction for forensic audit of the holding and subsidiary companies.
4. Order of investigation for money laundering and trial of offenses under the Companies Act.
5. Non-cooperation of directors and officers of the Corporate Debtor.
6. Validity of the sale of shares by the holding company.
7. Compliance with the sanction letter terms issued by Allahabad Bank.
8. Maintainability of the application under section 60(5) and section 25(2)(j) of the Insolvency and Bankruptcy Code, 2016.

Detailed Analysis:

1. Imposition of Vicarious Liability and Piercing the Corporate Veil:
The applicant sought to impose vicarious liability on the respondents and pierce the corporate veil, arguing that the holding company created a false description of the corporate debtor. However, the tribunal found that the applicant did not provide specific material facts or conduct the necessary inquiries to support these claims. The tribunal emphasized that the resolution professional (RP) must be satisfied about the transactions being avoidable, fraudulent, or undervalued before filing such applications.

2. Declaration of Transactions as Preferential, Undervalued, Fraudulent, Non-est, and Void Ab Initio:
The applicant alleged that the inter-se sale of shares among respondents was preferential, undervalued, and fraudulent. The tribunal noted that the RP had not conducted any forensic audit or engaged professional services to ascertain the nature of these transactions. The tribunal referred to the Supreme Court's guidance in Anuj Jain Vs Axis Bank Limited, highlighting that specific material facts are required to be pleaded for such claims, which were not present in this case.

3. Direction for Forensic Audit of the Holding and Subsidiary Companies:
The applicant requested a forensic audit to inspect the transactions and their veracity. The tribunal pointed out that the RP should have sought assistance from forensic auditors or other professionals before approaching the adjudicating authority. The tribunal found that the RP had not taken adequate steps to investigate the transactions independently.

4. Order of Investigation for Money Laundering and Trial of Offenses Under the Companies Act:
The applicant sought an investigation for money laundering and trial of offenses under the Companies Act. The tribunal did not find sufficient grounds or specific allegations to warrant such an investigation. The tribunal reiterated the need for concrete evidence and professional assistance in investigating the transactions.

5. Non-cooperation of Directors and Officers of the Corporate Debtor:
The tribunal noted that the RP had filed an application under section 19(2) of the Code for non-cooperation by the directors and officers of the corporate debtor. The tribunal directed the directors and officers to cooperate with the RP, failing which the RP could seek police assistance. However, the tribunal found that the RP had not diligently pursued these directions or taken necessary steps to enforce them.

6. Validity of the Sale of Shares by the Holding Company:
The respondents argued that the sale of shares held by the holding company in the corporate debtor was not restricted and did not constitute a transfer of the corporate debtor's property. The tribunal agreed, stating that shares are distinct from the assets of the company and their transfer cannot be challenged under the Code. The tribunal found no evidence of illegal or fraudulent transactions related to the sale of shares.

7. Compliance with the Sanction Letter Terms Issued by Allahabad Bank:
The applicant contended that the sale of shares violated the terms of the sanction letter issued by Allahabad Bank. The tribunal found that the shares held by the holding company were not subject to the terms and conditions of the sanction letter. The tribunal noted that the holding company had sold its shares in compliance with its own board resolutions and without any restriction from the bank.

8. Maintainability of the Application Under Section 60(5) and Section 25(2)(j) of the Insolvency and Bankruptcy Code, 2016:
The respondents argued that the application was not maintainable as it did not have a cause of action. The tribunal agreed, stating that the RP had not conducted the necessary inquiries or provided specific material facts to support the claims. The tribunal emphasized that the RP must be diligent in performing his duties and not rely solely on allegations without proper investigation.

Conclusion:
The tribunal dismissed the application (I.A. No. 841/KB/2020) due to the lack of specific material facts and proper investigation by the RP. Consequently, I.A. No. 1288/KB/2020 also became infructuous and was dismissed. The tribunal highlighted the need for RPs to conduct thorough inquiries and seek professional assistance before filing applications under the Code.

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