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TMI Blog2022 (9) TMI 631X X X X Extracts X X X X X X X X Extracts X X X X ..... of Association and assessed whether the transactions were collusive in nature or not and used its discretion whether to admit such an Application or not, keeping in view the scope and objective of the Code. It is appropriate at this juncture, to rely on the Judgement of the Hon ble Supreme Court in M/S EMBASSY PROPERTY DEVELOPMENTS PVT. LTD. VERSUS STATE OF KARNATAKA OTHERS [ 2019 (12) TMI 188 - SUPREME COURT ], in which the Hon ble Apex Court has clearly noted that the Adjudicating Authority has the jurisdiction to enquire into allegations of fraud when there is a prima facie case of fraudulent initiation of CIRP. The Assignment to Suraksha is not a bona fide one, peculiar to the facts of the attendant case and the loan amounts do not satisfy the essential requisites of a Financial Debt as envisaged under the Code. This Tribunal observed that the fundamental scope objective of IBC is Resolution and Maximization of Assets and not Recovery of loans which do not strictly fall within the definition of Financial Debt as defined under Section 5(8) of the Code. Appeal allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... the loan amount disbursed to them were allegedly Siphoned Off to various HDIL entities and was used to repay the loans by these entities to Yes Bank Limited. 7. The bench notes that the Corporate Debtor is a body Corporate and has independent identity distinct from the shareholders. The Bench also notes that the Corporate Debtor had borrowed the money and it must be repaid. Since the Corporate Debtor had borrowed the money, it cannot take a plea of intra shareholders dispute or allegation of internal wrong doings by the constituent shareholders as a reason for not meeting its repayment obligation. 8. Further, the alleged misuse on unauthorized use of the Term Loans by the constitutes of the Corporate Debtor does not in any way negate the existence of Financial Debt and the right of the Financial Creditor to recover the loans even assuming that the Corporate Debtor had diverted the money and misused the Term Loans. It does not discharge the Corporate Debtor of it is indebtedness in respect of loans and does not absolve the Corporate Debtor from repaying the same. 9. In any case, the Term Loans have been reflected in the balance sheet of the Corporate Debtor and is reflected i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r cheating Mack Star and the Appellant/Ocean Deity Investment Holdings Limited ('Ocean Deity') by way of these collusive transactions; that after several months of the Enforcement Directorate ('ED') having arrested Mr. Rana Kapoor, the Promoter of Yes Bank for conspiring with HDIL Promoter to cheat Mack Star, the Adjudicating Authority has passed the Order dated 20.09.2021. The Adjudicating Authority, despite having the attachment Orders and the EDs prosecution Complaint against the Promoters of Yes Bank and HDIL, did not address these issues and also did not take any cognizance of the findings of CBI and ED regarding the Criminal Conspiracy between Yes Bank and HDIL to evergreen the stressed loans of Yes Bank. • Both CBI and ED have independently concluded that there was a Criminal Conspiracy, pursuant to which act, there was a three steps circular flow of funds from Yes Bank, whereby Rs.147Crores/- have fraudulently been disbursed in the name of Mack Star; the amount was disbursed to Yes Bank Accounts of HDIL Group Companies; these loan amounts from Yes Bank Accounts of HDIL Group Companies i.e., Rs.146Crores/- were used for discharging the earlier loans availed by the fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be no question of registration of an FIR against the officials of the Yes Bank. The Learned Sr. Counsel brought to the notice of this Tribunal that apart from Mr. Rana Kapoor, three other senior Members of Yes Bank Management were named in the Enforcement Case and none of these Members charged with money laundering were ever shareholders of Mack Star and therefore this fraud cannot be characterized as an 'intra-shareholder' dispute. • Learned Sr. Counsel drew our attention to the Provisional Attachment Orders providing details of its comprehensive investigation into this loan fraud and unequivocally concluded that Yes Bank has illegally sanctioned a loan which is a result of conspiracy between Mr. Rana Kapoor and Wadhawan of HDIL; "2.9 Further, in January 2016, the investors realized that the Wadhawans had taken fraudulent loans from the YES Bank in the name of M/s Mack Star Marketing Pvt Ltd. They informed YES Bank Ltd. Even after this YES Bank Ltd. disbursed 3 instalments of loan amounting to Rs.19.60 Crore to Mack Star's account on 23.03.2016, 26.04.2016 & 25.05.2016… 2.11 That unknown officials of Yes Bank dishonestly ignored the terms of Mack Star's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 11. …Yes Bank never carried out any due diligence on Mack Star's need for funds and the ultimate end-use because they knew that the ultimate use was to finance loan repayments by the HDIL Group Companies. 13. ..the benefit of this arrangement accrued solely to Yes Bank, which was able to evade the applicable capital provisioning norms by evergreening its loans instead of declaring them as NPAs… Yes Bank is mischaracterizing facts by pretending to be a bona fide lender…. 24. …when funds were credited to Mack Star's Yes bank account and subsequently transferred to HDIL Group companies, such transfers were often initiated by Yes Bank using instructions obtained by them before disbursal of the loans…." • It is submitted that the Adjudicating Authority is silent about the findings of these investigations in the Impugned Order. • It is argued that both CBI and ED are Statutory Bodies and the results of the investigations arrived by them read together with the determination made by PMLA Adjudicating Authority ought not to have been ignored by the Adjudicating Authority, before considering the 'Admission' of the Section 7 Petition. &b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Investment Agreement that has been entered into amongst the Shareholders. • The Appellant reconstituted the Board of Mack Star on 01.09.2017 by removing all Wadhawan directors from Mack Star Board. Since the Financial Year 2017-18 all of Mack Star Annual Reports explicitly state that Yes Bank defrauded Mack Star and loans were fraudulently obtained by the erstwhile management of Mack Star (HDIL Promoter) in collusion with Yes Bank. It is further submitted that there are six separate references in Mack Star's Annual Report for 2019-20 to the Yes Bank loans, being illegal. Learned Counsel relied on the Judgement of the Hon'ble Supreme Court in 'Asset Reconstruction Company India Ltd.' Vs. 'Bishal Jaswal and Ors.', (2021) 6 SCC 366, wherein the Hon'ble Supreme Court has observed that every entry would not amount to an acknowledgement of debt as it is not uncommon to have an entry in the Balance Sheet with notes annexed, forming part of the Balance Sheet and that it would depend on the facts of each case whether such an entry would amount to an 'acknowledgement of debt'. • All these transactions were orchestrated without the knowledge of the Investor or the Investor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demonstrates that the 'Assignment' was a sham. • Lastly, Learned Sr. Counsel Dr. Singhvi vehemently contended that the Insolvency Application was defective in as much as Mr. Tikmani who was appointed as the IRP resigned in May 2019; an email was sent by Suraksha on 13.09.2021 only to create a fraudulent paper trail to conceal the fact that the Application was defective; that Mr. Tikmani has withdrawn his consent and Mr. Shailen Shah had also withdrawn his consent on 01.09.2021; Mr. Tikmani has withdrawn his consent on 13th May itself and therefore Mr. Shailen Shah was nominated in his place; but Suraksha in their Reply to I.A. 2221/2021 falsely stated that Mr. Tikmani has withdrawn his consent after the Admission Order was passed by the Adjudicating Authority, which makes it evident that Suraksha is admitting to cover a fatal lacuna in its Insolvency Application, which remained a defective one as per Section 7(3)(b) of the Code from 01.09.2021 to 20.09.2021, the date on which the Adjudicating Authority passed the Order 'Admitting' the Application. The subsequent Order 27.10.2021 passed by the Learned Adjudicating Authority appointing Mr. Shukla as the IRP cannot operate retro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst Yes Bank. Further the Appellant has not disputed the receipt and default of the Term Loans III to VI. As the date is admitted there is no scope of going into any dispute under Section 7 of the Code. • There is no final adjudication by Civil or Criminal Courts pertaining to the purported disputes raised by the Plan. The suit filed in the Hon'ble High Court of Bombay in 2020 is nothing but an attempt to hinder the Resolution Process. In fact, the Hon'ble High Court of Bombay refused to pass an Interim Order pertaining to the loan facility which demonstrates that there was no prima facie case in favour of Mack Star. Mack Star was also making all efforts to settle the debts as can be seen from the various emails exchanged between the parties. • The Articles of Association of Mack Star do explicitly bar Mack Star from raising funds from Financial Institutions. Suraksha cannot be dragged into the matter where there is an intra-shareholders dispute between the investors and HDIL Promoters. Moreover, 'borrowings of funds' is an activity specifically mentioned in the Memorandum of Association of Mack Star as being a part of authorized business of Mack Star. Having full kn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into between the parties and the outcome of the Section 7 Application. The four Term Loans in question which are stated to be the amounts 'due and payable' by the Respondent/Suraksha are detailed as hereunder: I. Term Loan III was a sum of Rs.7,60,00,000/- and was disbursed on 12.11.2012. II. Term Loan IV was for a sum of Rs.40,00,00,000/- and was disbursed in 5 tranches on 29.03.2014, 30.04.2014, 29.05.2014, 28.06.2014 and 26.07.2014. III. Term Loan V was for a sum of Rs.40,00,00,000/- and was disbursed on 29.09.2015. IV. Term Loan VI was for a sum of Rs.60,00,00,000/- and was disbursed in 6 tranches on 07.01.2016, 29.01.2016, 26.02.2016, 23.03.2016, 26.04.2014 and 25.05.2016." 8. It is important to peruse the table depicting the flow of funds together with the relevant dates to understand whether there was any circular movement of funds. The said table is reproduced as hereunder: Term Loan Disbursal Date Amount of Loan Disbursed to Mack Star (INR Crs.) Amount Diverted from Mack Star by Yes Bank (INR Crs.) Company of HDIL Group to which the funds were diverted Amount immediately routed back to Yes Bank (INR Crs.) III 12.11.12 7,600 7,983 HDIL 7,983 IV 29.03 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares. However, in the instant case, Mr. Sarang Wadhawan & Mr. Rakesh Wadhawan who were having very strong relationship with Mr. Rana Kapoor got sanctioned the loan of Rs.202.1Crores to the above said JV without knowledge/approval of DE Shaw group…. It is clearly established that Wadhawans had connived with Mr. Rana Kapoor for illegal sanction of the loan of Rs.202.1 Crore without permission of the Investor……. 8.6 It is also revealed that the Wadhawans of HDIL connived with Mr. Rana Kapoor of Yes Bank and fraudulently got sanctioned the loan of more than Rs.200 Crore to Mack Star…. But, immediately after its sanction, the entire loan amount was siphoned off by the Wadhawans through their HDIL group companies to Yes Bank again for settling the HDIL group companies' earlier loans taken from Yes Bank. Actually, these loans were on the verge of turning into NPA. This was the reason, this fraud was done by Wadhawans of HDIL in connivance with Mr. Rana Kapoor….." (Emphasis Supplied) 11. The relevant excerpt of PMLA Adjudicating Authority Confirmation Order is reproduced as follows: "…when the DE Shaw Group realized that the Wadhawans had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isioning consequences for Yes Bank….. 9. In 2011, Yes Bank entered into an arrangement with HDIL Promoters to sanction loans in Mack Star's name, the proceeds of which loans could be used to repay loans availed by various HDIL Group Companies from Yes Bank. Yes Bank knew Plaintiff No.1's consent was required for these loans but also knew that Plaintiff No.1, which played a passive role in Mack Star's affairs, would not have any commercial incentive to approve evergreening of potential NPAs on Yes Bank's loan book…. 10. The HDIL Promoters, being heavily dependent on Yes Bank for meeting HDIL's financial requirements…succumbed to pressure from Yes Bank to enter into this arrangement…. 11. …Yes Bank never carried out any due diligence on Mack Star's need for funds and the ultimate end-use because they knew that the ultimate use was to finance loan repayments by the HDIL Group Companies. 13. ..the benefit of this arrangement accrued solely to Yes Bank, which was able to evade the applicable capital provisioning norms by evergreening its loans instead of declaring them as NPAs… Yes Bank is mischaracterizing facts by pretending to be a bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other hand, as we have seen, in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is "due" i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject on application and not otherwise." 15. The Annual Report of Mack Star for the Financial Year 2019-20 has a note/caveat below which reads as hereunder: "**This amount represents the loan obtained fraudulently by the Erstwhile Management from Yes Bank in collusion with Yes bank to evergreen loan facilities extended by Yes Bank to HDIL and its group companies. This loan was recorded by the Erstwhile Management in the books of accounts of the Company whilst the funds purportedly borrowed by the Company from Yes Bank were either disbursed to HDIL or siphoned off by the Erstwhile M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 2019-20, it cannot dilute the fact that the loan amounts were indeed disputed. Further it is seen from the record that the AGM Resolution dated 29.05.2014 and form MGT - 7 were signed by Mr. Iyengar i.e., the Wadhawan Director, who in his written statement has admitted that Yes Bank had entered into an arrangement with Wadhawan and to sanction loan in Mack Star's name, the proceeds of which loans was to be used to repay loans availed by the various HDIL Group Companies back to Yes Bank. Learned Sr. Counsel Mr. Srinivasan contended that 99.96% of Mack Star's common shareholders had attended the AGM on 29.05.2014 and since the Appellant/Ocean Deity held 82.17% common shares of Mack Star the Appellant had attended the AGM on 29.05.2014 for the shareholder participation to be 99.96%. We find force in the submissions of Learned Sr. Counsel Mr. Krishnendu Dutta, based on the material on record, that Ocean Deity held only 1000 common shares of Mack Star as on 29.05.2014 and it was only in September 2014 that Rs.1,05,19,470/- preference shares held by the Appellant were converted into common shares and therefore Ocean Deity became 82.17% shareholder of Mack Star 'only in September 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluding any forward sale or purchase agreement, having the commercial effect of a borrowing; [Explanation.-For the purposes of this sub-clause,- (i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and (ii) the expressions, "allottee" and "real estate project" shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);] (g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account; (h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution; (i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause;" 19. Section 5(8) defines financial debt as a debt along with interest, if a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mean: "1. The act of paying out money, commonly from a fund or in settlement of a debt or account payable. 2. The money so paid; an amount of money given for a particular purpose." 71. In the present context, it is clear that the expression "disburse" would refer to the payment of instalments by the allottee to the real estate developer for the particular purpose of funding the real estate project in which the allottee is to be allotted a flat/apartment. The expression "disbursed" refers to money which has been paid against consideration for the "time value of money". In short, the "disbursal" must be money and must be against consideration for the "time value of money", meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilises the money…." (Emphasis Supplied) 21. Hon'ble Supreme Court in another matter of 'Anuj Jain IRP for Jaypee Infratech Ltd.' Vs. 'Axis Bank Ltd.', (2020) 8 SCC 401, examined in detail the ingredients of Section 5(8) in para 43 of the Judgment and held that: "43……………………… ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that 'Yes Bank had illegally sanctioned the loans of Rs.202.1Crores/- in the name of Mack Star as per collusion and criminal conspiracy of Yes Bank and the HDIL Group Companies': 24. In view of this overwhelming evidence and conclusion by Statutory Bodies which are independent agencies we are of the considered view that these financial transactions have to be examined on the touchstone of the ratio laid down by the Hon'ble Supreme Court in 'Phoenix ARC Private Limited' Vs. 'Spade Financial Services Ltd. & Ors.', (2021) 3 SCC 475, wherein the Hon'ble Apex Court has observed that 'collusive transaction does not lead to a creation of 'Financial Debt' under Section 5(8) of the Code'. One among several disbursements, in the instant case, is Rs.40 Crores/- that was disbursed by Yes Bank in Mack Star's name and directly credited to HDIL account without any specific instructions from Mack Star. Rs.140 Crores/- out of Rs.147.6 Crores/- was sanctioned by Yes Bank in Mack Star's name for the purpose of renovating 'Kaledonia' a two year old building constructed at a cost of Rs.100 Crore/-; more than 99% of the amount was disbursed by Yes Bank in the name of Mack Star's was routed back to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of realisation. The example is only illustrative. 90. In this case, the Adjudicating Authority (NCLT) has simply brushed aside the case of the Appellant that an amount of Rs. 1,730 Crores was realizable by the Appellant in terms of the order passed by APTEL in favour of the Appellant, with the cursory observation that disputes if any between the Appellant and the recipient of electricity or between the Appellant and the Electricity Regulatory Commission were inconsequential. 91. We are clearly of the view that the Adjudicating Authority (NCLT) as also the Appellate Tribunal (NCLAT) fell in error in holding that once it was found that a debt existed and a Corporate Debtor was in default in payment of the debt there would be no option to the Adjudicating Authority (NCLT) but to admit the petition under Section 7 of the IBC." (Emphasis Supplied) 26. In this case, the Adjudicating Authority simply brushed aside the results of the investigation and more surprisingly the Impugned Order is completely silent on this issue. 27. Keeping in view all the aforenoted Judgements and the documentary evidence on record, we are of the earnest view that merely because there is a 'debt' and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2022 in Comp. App. (AT) (Ins.) No. 795/2021 stands infructuous and is disposed of accordingly. Company Appeal (AT) (Insolvency) No. 806/2021 & I.A. No. 2221/2021 31. This Appeal is preferred by the Managing Director of Mack Star challenging the Impugned Order of the Adjudicating Authority and the I.A. 1740 of 2020/the Maintainability Application in C.P. (IB) No.-1621/2019, whereby the Section 7 Application preferred against Mack Star was admitted. 32. In addition to other submissions, it is the main case of the Appellant that the 'Maintainability Application' was not heard at length and that on the date of the final hearing, the Sr. Counsel was also not present and could not be heard. However, since the grounds raised with respect to Admission of the Section 7 Application are similar to the ones raised/submitted in Comp. App. (AT) (Ins.) 795/2021, for the same reasons, this Appeal is also allowed and Order of the Adjudicating Authority is set aside. 33. I.A. 2221 of 2021 in Comp. App. (AT) (Ins.) No. 806/2021 stands infructuous and is disposed of accordingly. Company Appeal (AT) (Ins.) No. 927/2021 & I.A. No. 1534/2022 34. This Appeal is preferred by Ocean Deity Investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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