Rajendra Bhuta vs Mr. Suri Rahul

Shyam Babu Gautam, Member (Technical)

This is an application filed by Resolution Professional Mr. Rajendra K Bhuta, seeking necessary directions under Section 19(2) of Insolvency and Bankruptcy Code, 2016 against the suspended directors of Corporate Debtor for having violated the provisions of Section 14(1)(b) of the IBC in relation to 3 debits aggregating to Rs. 21,33,405 during the moratorium period and for imposition of penalty on the Respondents under Section 74(1) read with Section 235(A) of the IBC for violating the provision of Sec 14(1)(b).

Submissions made by Applicant:

The Section 7 Petition was heard by this Tribunal on 10th July, 2019 and the Order was delivered on 22nd July, 2019. The Respondents Company was represented by Counsel and was fully aware of the proceedings and the Order contemplated and finally passed and delivered on 22nd July, 2019.

Three unauthorized debits/ withdrawals from the Bank Account of the Corporate Debtor is reflected in Bank statements which is Annexed as Exhibit 1 Page 4, 5 and 6 in the Affidavit of Rejoinder filed by the Applicant summarized as follows:

Sr.

Date

Amount

Explanation

by

Ex-

No.

Debited

Directors

(INR)

1.

26.07.2019

1,60,000

Self- withdrawal

2.

16.08.2019

2,00,000

Payment

to

East

West

Travel and Tour

3.

16.08.2019

17,73,405

Payment

of

Salary,

Rent

and Security

TOTAL

21,33,405

In gross violation of the IBC, the Respondent Directors proceeded to carry out the above 3 unauthorized transactions which makes them liable for appropriate action in law.

The subject of unauthorized withdrawals/unauthorized transactions was discussed at 7th CoC Meeting dated 17th January 2020 which is at Page No. 131 of the IA and after deliberation the CoC Members unanimously passed and directed the RP to take appropriate action and file the present IA.

The Applicant is relying upon Case Law of Manoj K. Daga Vs. ISGEC Heavy Engineering Private Limited and has annexed all the requisite Judgments passed by Hon'ble NCLAT and Hon'ble Supreme Court as 'Exhibit 2 to 9' from Page No. 8 to 38 of the rejoinder.

This application is filed for modification of order dated 17th December, 2019 wherein para 8, this Hon'ble Tribunal had observed that the Directors shall remain present personally on next date, and that thus need to deposit the money withdrawn/ transferred without approval of IRP in the account from which it is withdrawn and state why further action be not taken against them. Counsel states that when the order was dictated, it was in the format of suggestion but in the signed order it has come as a direction. We have perused the order which we passed and signed. We do not think that any modification is necessary. The I.A. stands disposed of.

Learned Counsel for the Directors Sh. Manoj Kumar Daga and Deepak Dagga submits the whole money will be returned as pointed out by the Learned Counsel for the IRP and that these two respondents as pointed out by the Learned Counsel for the IRP and that these two respondents to the I.A. No. 3878 of 2019 are ready to give undertaking in this regard that within four weeks time money will be returned.

This order was taken on appeal to the Hon'ble Supreme Court which order attached as 'Exhibit 3' to the rejoinder. The Hon'ble Supreme Court expressly noted that it was not inclined to interfere with the order passed by Hon'ble NCLAT.

This order was taken on appeal to the Hon'ble Supreme Court which order attached as 'Exhibit 3' to the rejoinder. The Hon'ble

Supreme Court expressly noted that it was not inclined to interfere with the order passed by Hon'ble NCLAT.

At the hearing before NCLAT on 12th March 2020 it was argued by the authorized withdrawals were for running of the business. Infact in para 6, para 8, para 22 and para 23 of the Order attached of

'Exhibit 4' from Page No. 19 the Hon'ble Court observes as under:

Learned Counsel for the Appellant and Mr. Deepak Daga (Respondents in I.A.), fairly states that as per the order dated 23.10.2019, the authorised person could sign the Bank Cheques but only after the approval of the IRP, but approval was not taken while making the withdrawals. Learned Counsel is trying to refer to the Affidavits filed to state that the withdrawals were justified withdrawals for making payments to the suppliers, workmen and electricity bills to keep Corporate Debtor as going concern. It is accepted fairly by learned Counsel that as per orders passed by this Tribunal and keeping in view the provisions of Insolvency and Bankruptcy Code, 2016 management of Corporate Debtor after admission of Section 9 application is with the IRP/ RP. The order dated 23.10.2019 required IRP of the Company to keep the Company as a going concern and the Board of Directors, Officers and employees were only expected to assist the IRP but in the present transaction the Directors have taken actions without involving the IRP. We are not happy with the Affidavits filed by Manoj Daga and Deepak Daga.

The above two Respondent Directors shall remain present personally on next date. They need to deposit the money withdrawal/ transferred without approval of the IRP in the Account from which it is withdrawn and state why further action be not taken against them.

Taking conspectus of the whole development in this CIRP proceeding and this Appeal, we are of the view that the Directors acted wholly illegally once moratorium had been applied, in going ahead and withdrawing monies from the accounts at the back of IRP by even issuing cheques "Self".

Such acts cannot be justified in any manner. The Appellant and Deepak Daga kept telling this Tribunal that they would return the money and in spite of undertaking given and time fixed, the money has not been returned and the CIRP process is seriously hampered. Consuming whole month stated in the Undertaking given and without returning any money, we find no substance in the hollow statements in I.A. No. 1075 of 2020

- Application seeking time to comply with Undertakings. The I.A. wrongly states that undertakings given were without prejudice. They were voluntarily given. There are no bona fides in seeking time. Looking to the statements made to this Tribunal by the Appellant and Deepak Daga through learned Counsel for the Appellant and the Affidavits and undertakings given, which have not been honoured, we are of the view that, prima facie, case is made out for proceedings against both the Directors in contempt. We are of the opinion that the Appellant and Deepak Daga since beginning were aware of nature of the acts they were committing in the illegal withdrawals. They disobeyed Orders of Adjudicating Authority and this Tribunal willfully and there is wilful non- compliance of undertakings given. I.A. No. 1075 of 2020 to seek time to comply undertaking is not honest and appears to have been filed to create grounds of defence to further abuse process to kill time. The I.A. is rejected. The acts of the two Directors have obstructed the proceedings of CIRP, the proceedings before Adjudicating Authority and this Tribunal. The acts prima facie disclose serious Contempt, violating mandate of law of IBC applied by Orders of Adjudicating Authority and this Tribunal and breach of undertaking given on oath, actionable as NCLT established under the Companies Act, 2013 acts as Adjudicating Authority and this Tribunal is empowered under Section 425 of Companies Act, 2013 read with enabling provisions to take action.

At the same time, considering record which shows that Appellant violated Orders of Adjudicating Authority and this Tribunal and looking to the apparent default on record where undertakings were given and not honoured, we find that the Appeal deserves to be dismissed in default. We dismiss the Appeal in default while permitting the IRP to move the Adjudicating Authority or any other authorities including Police authorities to pursue the matter with regard to money illegally withdrawn from the accounts of the Corporate Debtor so as to trace the money and get it back in the Company accounts. Prima facie, it appears to us that the illegal withdrawals can, inter alia, be treated as criminal misappropriation and criminal breach of trust.

On 31st August, 2020 the Hon'ble NCLAT proceed to register contempt proceedings against the directors - see 'Exhibit 4' Para 25 and continued in 'Exhibit 5' Page N. 32 of the rejoinder. Accordingly, the Applicant states that the present Respondents ought to be held guilty for violating of Section 14(1)(b) of Insolvency Bankruptcy Code, 2016 and approximate action ought to be initiated as prayed.

Further Applicant submits that the Respondent have taken stand that they have infused a sum of Rs. 19,75,000/- from their own funds on 16th August, 2019 and accordingly withdrawals were made from the funds infused by them for running the CD. The Applicant respectfully submits the total debits aggregating to Rs.21,33,405/-and not Rs. 19,75,000/- as alleged by the Respondent. In any event the justification provided by the Respondents is not reflected in the Bank Statement annexed to the IA. Accordingly, this Hon'ble forum ought to reject the arguments of the Respondents and direct the Respondents to return the amount of Rs. 21,33,405/- and initiate contempt proceeding against the Respondent for violation of Insolvency and Bankruptcy Code, 2016 as prayed in the Application. Attention of this Hon'ble Forum is also drawn to order dated 12th July 2021 where the name of the Original Applicant Mr. Rajendra K. Bhuta who was the erstwhile RP has been substituted to the name of the Liquidator who has given his consent to pursue this IA.

Submissions made by Respondent:

The subject IA is ill-conceived and filed merely as a counterblast after the Erstwhile Directors questioned the complete mismanagement of affairs by the RP and the CoC members. [See resolutions passed at the CoC meetings refusing to pay office rent, salaries of employees, administrative costs, security costs, etc. at pages 70 to 74 of Reply].

The allegation in the IA is limited only to breach of moratorium under s.14 of the IBC. The RP has taken a myopic and hyper-technical view that since the admission order is dated 22-07-2019 and impugned transactions/ debits were effected thereafter on 26-07-2019 & 16-08-2019, there has been a violation of moratorium.

Respondents infused their own personal funds of Rs.19,75,000/-The most important fact which has been mischievously suppressed by the RP is that it was the Respondents who had infused their own personal funds amounting to Rs.19,75,000/- in the Corporate Debtor on 16.08.2019 and then out of those funds, the Corporate Debtor made payments to employees, rent, security agency and to East West Travel. [See averments at 5.2 & 5.3 of Reply and bank account statement at page 114 of IA which reflects payment of Rs.19,75,000/- by Rahul Suri through RTGS]. Once again reproduced herein as Anx-1.

Re: Transaction of 26.07.2019 of Rs.1,60,000.00 - no details were provided at any prior point of time - no discussion took place at any CoC meetings - no explanations were sought from the Respondents. For the first time, this allegation is made by RP only in the IA. Furthermore, even the bank account statement produced at pages 113 & 114 of the IA also do not reflect details of the impugned debit of Rs.1,60,000/-. Nevertheless, Respondents have provided explanation for utilizing the said amount towards procuring diesel for Corporate Debtor's plant at Wada. [See averments at para 5.11 @ page 8 of Reply].

Admission Order though dated 22-07-2019 was available/ communicated for the first time to Respondents on 17-08-2019

14.1. The Admission Order though dated 22-07-2019 was available/ communicated for the first time to Respondents on 17-08-2019 [See averments at para 5.1 and Anx-1 @ page 39 of Reply]. Respondents had no prior knowledge of the Admission Order before 17-08-2019. For that matter even the IRP & CoC did not have any knowledge.

14.2. The impugned transactions/ debits were effected by Respondent No.1 bona fide as Director of the Corporate Debtor on 16-08-2019 when he was in charge of the management of affairs of the Corporate Debtor. Since the Admission Order was not communicated/ available till 17-08-2019, the Board of Directors of the Corporate Debtor continued to be in charge of the management from 22-07-2019 till the Admission Order was available on 17-08-2019 and the IRP took charge of the Corporate Debtor after 17-08-2019.

Thus, not only was the amount of Rs.19,75,000/- infused by the Respondents out of their own personal funds but the impugned transactions/ debits aggregating to Rs.19,73,405/- were carried out when the Board of Directors were in charge of the Corporate Debtor. The impugned transactions/ debits were made bona fide towards legitimate operational expenses of the Corporate Debtor i.e.

i. the employees' salaries, office rent, and payment for security [aggregating Rs.17,73,405/-], break-up of which has been provided in the excel sheet at Anx-3 @ pages 44 & 45; and

ii. to East West Travel & Tours [Rs.2,00,000/-] as reflected in the bank account statement at page 114 of the IA. Besides, the amount of Rs.1,60,000/- was expended towards operational costs at Corporate Debtor's plant at Wada for procuring diesel [See averments at para 5.11 @ page 8 of Reply].

Atul Jain (IRP) had already ratified the impugned transactions on 23-09-2019 itself and the Applicant RP is estopped from re-agitating the same issue again

After taking charge, the IRP (Atul Jain) had sought clarification on this issue from the Respondents on 23-09-2019 and a response/ explanation was provided on the very same day and was accepted by the IRP. [See Anx-4 @ page 46 of Reply]. Thus, the IRP had verified the explanations provided by the Respondent and had already ratified the same impugned transactions.

The RP (Rajendra Bhuta, Applicant herein) has absolutely no personal knowledge whatsoever

The RP (Rajendra Bhuta, Applicant herein) took charge only in November 2019 and has no personal knowledge whatsoever about these transactions. In January 2020, for the first time in a CoC meeting held on 17-01-2020, the RP raised this issue and without giving any opportunity of explanation to the Respondents declared that there was breach of moratorium u/s. 14 [See page 131 of IA]. Then email was issued by the RP on 20-01-2020 to Respondent No. 1 and a response was immediately provided on 23-01-2020 within 3 days. [See pages 149 & 150 of IA]. The Erstwhile Directors have always co-operated and provided all necessary information.

Exclusion of 25 days from CIRP Perion from 22nd  July 2019 on account of receiving the Admission Order late

18.1. It is an admitted position, that the Admission Order was available and uploaded only after 25 days. [See Public Announcement Anx-II @ page 28 of Apln]. For this reason, the RP had sought orders from this Hon'ble Tribunal for excluding the 25 days from the CIRP period and the same was allowed by the Hon'ble Tribunal vide its order dated 16-01-2020 [See Anx-6 @ page 48 of Reply]. Thus, the period of 25 days, from 22-07-2019 till 16-08-2019 has been excluded from the CIRP period by this Hon'ble Tribunal at the request of the Applicant.

18.2. The impugned debit entries were effected on behalf of the Corporate Debtor during the period which was excluded from CIRP i.e. prior to 17-08-2019, and hence there has been no violation and/or contravention of moratorium for this reason as well.

18.3. The RP cannot be permitted to blow hot and cold, approbate and reprobate. Having taken the benefit of exclusion of 25 days from the CIRP for seeking extension of time, the Applicant cannot now take a contradictory stand to include transactions effected during the excluded period and treat them as if they were carried out during the CIRP.

18.4. By virtue of the fact that the RP has procured order of exclusion of 25 days starting from 22-07-2019 till the Admission Order was available on 16-08-2019, the Applicant and CoC members ought to have extended the same benefit to the Corporate Debtor and to the Respondents and cannot be permitted to pick and choose dates which suit their interests and convenience.

LIMITATION - The subject IA is time-barred:

19.1. As per Reg. 35- A of the Insolvency and bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016, the RP is required to form an oinion whether the Corporate Debtor has been subjected to any transaction covered under s.43, 45, 50 or 66 on or before 75th day of insolvency commencement date; RP to make a determination on or before 115th day of insolvency commencement date; and RP to file application before Adjudicating Authority on or before 135th  day of insolvency commencement date.

19.2. The impugned transactions/ debits were itself first questioned by the RP in the 7th CoC Meeting held on 17-01-2020 i.e. 179 days after the insolvency commencement date, and thus the subject IA is grossly time-barred and beyond all the three limitation dates prescribed under Reg. 35-A.

The RP has no locus/ authority to prosecute the subject IA after liquidation:

20.1. The liquidation order was passed by this Tribunal on 9th March 2021, after which a new person i.e. Mr. Jagdish Ahuja has taken charge of the Corporate Debtor as the Liquidator (the RP was unwilling to continue as Liquidator). The Applicant RP being no longer in charge of affairs of the Corporate Debtor is not entitled to continue the subject IA. The role of the Applicant RP is finite and comes to an end when the order of liquidation was passed. The Applicant RP's role has thus become functus officio on 9th March 2021 onwards.

20.2. The Liquidator is required to first apply his mind to the matter at hand and determine whether he wishes to continue pursuing the subject IA, and if so, then the Liquidator ought to bring himself on record officially in place of the Applicant RP. In the present form the Applicant RP has no locus to prosecute the subject IA.

The Manoj Daga judgment relied upon by the RP is wholly inapplicable:

21.1. The facts in the Manoj Daga judgment cited by the RP are clearly distinguishable from facts of our case. In Manoj Daga's case, there were unauthorized withdrawals by Suspended Directors when the IRP was already in charge of the Corporate Debtor and such withdrawals were done without IRP's approval and on the basis of "self" cheque withdrawals. In our case, the admission order was not available and not communicated, the Directors were in charge when the transactions were effected and payments made to employees, security, procurement of diesel i.e. towards operational costs for running the business of the Corporate Debtor (and not self- withdrawal) and only thereafter the IRP took charge. Besides this, in our case, the IRP sought explanations from the Respondent Directors and was satisfied with their explanations and ratified the bona fide actions of the Respondent Directors.

21.2. More importantly, ours is a case where personal funds were first infused by the Director for operational expenses of the company for meeting operational expenses of the Corporate Debtor (not delf withdrawals), which is clearly distinguishable from the facts in Manoj Daga's case where cash was withdrawn after IRP had taken over the company.

Case-laws relied upon by Respondents:

22.1. Velamur Anand v. UBI & Anr. - NCLAT judgment dated 16- 05-2018 on exclusion of CIRP period;

22.2. Assistant Transport Commissioner v. Nand Singh (1979) 4 SCC 19 on the law that an order operates against an aggrieved party only upon the said order being communicated;

22.3. Bipromasz Bipron Trading SA v. BEL (2012) 6 SCC 384 (See para 35 onwards for discussion on various judgments on importance of communication of order); and

22.4. M/s. Venus Recruiters Pvt. Ltd. v. Union of India - Delhi High Court judgment dated 26-11-2020 (See paras 77 to 80 ) on the role of the RP being a finite role which comes to an end upon conclusion of the CIRP period, and the RP then becomes functus officio.

We have perused the records available in the present application, it is noted that directors have co-operated with the IRP and RP. Though, there is infusion of funds which is on records but Rs.1,60,000/- which is self-withdrawn and claimed to be utilised towards diesel consumption no proof is furnished in regards of the same. It is also noted that RP has sought exclusion of period of 25days from the admission till communication of the order, there can not be vacuum in management of the Company. Directors were very well in charge of the corporate debtor and its affairs till the IRP taken over charge. Considering the facts of the case we are not inclined to impose any punishment. Directors are directed to deposit Rs.1,60,000/- self withdrawn money plus Rs.1,00,000/- as fine in the account of the Corporate Debtor.