Ashok Mahindru & Anr. Vs. Vivek Parti - Thus, stay of proceedings under Section 19(2) and Section 66-67 is not contemplated under Section 96(1)(b) and the scheme of Code in no matter provide for stay of such applications.

 NCLAT 29.11.2022) in Ashok Mahindru & Anr. Vs. Vivek Parti (Company Appeal (AT) (Insolvency) No.1324 of 2022) held that;

• Interim moratorium shall be for such proceedings which relate to a liability or obligation due i.e. due on date when interim moratorium has been declared. Section 96(1)(b) cannot be read to mean that any future liability or obligation is contemplated to be stayed.

• Thus, stay of proceedings under Section 19(2) and Section 66-67 is not contemplated under Section 96(1)(b) and the scheme of Code in no matter provide for stay of such applications.

• Section 66 of IBC empowered the Tribunal to pass appropriate orders when the suspended directors or insolvency professional of the Corporate Debtor carried on fraudulent trading or business during resolution process.

Excerpts of the order;

29.11.2022: Heard learned counsel for the Appellants as well as learned counsel for the Respondent. This appeal has been filed against the order dated 09.09.2022 passed by the Adjudicating Authority (National Company Law Tribunal), New Delhi, Court IV by which I.A. No. 4173/ND/2022 filed by the Applicants/Appellants has been rejected. 

# 2. Proceedings were initiated under Section 9 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘I&B Code’) by order dated 05.09.2019 against the Corporate Debtor - ‘Advance Home and Personal Care Ltd.’. In the proceedings under Section 9, an application was filed by the IRP under Section 19 sub-section (2) on 04.12.2019 against the Appellants who were Suspended Directors of the Corporate Debtor. Another application was filed by the Resolution Professional on 23.07.2020 being I.A. No. 3504 of 2020 under Section 66 and 67 of the I&B Code. Proceedings under Section 95 were initiated against the Appellants as a Personal Guarantor for ‘Advance Surfactants India Ltd.’ by order dated 06.12.2021 and 07.12.2021. Consequently, the interim moratorium was kicked in the said proceedings. An application was filed by the Appellants in CP (IB) 1023/ND/2018, which was Section 9 application, for stay of proceeding under Section 19(2) as well as under Section 66 and 67, which has been rejected. Aggrieved by the said order this appeal has been filed. 

# 3. Learned counsel for the Appellants submits that in view of the triggering of the interim moratorium in proceedings under Section 95 by order dated 06.12.2021 and 07.12.2021 all proceedings have to be stayed. He submits that in proceedings under Section 19(2) and Section 66 and 67 there is possibility of any order against the Appellants in terms of monetary consideration, which may be paid by the Appellants ultimately, hence, proceedings are required to be stayed in view of the interim moratorium. It is further submitted that the Adjudicating Authority has rejected the application of the Appellants’ without giving any reason except observing that the application has been filed to halt all the proceedings against the Corporate Debtor. 

# 4. Learned counsel for the Respondent refuting the submissions of learned counsel for the Appellants contends that what is contemplated by Section 96 is stay of proceedings relating to the debt due. Section 96 never contemplated to stay the proceedings under Section 19(2) and Section 66 and 67, hence, the Adjudicating Authority has rightly rejected the application of the Appellants. 

# 5. We have considered the submissions of learned counsel for the parties and perused the record. 

# 6. Section 96 of the I&B Code which deals with interim moratorium provides: 

• “96. Interim-moratorium. — 

(1) When an application is filed under section 94 or section 95— 

(a) an interim-moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application; and 

(b) during the interim-moratorium period— 

(i) any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed; and 

(ii) the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.” 

# 7. The expression used in Section 96(1)(b)(i) is “any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed”. 

# 8. The term ‘debt’ has been defined in the I&B Code in Section 3(11), which is to the following effect: 

• “3(11). “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;” 

# 9. When we read Section 96(1)(b) with the definition of ‘debt’ in Section 3(11), what is contemplated to be stayed is the proceeding relating to debt, which means a liability or obligation in respect of a claim which is due from any person. Interim moratorium shall be for such proceedings which relate to a liability or obligation due i.e. due on date when interim moratorium has been declared. Section 96(1)(b) cannot be read to mean that any future liability or obligation is contemplated to be stayed. Thus, stay of proceedings under Section 19(2) and Section 66-67 is not contemplated under Section 96(1)(b) and the scheme of Code in no matter provide for stay of such applications. The Adjudicating Authority did not commit any error in rejecting application of the Appellants praying for stay of proceedings under Section 19(2) and Section 66-67. Learned counsel for the Respondent has rightly placed reliance on judgment of this Tribunal in “Rakesh Kumar Jain, RP HBN Homes Colonizers Pvt. Ltd. vs. Jagdish Singh Nain, RP of HBN Foods Ltd. and Ors., Company Appeal (AT) (Ins.) No. 425 of 2022”, decided on 04.08.2022 where question arose with regard to Section 14(1)(a) and application under Section 66 and 67. This Tribunal in Para 14, 15, 16, 17 and 18 laid down following: 

• “14. The core contention of the appellant is that the prohibition under Section 14 (1) (a) is applicable to Section 66 of IBC also. This contention cannot be accepted for the reason that these two provisions are independent, incorporated for different purposes. Section 14 of IBC is intended to prevent fictitious claims by 3rd parties to realise the amount by execution of the orders decrees etc. whereas Section 66 of IBC is intended to prevent fraudulent trading or business by corporate debtor through its corporate insolvency resolution professional or suspended directors, during insolvency resolution process or liquidation process. These two provisions have to be read independently to achieve the object of the enactment. 

• 15. While interpreting the provisions, the statute must be construed to make it effective and workable. The Courts/ Tribunals strongly lean against a construction which reduces the statute to a futility, vide judgment of Apex Court in M. Pentiah Vs. Veeramallappa Muddala1. A statute or any enacting provision therein must be so construed as to make it effective and operative “on the principle expressed in Case Citation: (2022) ibclaw.in 967 NCLAT IBC Laws| www.ibclaw.in -6- Company Appeal (AT) (Insolvency) No. 1324 of 2022 the maxim: ut res magis valeat quam pereat”, vide judgment of Apex Court in CIT Vs. S. Teja Singh2. On application of the principles that courts while pronouncing orders upon the constitutionality of a statute start with a presumption in favour of constitutionality and prefer a construction which keeps the statute within the competence of the Legislature, vide judgment of Apex Court in Corporation of Calcutta Vs. Liberty Cinema3. 

• 16. In view of the settled principle of law both the provisions referred above should be construed harmoniously to give effect to the intendment of the code and to make it workable. Even otherwise the Court must interpret the provisions harmoniously to avoid inconsistency or repugnancy. It has already been seen a statute must be read as a whole and one provision of the Act should be construed with reference to the other provisions in the same Act, so, as to make a consistent enactment, of the whole statue. Such a construction has the merit of avoiding any inconsistency or repugnancy either within a section or between a section and other parts of the statue. It is the duty of the courts to avoid “a head on clash” vide Raj Krushna Vs. Binod Kanungo4, Sultana Begum Vs. Premchand Jain5, Kailash Chandra Vs. Mukundi Lal6. between two sections of the same Act and, “whenever it is possible to do so, to construe provisions which appear to conflict so that they harmonise” vide University of Allahabad Vs. Amritchand Tripathi 7 Accordingly, the provisions of the Maharashtra Regional and Town Planning Act, 1966, were read together by the Supreme Court after noting the purpose of the Act. The Act was held not to envisage a situation of conflict, and therefore, the edges were required to be ironed out to read those provisions of the Act which were slightly incongruous, so that all of them are read in consonance with the object of the Act, which is to bring about orderly and planned development vide Manohar Joshi Vs. State of Maharashtra and Ors.8 

• 17. Applying the principles laid down by the Apex court in the above judgments it is the duty of this Tribunal to construe Section 14 (1) (a) and Section 66 of IBC harmoniously to make the enactment effective and workable. 

• 18. In the present facts of the case there is absolutely no inconsistency or repugnancy between Section 14 (1) (a) and Section 66 of IBC. Section 14 of IBC is a bar against institution and prosecution of any suits or proceedings or execution of orders and decrees in other courts or Tribunals but not a bar to pass appropriate order in the pending proceedings against the resolution professional or suspended directors and related parties, before the Adjudicating Authority, during the insolvency resolution process or liquidation process. On the other hand, Section 66 of IBC empowered the Tribunal to pass appropriate orders when the suspended directors or insolvency professional of the Corporate Debtor carried on fraudulent trading or business during resolution process. Therefore, the Adjudicating Authority passed the impugned order only by exercising power that conferred on it by Section 66 of IBC. Hence, the contention that during moratorium, the Adjudicating authority shall not pass an order impugned in this appeal is unsustainable, without any merit. If such contention is accepted by this Tribunal, Section 66 of IBC would become otiose or redundant.” 

# 10. Learned counsel for the Appellant has also placed reliance on judgment of Hon’ble Supreme Court in “(2018) 17 SCC 394, State Bank of India vs. V. Ramakrishnan & Anr.”, where the Hon’ble Supreme Court had occasion to consider Section 96 and Section 101 with Section 14 and it was observed that Section 14 cannot be possibly apply to a personal guarantor. In para 26 following has been observed: 

• “26. We are also of the opinion that Sections 96 and 101, when contrasted with Section 14, would show that Section 14 cannot possibly apply to a personal guarantor. When an application is filed under Part III, an interim-moratorium or a moratorium is applicable in respect of any debt due. First and foremost, this is a separate moratorium, applicable separately in the case of personal guarantors against whom insolvency resolution processes may be initiated under Part III. Secondly, the protection of the moratorium under these Sections is far greater than that of Section 14 in that pending legal proceedings in respect of the debt and not the debtor are stayed. The difference in language between Sections 14 and 101 is for a reason. 

• 26.1. Section 14 refers only to debts due by corporate debtors, who are limited liability companies, and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and coextensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them. However, insofar as firms and individuals are concerned, guarantees are given in respect of individual debts by persons who have unlimited liability to pay them. And such guarantors may be complete strangers to the debtor – often it could be a personal friend. It is for this reason that the moratorium mentioned in Section 101 would cover such persons, as such moratorium is in relation to the debt and not the debtor.” 

# 11. The judgment of the Hon’ble Supreme Court in the above case does not support the submissions of the Appellants which has been raised in the facts of the present case that proceedings under Section 19(2) and Section 66-67 shall be deemed to have been stayed by virtue of interim moratorium under Section 96(1)(b). 

# 12. We, thus, are of the view that no error has been committed by the Adjudicating Authority in rejecting application of the Appellants. Appeal is dismissed 

 

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Mohan Lal Jain, Liquidator of Kaliber Associates Pvt. Ltd. vs Lalit Modi & Ors. - Preferential and fraudulent Transaction - AA can not refer to MCA or investigating authority

 NCLAT (13.03.2019) in Mohan Lal Jain, Liquidator of  Kaliber Associates Pvt. Ltd. vs Lalit Modi & Ors. [Company Appeal (AT) (Insolvency) No. 944 of 2020] held that;.

• # 5.  It is abundantly clear that allegations of preferential transactions as also fraudulent trading/ wrongful trading carried on by the Corporate Debtor during the insolvency resolution can be inquired into by the Adjudicating Authority. …….   All that the Adjudicating Authority was required to do was to take cognizance of the complaint emanating from the Liquidator in regard to the alleged preferential transactions and fraudulent trading/wrongful trading having occurred qua the Corporate Debtor. . . 

Excerpts of the order;

16.12.2020: Ministry of Corporate Affairs has been arrayed as party Respondent No. 46 in terms of the direction given in order dated 6th November, 2020. However, there is no appearance on behalf of Respondent No. 46, though Mr. Sanjay Shorey, Director (Legal), MCA has appeared previously.

# 3. In terms of impugned order dated 27th February, 2020, apart from making a modification in its earlier direction in respect of CA702/2019 which is not the subject of challenge in this appeal, the Adjudicating Authority when approached by the Liquidator for invoking the provisions of Sections 43/66 of the I&B Code for taking action in regard to preferential transactions and fraudulent trading/ wrongful trading, the Adjudicating Authority having regard to different versions in regard to such transactions emanating from both parties, observed that it would be beyond the scope of powers of the Adjudicating Authority to look into the transactions which attract the provisions of Sections 43/66 of the I&B Code and explanation of the opposite party, if required, can be offered to the Investigating Agency.

# 4. It is submitted on behalf of the Appellant that while the jurisdiction of the Adjudicating Authority was rightly invoked by the Resolution Professional/ Liquidator as specifically provided by Section 43 and Section 66 of the I&B Code, respectively, it was not permissible for the Adjudicating Authority to abdicate its powers and refer the matter to the Ministry of Corporate Affairs or an Investigating Agency. It is submitted that the allegations on the basis of which jurisdiction of the Adjudicating Authority was sought to be invoked with reference to preferential transactions and fraudulent trading/ wrongful trading falling within the ambit of Sections 43 and 66 of the I&B Code respectively, lies within the domain of the Adjudicating Authority and the express provisions of these sections leave no room for ambiguity in this regard. Shri Arun Kathpalia, learned senior counsel representing the Appellant has referred to observations of Hon’ble Apex Court made in “Embassy Property Developments Pvt. Ltd. vs. State of Karnataka and Ors., 2019 SCC OnLine SC 1542”, paras 51 and 52, in this regard, which are extracted hereinbelow:-

• “51. The objection of the appellants in this regard is well founded. Section 65 specifically deals with fraudulent or malicious initiation of proceedings. It reads as follows:

- “65. Fraudulent or malicious initiation of proceedings. – 

(1) If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency or liquidation, as the case may be, the adjudicating authority may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees.

(2) If, any person initiates voluntary liquidation proceedings with the intent to defraud any person the adjudicating authority may impose upon such person a penalty which shall not be less than one lakh rupees but may extend to one crore rupees.”

• 52. Even fraudulent tradings carried on by the Corporate Debtor during the insolvency resolution, can be inquired into by the Adjudicating Authority under Section 66. Section 69 makes an officer of the corporate debtor and the corporate debtor liable for punishment, for carrying on transactions with a view to defraud creditors. Therefore, NCLT is vested with the power to inquire into (i) fraudulent initiation of proceedings as well as (ii) fraudulent transactions. It is significant to note that Section 65(1) deals with a situation where CIRP is initiated fraudulently “for any purpose other than for the resolution of insolvency or liquidation”.

# 5. It is abundantly clear that allegations of preferential transactions as also fraudulent trading/ wrongful trading carried on by the Corporate Debtor during the insolvency resolution can be inquired into by the Adjudicating Authority.This being the settled position of law, we are of the considered opinion that it was not open to the Adjudicating Authority to link the fate of CA-1342/2019 with CA-702/2019. All that the Adjudicating Authority was required to do was to take cognizance of the complaint emanating from the Liquidator in regard to the alleged preferential transactions and fraudulent trading/wrongful trading having occurred qua the Corporate Debtor. Unfortunately, the impugned order, to the extent of disposal of CA-1342/2019 is not in conformity with the statutory provisions and the dictum of the Hon’ble Apex Court. The impugned order to the extent indicated, cannot be supported and the same is modified by providing that the Adjudicating Authority will inquire into such alleged dealings in accordance with law with expedition, preferably within two months. Appeal is accordingly disposed of.

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Vikas Prakash Gupta. Vs.Vinod Kuwadia & Anr. - Adjudicating Authority having found the suspended directors of Fraudulent trading under the provisions of section 66, awarded punishment under section 74 of the Code.

 NCLT Mumbai-3 (06.10.2021) in Vikas Prakash Gupta. Vs.Vinod Kuwadia & Anr..[IA 1235/2020 IN C.P.(IB)- 4348/(MB)/ 2018] Adjudicating Authority having found the suspended directors of Fraudulent trading under the provisions of section 66, awarded punishment under section 74 of the Code.

Excerpts of the order;

# 1. This Application has been filed by the Resolution Professional of Man Tubinox Ltd u/s 14(1)(b) r/w Section 66 of the IBC, 2016 for reversal of transaction illegally conducted by handing over the property of the Corporate Debtor to the Respondents M/s Man Tubinox Ltd during the Moratorium period.

 

# 2. The Admission of the Petition was heard on 29.03.2019 and the same was Reserved for Orders. However, the Order was pronounced on 12.06.2019 and the Interim Resolution Professional (IRP) was appointed on the same date. Therefore, it is very evident to this Bench that when the Order was Reserved on 29.03.2019, the Corporate Debtor was well aware of the impending CIRP in the matter.

 

# 3. In his Application the RP mentions that the Corporate Debtor holds lease right over an area admeasuring 61629.44 sq. mtrs located at Plot No.847, Sector III, Industrial Area, Pithampur, Dist. Dhar, Madhya Pradesh. This lease hold right was obtained from Madhya Pradesh Audyogik Kendra Vikas Nigam (MPAKVN), Indore and the lease deed was executed on 22.06.2015 for a period of 30 years. This lease deed was to expire on 21.06.2045.

 

# 4. The Resolution Professional has submitted that the Corporate Debtor entered into a Sub-Lease Deed dated 01.04.2019 with another Company viz. Maan Tubes Ltd for assigning a lease hold right in respect of 25,261.25 sq. mtrs out of the total area of 61,629.44 sq. mtrs which was obtained by the Corporate Debtor  from Madhya Pradesh Audyogik Kendra Vikas Nigam (MPAKVN), Indore. The Resolution Professional contends that this Sub-Lease Deed was executed with a mala fide intention by the suspended Directors of the Corporate Debtor with the objective to leave the creditors without this asset. The RP mentions that Maan Tubes Ltd is a ‘related party’ of the Corporate Debtor on the ground that, one of the directors of the Maan Tubes Ltd, Mr. Jagdish Ishwar Manik is also a Director/ Promoter of the Corporate Debtor. It is also to be noted that Mr. Jatin Ishwar Manik has been the Director in Maan Tubes Ltd from 15.03.2019 till 03.01.2020.

 

# 5. This Bench notes that the lease deed dated 25.06.2015 entered into by the Corporate Debtor with NPAKVN did not allow any sub-lease except as provided in the said lease. Relevant extract of the Agreement Clause 25 and 26 is reproduced below:-

• “Cl. 25:- The Lessee shall not sublet, assign or otherwise transfer the said premises/ land or any part thereof or any building constructed thereon for any purpose whatsoever, except as provided in the said rules.

• Cl. 26:- The Lessee shall not change the construction of ownership of the unit without the prior permission of the lessor in writing and shall pay the required fee/ chargers as per the provisions of the said rules.”

 

# 6. This Bench further notes that Madhya Pradesh Industrial Development Corporation, Indore allowed Sub-lease to Maan Tubes Ltd by an Order dated 29.06.2019 based on an Application dated 06.06.2019 surreptitiously made by the ex-Promoter of the Corporate Debtor. The Bench notes that the Company Petition was reserved on 29.03.2019 and the Sub-lease was signed on 01.04.2019 on a letter of request from the Promoters on 06.06.2019. This, as per the Bench, is an express violation of Section 66 of the IB Code which reads as under:-

• “66. Fraudulent trading or wrongful trading. -- 

• (1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intend to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were 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 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 corporate insolvency resolution process in respect of such corporate debtor; and

• (b) such director of partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor.”

 

# 7. It is clear to this Bench that the Respondent No.1 to 4 who are suspended Directors of the Corporate Debtor Company, i.e. Mr. Vinod Kuwadia, Mr. Jagdish Jamaklal Mansukhani, Mr. Narendra Kumar Tripathy, Ms. Nirmala Tugnawat were aware that the Petition was Reserved for Orders and just before the Insolvency commencement date, when they knew that there is no reasonable prospect of avoiding the CIRP in respect of the Corporate Debtor Company, carried on with the intent of defrauding the creditors of the Corporate Debtor Company by sub-leasing a large chunk of the only asset of the Corporate Debtor to a related party who happens to be the son-in-law of one of the suspended Directors.

 

# 8. The Bench has no doubt in its mind that the suspended Directors were fully aware of the impending CIRP and also knew that restrictions under Section 14 of the Insolvency Code would kick in. Therefore, just before the commencement of the CIRP, in total violation of Section 66 of the Code, entered into a Tripartite Agreement with a related party, Maan Tubes Ltd. It is also important to note that when the sub-lease was granted on 29.06.2019, they did not inform the Madhya Pradesh Industrial Development Corporation that the Sub-lease is null and void as the Corporate Debtor which has Sub-leased the property is no longer with the original promoters but with the Interim Resolution Professional/ Resolution Professional. It is also, therefore, clear that M/s Maan Tubes Ltd has concealed information from the Madhya Pradesh Industrial Development Corporation in defrauding the creditors of the Corporate Debtor Company.

 

# 9. In view of the above, this Bench Orders the following:-

(i) Cancels the Tripartite Agreement executed on 25.10.2019 during the Moratorium period in violation of Section 14 of the IBC. The Bench further directs the Madhya Pradesh Industrial Development Corporation Limited to cancel its registration of the Tripartite Agreement as Mr. Vinod Kuwadia of Maan Tubinox Ltd has fraudulently and without any authority of the Resolution Professional to whom the responsibility of running the Corporate Debtor has passed u/s 74.

(ii) The General Manager, Madhya Pradesh Industrial Development Corporation is also directed to cancel its Order dated 29.06.2019 by which it allowed the Sub-lease of land admeasuring 24,281.2 sq. mtrs to M/s. Maan Tubinox Limited.

(iii) This Bench finds that each of the Corporate Debtor ex director/ promoter have violated Section 66 and also Section 14 of the IBC and, therefore, in terms of Section 74 of the IBC, impose a fine of Rs.5 lakh (Rupees Five Lakh Only). On each of them. This fine will be credited to the bank account of the Corporate Debtor Company within five working days from the pronouncement of this Order.

 

# 10. The RP is directed to file compliance report within 3 weeks of the pronouncement of this Order.

 

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Blogger’s Comments; Adjudicating Authority is not competent to impose fine/punishment for offences as defined under section 68 to 77, Chapter VII (Offences & Penalties) under part two of the Code. Section 236 of the Code reads as under;

 

236. Trial of offences by Special Court. -

(1) Notwithstanding anything in the Code of Criminal Procedure, 1973(2 of 1974), offences under of this Code shall be tried by the Special Court established under Chapter XXVIII of the Companies Act, 2013 (18 of 2013).

(2) No Court shall take cognizance of any offence punishable under this Act, save on a complaint made by the Board or the Central Government or any person authorised by the Central Government in this behalf.

(3) The provisions of the Code of Criminal Procedure, 1973 shall apply to the proceedings before a Special Court and for the purposes of the said provisions, the Special Court shall be deemed to be a Court of Session and the person conducting a prosecution before a Special Court shall be deemed to be a Public Prosecutor.

(4) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, in case of a complaint under sub-section (2), the presence of the person authorised by the Central Government or the Board before the Court trying the offences shall not be necessary unless the Court requires his personal attendance at the trial.

 

However AA, under section 66(1), has powers to pass an order that any persons who were 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.

 

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