Punishment for Fraud Under Companies Act

1. Classic Transformers Private Limited (Corporate Debtor or CD) was incorporated in 1985. It is classified as Non-Government company and it has its registered office in Ahmedabad. It has one manufacturing unit in Talegaon district in Pune, Maharashtra and a principal office in New Delhi. As per records of MCA, its authorized share capital and paid-up share capital is Rs. 200 lacs. It carries on the business of manufacture of television and radio transmitters and wireless apparatus. The directors of Classic Transformers Private Limited are Mr. Paras Singhania and Mr. Raman Nair.
2. One of the operational creditors, Best Tradex Private Limited filed an application for initiating corporate insolvency resolution process of Classic Transformers Private Limited for non-payment of its dues to the tune of Rs. 1.30 crores. The Adjudicating Authority, after issuing notice to the CD passes an order of admission on 30th August, 2023. Mr. Rajiv Khosla was appointed as Interim Resolution Professional (IRP)on the same date. In its first meeting held on 10th October, 2023, committee of creditors appointed Ms. Anamika Rajendran as Resolution Professional (RP) in place of Mr. Rajiv Khosla.
3. IRP had made a public announcement in Form A on 1st September, 2023 in two newspapers (one english language newspaper and one regional language newspaper) in english language circulating at the location of the registered office of the company and in Pune, as the IRP felt that the CD conducts material business operations from Pune also. It was also published on the website of CD and website designated by IBBI. The last date for submission was stated as 13th September, 2023. Mr. Rajiv Khosla incurred Rs. 80,000/- as cost of publishing. The committee of creditors ratified the expense on publication to the tune of Rs. 50,000/- in its first meeting. IRP has filed application (IA 510 of 2023) against CoC and Best Tradex Pvt Ltd. for payment of remaining publication expenses.
4. The following claims were received and admitted by Mr. Rajiv Khosla, IRP and later on by Ms. Anamika Rajendran, RP :

5. The break-up of claims admitted till date is as under :

Financial Creditors         – Rs. 9.70 crores

Operational Creditors – Rs. 6.15 crores

 Total                               Rs. 15.85 crores

6. The committee of creditors was constituted by IRP as follows:
7. Janta Bank
8. Parivaar Bank
9. Revive Finance
10. Big Lease
11. According to IRP, though Raman Nair is a financial creditor but being a suspended director, he is not part of committee of creditors. IRP had written to all operational creditors to select one of their representatives to participate in the meeting of committee of creditors but despite sending 3 emails, the operational creditors collectively have not named a single representative. 
12. IRP and RP invited suspended directors Paras Singhania and Raman Nair to attend meeting of committee of creditors by sending them notices of all committee of creditors meetings. Three meetings of committee of creditors were held until 12th December, 2023.
13. One of the operational creditors Electrolux Supplies Inc based in New Delhi files its claim on 15th December, 2023 with the RP for Rs. 45 lacs. After receiving the claim RP writes e-mail to Electrolux Supplies Inc. that its claim cannot be considered as it has been filed after the time limit mentioned in the Code read with CIRP Regulations though the books of account also show that Rs. 45 lacs is due to Electrolux Supplies Inc. Based on legal advice, Electrolux Supplies Inc files an application (IA 810 of 2023)  under section 60(5) before Adjudicating Authority against rejection of the claim on the ground that the delay occurred on the following grounds: 
14. Electrolux Supplies Inc was not aware of the initiation of CIRP against the CD as it is based in Gurugram (adjacent to New Delhi) and the public announcement was not made in newspapers circulating in New Delhi. 
15. RP should have admitted the claim of Electrolux Supplies Inc on the basis of books of account and it was not necessary for Electrolux Supplies Inc. to file its claim.
16. Best Tradex has also filed an application (IA 633 of 2023) before Adjudicating Authority that they have not been included in committee of creditors in terms of section 21 and 24 of the Code. RP’s stand is that since individually the operational creditor’s claim is not more than 10% of the total dues, IRP or RP was under no obligation to send notice of committee of creditors meeting to operational creditors. Best Tradex, while reiterating that since total claims of OC’s is more than 10%, being a largest OC, it is entitled to participate in committee of creditors.
17. Revive Finance, whose claim was admitted after more than 3 months of its filing, moved an application (IA 754 of 2023) to the Adjudicating Authority stating that the  decisions taken in all three meetings of committee of creditors held before they were included in committee of creditors as invalid. In these 3 meetings, they claimed, crucial decisions were taken relating to appointment of RP, ratification of expenses, appointment of valuers, approval of fees of RP and other crucial decisions relating to running of CD as a going concern. Thy also claimed that unnecessary queries were raised by IRP/RP to delay the admission of claim. On behalf of RP, it was stated that 3 emails were sent as documents filed by them are deficient, they did not submit loan agreement despite repeated emails.
18. On 1st January, 2024, the promoters of Classic Transformers Private Limited entered  into a settlement with the Applicant Best Tradex and agreed to pay all their dues in exchange of Best Tradex filing an application for withdrawal of corporate insolvency resolution process. The promoters of the CD have filed an application (IA No. 17 of 2024) to Adjudicating Authority for withdrawal on 15th January, 2024 on the basis that their claims have been paid by the promoters in full and final.
19. The books of account of the CD shows that loan of Rs. 1 crore was taken from Raman Nair in 2018 and is still outstanding. Another account “Advance to Raman Nair” appeared in the books of account and the last 2 financial years, 2021-22 and 2022-23 showed the following transactions:

RP has filed an application with the Adjudicating Authority (IA 25 of 2024) on 20th January 2024 claiming Rs 31 lacs (amount outstanding as on 30.8.2021 plus amounts paid by CD to Raman Nair on 20.12.2021, 18.9.2022 and 2.1.2023) as preferential transactions u/s 43 of the Code and prayed for recovery of these amounts. Raman Nair has filed a reply stating that these transactions are not preferential on the following grounds:

1. Advance account was a running account for the expenses to be incurred on behalf of the CD and he has in his possession bills not accounted for in the books of account.
2. RP has aggregated the amounts paid by CD and does not take into account the expense adjustment done or amounts received back by CD.
3. He has given an interest free loan and his claim has been admitted to that extent. Assuming but not admitting that RP is correct, Raman Nair is entitled for set off.
4. RP has filed the application beyond the stipulated period as provided in Regulations and hence the application is time barred.
5. Draft of Forensic Audit report was not shared with the suspended directors and hence there is violation of principles of natural justice.
6. Even otherwise the transactions were in the ordinary course of business.

RP, in rejoinder, claims that payment transaction is not to be mixed with expense adjustment or amount received from Raman Nair. For amounts paid by Raman Nair, he should file a claim and there is no provision of set off in CIRP. The application in filing preferential transaction application was delayed due to non-cooperation of suspended directors in providing information to forensic auditor who had sent 2 emails to them. The final report was placed before committee of creditors who had directed RP to file application.

14. RP, based on forensic audit, in the same IA 25 of 2024, also alleged that substantial amounts to the tune of Rs. 1.50 crores, shown as investments, were written off on 31.3.2023 by the suspended directors as reflected in books of account. The amount was paid to 2 related parties, namely, Hi-life Technologies Pvt Ltd (Rs. 70 lacs) and Super Motors Private Limited (Rs. 80 lacs). These amounts were paid as investment in 2016 and 2017. RP has treated them as fraudulent transactions and has prayed for recovery of the amounts from suspended transactions as fraudulent and wrongful trading under section 66 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016).  

Suspended directors have filed a common reply stating that by no stretch of imaginations, write offs can be treated as fraudulent transaction as there is no outflow. RP has the freedom to revise the accounts and reverse the transactions in books. The amounts relate to 2016 and 2017 and is beyond the purview of scope of RP. Further, the investments were made in good faith to expand the business of CD but could not fructify. Moreover, RP has filed a single IA u/s 43 and 66, which is not permitted.

RP, argues that suspended directors had the knowledge of the fact that CD is going under insolvency and they should have taken steps to recover the amounts. The amounts written off in the books of CD are still being shown in the books of account of Hi-life Technologies Pvt Ltd and Super Motors Private Limited and produced financial statement of both the companies filed with Registrar of companies for FY 2022-23. 

15. The plant and machinery of CD is charged to Janta Bank and is worth 8 crores @ 18% p.a. interest. IRP  was in need of funds to run the CD as a going concern and hence obtained interim  finance of Rs 1 crore by charging plant and machinery to Perfect Finance. Janta Bank has now objected to this action by IRP by stating that neither its consent nor CoC’s consent was obtained. Janta Bank has filed the application (IA 603 of 2023) before the adjudicating authority praying that the amount received from Perfect Finance should not be classified as Interim Finance and the mortgage created on Plant and Machinery should be set aside.
16. RP has taken up the issue of completion of audit but the statutory auditor, RAK Associates is not cooperating. RP has filed an application for non-cooperation against the statutory auditor u/s 19(2) of the Insolvency and Bankruptcy Code, 2016 (IA 540 of 2023).  Statutory auditor contends that he is not covered u/s 19 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016) and hence the application should be dismissed in limine. Secondly, he has provided all documents to the RP whatever was in his possession. RP states that the statutory auditor has not supplied working papers containing details of debtors of CD. 
17. RP has also issued a letter terminating the appointment of statutory auditor and appointing a new one. Having done that, he places this fact before the committee of creditors in their meeting, who ratify his action unanimously. Previous statutory auditor is aggrieved and he files an application  (IA 56 of 2024) challenging the decision of RP and its ratification by committee of creditors to replace him.
18. Janta Bank has filed an IA 602 of 2023 objecting the inclusion of Big Lease as financial creditor in the committee of creditors. As per them, Big Lease is an operational creditor and not financial creditor.

CSM 2 Case Study on PPIRP

ABC Ltd., a medium-sized manufacturing company based in India, has been struggling with financial difficulties exacerbated by the economic downturn caused by the COVID-19 pandemic. With mounting debt and dwindling revenues, ABC Ltd. finds itself in a situation where it needs to explore insolvency resolution options to salvage its operations and protect the interests of its stakeholders.

ABC Ltd. is classified as a medium enterprise under the Micro, Small and Medium Enterprises Development Act, 2006 though registration is pending. ABC Ltd. has committed a default of Rs 54 lacs to My Bank. The company has not undergone any insolvency resolution process in the past three years. Financial creditors representing at least 66% of the financial debt due to them have proposed the appointment of an insolvency professional for conducting the PPIRP.

A majority of the directors of ABC Ltd. have made a declaration stating the intent to initiate the PPIRP and affirming that it is not for fraudulent purposes. A special resolution has been passed by the members of ABC Ltd. approving the initiation of the PPIRP. There is an application under section 43 against one of the directors of ABC Limited for his involvement in Bright Star Limited, a company under CIRP. ABC Limited has prepared a draft Base Resolution Plan. ABC Limited files an application to the Adjudicating Authority for initiating pre-packaged insolvency resolution process. Base Resolution Plan prepared by ABC Ltd contains lower payment to financial creditors with a proposal to pay in full to the operational creditors.

CSM 3- Case Study on Voluntary Liquidation

Sunmark Enterprises Limited, a medium-sized manufacturing company, has been experiencing financial difficulties for the past several years due to a decrease in demand for its products and heightened competition in the market. Following a comprehensive evaluation of its financial standing and future outlook, the Board of Directors opts to commence voluntary liquidation pursuant to Section 59 of the Insolvency and Bankruptcy Code (IBC) to ensure a systematic conclusion of the company’s operations.

1. Appointment of Liquidator:
   • On 20th December 2023, the Board of Directors convenes a meeting and passes a resolution proposing voluntary liquidation.
   • Mr. John, a registered insolvency professional, is appointed as the liquidator to oversee the liquidation process on 10th February 2024.
2. Declaration of Solvency:
   • A board meeting is held, during which a declaration of solvency is made, affirming that Sunmark Enterprises Ltd. is solvent and capable of settling its debts within a specified period not exceeding one year from the onset of liquidation.
3. Approval of Shareholders:
   • On 10th January 2024, shareholders of Sunmark Enterprises Ltd. pass a special resolution, endorsing the decision to commence voluntary liquidation.
   • The resolution garners approval by a majority vote representing at least 75% of the shareholders’ voting power.

Following the shareholders’ approval by a special resolution, creditors of the company also consent to the voluntary liquidation with a two-thirds majority on 1st February 2024. Despite incurring losses in the previous year and anticipating further losses, the liquidator expresses intent to continue business operations during the liquidation period. Seeking professional guidance, the liquidator faces several challenges and scenarios:

1. Preparation of Preliminary Report:
   • The liquidator drafts a Preliminary Report, estimating the assets and liabilities as of the liquidation commencement date. However, doubts arise regarding the reliability of the company’s financial records.
2. Unfiled Claims and Foreign Creditor:
   • Despite issuing announcements inviting claims, three employees fail to file their claims. Additionally, a foreign creditor submits a claim of $2000, prompting uncertainty regarding the applicable foreign exchange rate for claim admission.
3. Rejected Claim and Lack of Reasons:
   • One creditor disputes the rejection of their claim by the liquidator, citing a lack of justification for the decision.
4. Bank Account Establishment:
   • The liquidator establishes a separate bank account in the name of the corporate entity for liquidation purposes.
5. Salary Payment and Unsold Machinery:
   • An employee urgently requests a cash payment of their salary amounting to Rs. 20,000.
   • Despite extensive efforts, the liquidator struggles to sell an old machinery valued at Rs. 50,000, with consultants and brokers indicating its low marketability. However, a creditor expresses willingness to accept the machinery as part of their claim settlement.

In navigating these complexities, the liquidator must adhere to legal requirements and seek appropriate guidance to ensure fair and efficient resolution throughout the voluntary liquidation process. He seeks your answwer to following questions: –

CSM 4 – Part III Case Study

Raj Shekhar’s bankruptcy process commenced on 1st April 2024 after the unsuccessful resolution of his insolvency proceedings initiated on 1st August 2023. The Bankruptcy Trustee issued a public notice on 4th April 2024, with the deadline for claim filing set for 25th April 2024.

He possesses the following assets under his and his family’s ownership:

•   A 2 BHK property in NOIDA acquired in 2001 for Rs. 11 lakhs.
• A 3BHK residence in Mumbai purchased in 2015 for Rs. 50 lakhs.
• A 2 BHK dwelling in Gurgaon under his wife Alka’s name, assessed at Rs. 66 lakhs.
• A jointly-owned flat in Indore with his wife, booked for Rs. 27 lakhs.
• A laptop valued at Rs. 52,000.
• A Honda City utilized for office purposes, valued at Rs. 8.50 lakhs.
• A Wagon R utilized for personal use, valued at Rs. 4 lakhs.
• An Enfield Motorcycle used for leisure activities, valued at Rs. 2.50 lakhs.
• Leased office space in Munirka with a monthly rent of Rs. 25,000.
• A diamond ring procured for Rs. 1.50 lakhs.
• Gold jewelry valued at Rs. 15 lakhs.
• Gold jewelry under his wife’s name, including a Mangal sutra, valued at Rs. 22 lakhs.
• Ornaments for his home temple amounting to Rs. 3 lakhs.
• An iPad worth Rs. 45,000.
• Watches valued at Rs. 1.50 lakhs.
• Office books valued at Rs. 1.20 lakhs.
• Home furniture worth Rs. 2.50 lakhs and office furniture worth Rs. 1 lakh.
• Life insurance policies in various names totaling Rs. 225 lakhs.
• Children’s bicycle valued at Rs. 5000.
• Shares in companies worth Rs. 3.5 lakhs.
• Mutual fund investments worth Rs. 2 lakhs.
• Public Provident Fund (PPF) investments totaling Rs. 3 lakhs.
• Assets belonging to his second sister residing abroad, valued at Rs. 5 lakhs.

His liabilities include:

• Business sundry liabilities amounting to Rs. 15 lakhs.
• GST liability totaling Rs. 2 lakhs.
• Unpaid electricity bills of Rs. 50,000.
• Outstanding traffic challan of Rs. 3,000.
• Maintenance payment to his ex-wife at Rs. 50,000 per month, pending for the last six months.
• Personal loans from friends totaling Rs. 45 lakhs.
• Loan from his brother-in-law amounting to Rs. 3 lakhs.
• Loan against Honda City from a bank worth Rs. 5 lakhs.
• Student loan taken for his sister’s son, amounting to Rs. 10 lakhs.
• Damages of Rs. 55,000 awarded by the court due to water leakage from his Mumbai flat.
• Business loan of Rs. 75 lakhs.
• Outstanding credit card dues of Rs. 1.60 lakhs.
• Income tax liability of Rs. 10 lakhs.
• School fees for his two children, unpaid for three months, at Rs. 20,000 per month each.
• Outstanding dues at a local grocery store totaling Rs. 32,000.

Case Study on Business and General Laws

Avanti Roadways Pvt. Ltd., incorporated under the Companies Act, 2013, operates from its registered office situated at Plot No.1, First Floor, East Chamber, Gwalior, Madhya Pradesh. The company is structured with an authorized capital of INR 5,00,000, which is fully issued, subscribed, and paid-up. The core activities of the company are focused on constructing residential and commercial buildings and educational institutions.

The Registrar of Companies in Gwalior, citing non-compliance with the statutory requirement to file Annual Returns and Financial Statements for the fiscal years 2014-15 through 2017-18, initiated proceedings under Section 248(1) of the Companies Act, 2013, read with Rule 7 and Rule 9 of the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016. Consequently, a notice of intent to remove the company’s name from the register was issued. In response to this notification, the company filed an appeal with the National Company Law Tribunal (NCLT) in Gwalior under Section 252 of the Companies Act, 2013, asserting that it continued to engage actively in business operations throughout the period in question. The company admitted oversight in the non-filing of the required documents, attributing it to lapses by the management.

During the period under review, the company was involved in several significant projects, including constructing a multi-functional educational complex under a government contract, which involved intricate compliance with environmental regulations and state educational mandates. This project, along with other private commercial ventures, significantly contributed to its revenue streams, though it complicated the operational and regulatory reporting requirements.

As part of its defense, Avanti Roadways Pvt. Ltd. demonstrated through detailed documentation—including contracts, invoices, and bank statements—that it was operational and financially active during the years for which filings were not completed. Following the notice from the Registrar, the company undertook substantial revisions to its management structures, enhancing its regulatory compliance processes to include automated systems for tracking and reporting essential corporate activities and statutory filings.

The appeal by Avanti Roadways Pvt. Ltd. is pending before the NCLT, where the company seeks not only to contest the Registrar’s decision but also to establish a precedent for considering operational continuity and factual business engagement in decisions related to statutory compliance enforcement.

Case Study: The Case of Rajesh Kumar and the Corporate Insolvency Resolution Process

Background: Rajesh Kumar, an Insolvency Professional (IP) registered with the Insolvency and Bankruptcy Board of India (IBBI), faced disciplinary action following a Show Cause Notice (SCN) by the IBBI. This action originated from procedural issues during the Corporate Insolvency Resolution Process (CIRP) of M/s Indore Developers Private Limited, where he was appointed as the Resolution Professional (RP).

Legal Framework: This case is governed by the Insolvency and Bankruptcy Code, 2016 (IBC), specifically focusing on the duties and responsibilities of an insolvency professional overseeing the CIRP. Kumar was accused of providing unequal treatment to certain decree-holding homebuyers in the resolution plan, potentially breaching several sections of the IBC and related regulations.

Investigation and Proceedings: Following a complaint from a homebuyer, the IBBI launched an investigation into Kumar’s conduct during the CIRP. After receiving the investigation report, the IBBI issued a SCN, which was later handled by its Disciplinary Committee (DC) for resolution. Kumar defended his conduct through various submissions and a personal hearing, arguing that his decisions were aligned with legal precedents and the decisions of the Committee of Creditors (CoC).

Findings and Contraventions: The DC identified discrepancies in Kumar’s management of the claims of decree-holding homebuyers. Despite legal opinions indicating that these claims should be treated as those of financial creditors, they were categorized differently in the resolution plan submitted to the CoC. This action raised concerns about Kumar’s adherence to the statutory requirements and the broader principles of fairness and transparency in the CIRP. Kumar also admitted the claim of the aforesaid decree holders as “Creditors in class” based on the said legal opinions. However, it is observed that despite having admitted the claims of these decree holders as “Creditors in class”, he has treated the claim of the said decree holders as “Other Creditors” in the resolution plan placed before the CoC, instead of “Creditors in Class”.

Legal Issues and Analysis: The main legal issue involved the interpretation and application of sections 30(2)(e) and (f) of the IBC concerning the treatment of creditors in a resolution plan. Kumar’s handling of these claims brought up questions regarding the compliance with these statutory provisions and the fundamental principles of equitable treatment of creditors.

Arguments by Kumar: Kumar submitted that he had admitted the claim of the decree holders under the category of creditors in a class based on the legal opinion. However, the resolution applicant has provided a specific treatment to all such creditors which was then approved by the CoC and the AA. As elaborated above, (a) this was in line with the applicable law at the relevant time; (b) the resolution applicant has the discretion to provide the treatment for the stakeholders including the decree holders; (c} the resolution plan has been approved by the committee of creditors in its commercial wisdom which is paramount; (d) the resolution plan has been approved by the AA. He submitted that he has not ‘deprived the decree holders from their legal rights and claims as homebuyers’, he has conducted the CIRP in terms of the Code and the treatment to be provided to the stakeholders is beyond his ambit. 

The DC upholds his contravention of section 30(2)(e), 30(2)(f), 208(2) (a) & (e) of the Code, regulation 39(2) of the CIRP Regulations, regulations 7(2) (a) & (h) of the IP Regulations read with clauses 1, 3 and 14 of the Code of Conduct.