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IBC

NCLT Is Empowered To Pierce The Corporate Veil To Ascertain The Real Successful Bidder: NCLT Delhi

Pallavi Mishra
11 May 2022 5:51 AM GMT
NCLT Is Empowered To Pierce The Corporate Veil To Ascertain The Real Successful Bidder: NCLT Delhi
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The National Company Law Tribunal (NCLT), New Delhi Bench, comprising of Dharminder Singh (Judicial Member) and Sumita Purkayastha (Technical Member), while adjudicating applications filed in the matter of Argentium International Pvt. Ltd. v Utm Engineering Pvt. Ltd, has held that the NCLT has the power to pierce the 'corporate veil' in order to ascertain the real successful bidder. The separate personality of the company is statutory privilege, but it must be used for the legitimate purpose only, whenever fraudulent or dishonest use is made of the legal entity, the individual will not be allowed to hide behind the curtain of the corporate personality.

The order was passed while adjudicating applications bearing I.A. No. 3172/ND/2021 and I.A. No. 3113/ND/2021 together.

Background Facts

Argentium International Pvt. Ltd. ("Operational Creditor") had filed a petition under Section 9 of the Insolvency and Bankruptcy Act, 2016 ("IBC") before NCLT, New Delhi ("Adjudicating Authority") seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against UTM Engineering Pvt. Ltd. ("Corporate Debtor"). The CIRP was initiated by the Adjudicating Authority vide order dated 17.10.2019 and later liquidation process was initiated on 15.10.2020 and Mr. Kanti Mohan Rustagi was appointed as the liquidator.

The Liquidator, upon instructions of the NCLT, had prepared the details of the Corporate Debtor for its sale as a going concern and had submitted it to the other Joint Venture Partner of the Corporate Debtor i.e. M/s Tantia Construction Limited ("JV Partner"/"TCL"/"TCL-UTM"). TCL was overtaken by EDCL Infrastructure Limited ("EDCL"), which was the successful resolution applicant in the CIRP of TCL. Also, a Stakeholder's Consultation Committee ("SCC") was formed by the Liquidator.

The Adjudicating Authority had directed TCL on 11.01.2021 to send communication to the Liquidator with respect to their proposal for buying the Corporate Debtor as a going concern. Further directions were also issued that appropriate communication and information be supplied to the TCL to take ahead the takeover.

On 22.01.2021, an 'Invitation to Expression of Interest' was published in newspaper for the auction of the Corporate Debtor. The Liquidator informed the SCC that no bids have been received and also requested TCL and suspended Director of the Corporate Debtor, Mr. Gyandeep Kantipudi (who had shown interest in acquiring the Corporate Debtor as a Going Concern), to submit the proposal for acquisition of the Corporate Debtor at the earliest.

On 15.03.2021, M/s Red Brick Consulting Pvt. Ltd. had submitted a proposal for acquisition of the Corporate Debtor, the proposal was discussed by the Liquidator before SCC and members were requested to submit their views. Thereafter, on 22.04.2021 the Liquidator had received a mail TCL wherein the details with respect to the submission of Earnest Money Deposit by EDCL was mentioned along with the transaction details.

Subsequently, arrangements were made for the E-auction and the auction property was live on the portal of E-Auction agency. However, due to outbreak of COVID-19 pandemic and resultant lockdowns, the E-Auction could only take place until 19.06.2021. Now EDCL and Red Brick were two participants in the E-Auction.

However, in the E-auction dated 19.06.2021, only one bid of Rs. 2.05 Crores was put in by Red Brick against the reserve price of Rs 2.04 Crores. The detailed report in respect of the bidding was provided by the E-auction portal on conclusion of the e-auction at 2.00 pm. As no counter bid was placed, Red Brick Consulting Pvt. Ltd. was announced as the Successful Bidder. Accordingly, a Letter of Intent (LOI) dated 19.06.2021 was issued to the Successful Bidder. On 07.07.2021 the Liquidator convened the 7th SCC meeting and informed the stakeholders about the successful conclusion of the E-auction process for the sale of the Corporate Debtor as a going concern and issuance of the Letter of Intent to the Successful Bidder.

Application Bearing IA No. 3172/ND/2021

The application was filed by Red Brick Consulting Pvt. Ltd. ("Successful Bidder/Red Brick") through the Liquidator, seeking reliefs in order to effectively take control over the Corporate Debtor and to continue the ongoing railway project at Dausa, Rajasthan. Few of the reliefs sought were that the records, files and correspondences of the Corporate Debtor be handed over to Red Brick; the Signatories of the existing bank accounts of Corporate Debtor be replaced with Red Brick; a direction for smooth handover of the Dausa Site alongwith accounts, materials, equipment; a direction to TCL (the JV Partner) to pass a resolution stating that they have no objection towards the appointment of a new Authorized Representative of their choice for the TCL-UTM JV and that Corporate Debtor shall continue to run the operations of the JV et al.

Application Bearing I.A. No. 3172/ND/2021

The Application was filed by TCL-UTM, the Joint Venture of the Corporate Debtor, challenging the eligibility of Red Brick Consulting Pvt. Ltd. under Section 29Aof IBC to take over the Corporate Debtor and seeking quashing of the approved Bid. It was submitted that Successful Bidder, Red Brick, is controlled and managed by Mr. Gyandeep Kantipudi, who is also the suspended/erstwhile Director, Promoter and Shareholder of the Corporate Debtor. It was submitted that the Liquidator himself had moved an application before the Adjudicating Authority alleging that Mr. Gyandeep Kantipudi had siphoned off the money of Corporate Debtor. The said application was in relation to preferential, under-value transactions and fraudulent transactions, which is pending consideration.

Therefore, the Liquidator was aware all throughout about Mr. Gyandeep's involvement, position, role and control of management in the Successful Bidder. Whereas, the Liquidator is obligated under Regulation 33(3) of the IBBI (Liquidation Process) Regulations, 2016 to not proceed with the sale of an asset, where he has reason to believe that any collusion exists between the buyers; or the corporate debtor's related parties and buyers; or the creditors and the buyer, and shall submit a report to the Adjudicating Authority seeking appropriate orders against the colluding parties.

Issues

  1. Whether the Red Brick Consulting Pvt. Ltd. was ineligible and hit by Section 29A of the IBC to participate in the bid to acquire the property of the Corporate Debtor?
  2. Whether the Corporate Debtor being MSME was exempted from provision of the Section 29A of the IBC?

Observation Of The Adjudicating Authority

Ineligibility Under Section 29A

The Adjudicating Authority upheld that Red Brick was ineligible to bid in auction, as Mr. Gyandeep Kantipudi was the Director, Promoter and Shareholder of the Corporate Debtor with allegations of siphoning off of funds and he is also in control and management of Red Brick. The Bench observed that if that person is ineligible as a Resolution Applicant, he would be ineligible to purchase the property in auction even in liquidation proceedings. Reliance was placed on the Supreme Court judgment in Arun Kumar Jagatramka v Jindal Steel and Power Ltd. & Anr., Civil Appeal No. 9664 of 2019, wherein it was clearly held that Section 29A of IBC has been enacted in the larger public interest, to facilitate effective Corporate Governance, and through this provision the Parliament rectified a loophole in the IBC, which allowed back-door entry to erstwhile management in the CIRP.

It was further observed that in several instances the Courts or Tribunals have upheld the Principle of Corporate Entity and resisted the temptation to break through the veil, but where the benefit is misused; the Tribunals are not powerless to up-lift the veil of the corporate personality to see the realities behind the veil. In doing so, the Tribunal sub-serves the important public interest and to arrest misuse or abuse of the benefit conferred by law. The Adjudicating Authority held that it had power to pierce through the Corporate Veil; the operative portion is as follows:

"Tribunal is also not denuded of authority to pierce the 'corporate veil' to ascertain the real successful bidder. Therefore, the 'Corporate Veil' has to be lifted to prevent unjust and fraudulent act of the respondent herein and in order to look-into realities behind the legal façade and to hold him liable to the acts of the Corporate Debtor. No doubt, the separate personality of the company is statutory privileges, but it must be used for the legitimate purpose only. Whenever & wherever, if fraudulent or dishonest use is made of the legal entity, the individual will not be allowed to hide behind the curtain of the corporate personality. A duty is casted upon the Tribunal or the Court to break this shell of the company and to see who is actually benefitted by this curtain."

Exemption Of MSME From Section 29A Of IBC

The Adjudicating Authority observed that there was no Memorandum of Registration on record to show that the Corporate Debtor was a Micro, Small and Medium Enterprise ("MSME"). Reliance was placed on NCLAT judgment in Ashish Mohan Gupta Vs. Liquidator of M/s Hind Motors Ltd., Company Appeal No. 895 of 2019, wherein it has been held that as a matter of caution, NCLT should refrain from deciding whether a Company is MSME or not. Therefore, the Bench opined that IBC proceedings being summary in nature, hence, the Tribunal ought not to decide whether a company is MSME or not. It was further observed that:

"Corporate Debtor/Enterprises doesn't become micro or small enterprises of supplier to claim the benefit within the meaning of MSMED Act, 2006, by submitting a memorandum qua obtaining registration subsequent to entering into the contract and supply of goods and services. If any registration is obtained afterwards, the same shall be prospective and applies for supply of goods & services subsequent to registration, accordingly, cannot operate retrospectively."

Decision Of The Adjudicating Authority

The Adjudicating Authority held that M/s Red Brick Consulting Pvt. Ltd. had participated in the auction of the Corporate Debtor to extend benefit to the Corporate Debtor's Managing Director and erstwhile Director, Mr. Gyandeep Kantipudi, and the Liquidator was well aware of this fact. Accordingly the auction is hit by Section 29(a) of the IBC and Regulation 33(3) of the IBBI (Liquidation Process) Regulations, 2016.

The Bench set aside the E-auction and directed the Liquidator to re-auction the property after obtaining fresh valuation.

The I.A. No. 3172/ND/2021 filed By TCL-UTM/Joint Venture was allowed, whereas, I.A. No. 3113/ND/2021 filed on behalf of M/s Red Brick Consulting Pvt. Ltd. dismissed by stating that Red Brick was not a necessary party as the auction did not fructify into sale.

Case Title: Argentium International Pvt. Ltd. v Utm Engineering Pvt. Ltd., IB No. 248/ND/2019.

Click Here To Read/Download Order

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