Dr. Subhash Chandra – NCLT Order analysis: The specific observations of the Technical Member regarding the collusive nature of the transactions

In this article, I try to bring out the specific observations of the Technical Member regarding the collusive nature of the transactions.

 

Introduction

 

During the Personal Insolvency Resolution Process (PIRP) of the Personal Guarantor (PG), Dr. Subhash Chandra, the Hon’ble Member (Technical) of the National Company Law Tribunal (NCLT) raised critical concerns and made specific observations regarding the procedural irregularities, lack of due diligence, and the potentially collusive nature of the transactions and claims admitted by the Resolution Professional (RP). While the Judicial Member took a more literal approach to the statutory definitions, the Technical Member focused heavily on the substance of the transactions, the conduct of the RP, and the surrounding circumstances that pointed towards an orchestrated attempt to dilute legitimate voting power and shield assets.

 

1. Admission of Unverified and Disputed Claims

 

A primary observation of the Technical Member regarding the collusive nature of the proceedings was the RP's hasty admission of massive, unverified claims without proper documentation.

 

Claims of Unverified Individuals from Haryana: The Technical Member highlighted that the RP admitted claims submitted by Mr. Anil Kumar and Mr. Sunil Jain on behalf of 960 and 300 individuals, respectively, despite the complete absence of supporting documentary material. The Technical Member concluded that admitting these claims without verification was a clear lapse in the RP's statutory obligations and pointed to an attempt to artificially inflate the creditor pool.

 

Admission of Disputed Corporate Claims: The Technical Member noted that the RP admitted claims of several disputed entities—including Veena Investments Pvt. Ltd., Direct Media Distribution Ventures Pvt. Ltd., World Crest Advisors LLP, Lemonade Capital Advisors LLP, and Corpcall Capital Advisors LLP, without adequate scrutiny of the underlying documentation necessary to establish a valid, enforceable, and legally subsisting liability of the PG.

 

2. Collusive Guarantees and Moratorium Violations

 

The Technical Member evaluated the nature of the guarantees that formed the basis of the claims of several disputed financial creditors.

 

Guarantees for Related Entities: The claims of Lemonade Capital Advisors LLP and Corpcall Capital Advisors LLP were based on deeds of guarantee executed by the PG to secure loans taken by Churu Enterprises LLP, which was another related entity of the promoter group.

 

Invocation During Interim Moratorium: It was observed that these guarantees were invoked during the period when the interim moratorium was actively in force. The Technical Member noted the objecting creditors' contentions that these guarantees were collusive in nature and designed to manufacture liabilities to influence the voting share in the Meeting of Creditors.

 

3. Undue Influence of Related Parties and Procedural Irregularities

 

The Technical Member expressed grave concerns about the overall integrity of the PIRP, observing that the process was heavily compromised.

 

Marred by Irregularities: The Technical Member observed that the approval process of the Repayment Plan was marred by serious procedural irregularities, a lack of due diligence, and the undue influence of related parties.

 

Vitiation of Fairness: This undue influence and the hasty conduct of the RP in admitting disputed claims "despite objections" were seen as factors that undermined the fairness, transparency, and integrity of the insolvency proceedings.

 

4. Inadequate Asset Tracing and Net Worth Discrepancies

 

The Technical Member pointed out a stark contrast between the PG's financial disclosures and the historical records, suggesting a deliberate attempt to conceal the PG's true financial position.

 

Massive Drop in Net Worth: The PG claimed a current net worth of only Rs. 31.79 crores. However, historical net worth certificates previously furnished to RBL Bank in 2017 and Canara Bank in 2018 recorded his net worth at approximately Rs. 45,888 crores and Rs. 40,562 crores, respectively.

 

Failure to Investigate: Despite this staggering discrepancy, the RP failed to appoint an independent forensic auditor or an asset-tracing agency to investigate the PG's assets and determine his real net worth. The Technical Member viewed this failure to investigate as a material omission that supported the allegations of collusive conduct and inadequate asset tracing.

 

5. The Lutyens' Delhi Property Valuation Discrepancy

 

One of the most striking pieces of evidence of collusive conduct and inadequate asset tracing highlighted by the Technical Member was the valuation and subsequent sale of a key asset.

 

Disclosed Value vs. Actual Sale Price: In the Statement of Affairs dated September 16, 2024, the PG disclosed total assets of only Rs. 31,77,39,371, which included a residential property in Lutyens' Delhi valued at Rs. 25 crores (mortgaged to STCI Finance Limited).

 

Fifty-Fold Valuation Gap: This same Lutyens' Delhi property was subsequently reported to be sold for approximately Rs. 1,260 crores – nearly fifty times its disclosed value. The Technical Member observed that this massive discrepancy prima facie demonstrated the necessity of a proper investigation into the PG's assets and strongly suggested circumstances of collusive conduct and systematic undervaluation of assets to the detriment of independent creditors.

 

6. Purposive Interpretation of "Associate" to Prevent Mischief

 

To address the collusive voting blocks within the Meeting of Creditors, the Technical Member advocated for a broader, purposive interpretation of the statutory framework.

 

Construing Section 79(2)(g): The Technical Member framed the issue of whether the definition of an "associate" under Section 79(2)(g) of the IBC should be purposively construed to include any company in which an associate exercises control or holds a majority stake, either independently or together with the debtor.

 

Preventing Statutory Mischief: The Technical Member argued that such a purposive construction was necessary to prevent the "mischief" the provision was intended to address—namely, related parties and associates acting in concert with the debtor to control the voting process and push through a collusive repayment plan.

 

7. Summary of Technical Member's Key Observations

 

Area of Concern	Specific Observation / Finding
Unverified Claims	Admitted claims of 1,260 individuals from Haryana without any supporting documentary evidence, constituting a statutory lapse.
Related-Party Influence	The PIRP was conducted in a hurried, opaque manner, marred by serious procedural irregularities and undue influence of related parties.
Collusive Guarantees	Guarantees in favour of Lemonade Capital and Corpcall Capital were linked to a group entity (Churu Enterprises) and invoked during the interim moratorium.
Asset Undervaluation	A Lutyens' Delhi property disclosed at Rs. 25 crores was sold for Rs.1,260 crores, indicating a fifty-fold discrepancy and suggesting collusive asset shielding.
Net Worth Discrepancy	A drop in net worth from over Rs. 40,000 crores to Rs. 31.79 crores was accepted by the RP without appointing a forensic auditor or asset-tracing agency.
Statutory Interpretation	Section 79(2)(g) must be purposively construed to prevent associates from participating in the voting process and manipulating the outcome.

 

8. Conclusion

 

The Technical Member’s observations paint a detailed picture of a process that was prima facie collusive and structurally flawed. By highlighting the hasty admission of unverified claims, the invocation of guarantees during the moratorium, the massive fifty-fold discrepancy in the valuation of the Lutyens' Delhi property, and the un-investigated drop in the PG's net worth, the Technical Member concluded that the PIRP lacked the necessary due diligence, fairness, and integrity. These findings led the Technical Member to accept the objecting creditors' assertions and reject the repayment plan, resulting in a formal split of opinion with the Judicial Member. This unambiguously underlines how the lifting of corporate veil is still a valid proposition.

 

Let us see what the 5 Member bench of NCLT concludes.