In my previous article, I discussed the principles of “Substance over Form” and “Form over Substance”.
In this article, I discuss the specific findings of the Technical Member regarding the substance of the financial arrangement in Dr. Subhash Chandra's case apparently to evade legal obligation of honouring personal guarantee for repayment of a loan of Rs.22,000 crore.
Introduction
In the insolvency resolution proceedings of Dr. Subhash Chandra, the Learned Member (Technical), Ms. Reena Sinha Puri, adopted a highly critical, substantive, and purposive approach to analysing the financial arrangements and the conduct of the Resolution Professional (RP). Unlike the majority, who favoured a literal legal interpretation, the Technical Member went deep into the substance of the financial arrangements, the conduct of the RP, and the commercial reality of the transactions. The Technical Member's findings focused on several key areas where the form of the transactions was used to obscure their true substance, potentially compromising the integrity of the Personal Insolvency Resolution Process (PIRP).
1. Admission of Unverified and Questionable Claims
The Technical Member raised serious concerns regarding the RP's conduct in admitting massive claims without proper verification of documentation and the enforceability of the Personal Guarantor's (PG) liability.
Claims of Corporate Entities: The Technical Member scrutinized the admission of claims from entities such as Veena Investments Pvt Ltd, Direct Media Distribution Ventures Pvt Ltd, World Crest Advisors LLP, Lemonade Capital Advisors LLP, and Corpcall Capital Advisors LLP.
The Churu Enterprises Connection: Specifically, the claims submitted by Lemonade Capital Advisors LLP and Corpcall Capital Advisors LLP were founded upon deeds of guarantee allegedly executed by the PG in connection with financial facilities availed by another group entity, namely Churu Enterprises LLP. The Technical Member highlighted that these claims represented inflated debt in favour of related parties, admitted by the RP merely on assertions without adequate scrutiny or supporting documentation.
Unverified Individual Claims: The Technical Member strongly objected to the admission of claims filed by Mr. Anil Kumar and Mr. Sunil Jain on behalf of 960 and 300 unverified individuals from Haryana. These claims were admitted despite the complete absence of supporting documentary material, which the Technical Member identified as a clear lapse in the RP's statutory obligation to undertake appropriate verification.
2. Purposive Construction of "Associate" and Related Parties
A central finding of the Technical Member was that the corporate structure was being used as a façade to bypass statutory voting restrictions.
Purposive Interpretation of Section 79(2)(g): The Technical Member framed a specific issue on whether Section 79(2)(g), which defines an "associate" of the debtor, should be purposively construed. She argued that the definition must be interpreted to mean any company in which an associate exercises control or holds a majority stake, either independently or together with the debtor. This was essential to prevent the mischief of routing transactions through corporate entities to evade statutory consequences.
Exclusion from the Meeting of Creditors: The Technical Member found that the RP failed to exclude these associate/related parties from the Meeting of Creditors, thereby allowing their participation in the voting process in violation of Section 109(4)(b) of the IBC. She observed that even though the PG claimed these entities were unrelated, they were effectively controlled directly or indirectly by individuals related to the PG.
3. Omission and Misrepresentation of Assets
The Technical Member identified significant irregularities in the disclosure of the PG's assets, indicating that the RP failed to conduct proper due diligence under Section 79(14) of the IBC.
Omission of Investments: In paragraphs 117 and 118 of her order dated 03.09.2025, the Technical Member specifically found that an investment in "Subhash Chandra & Sons" under current assets was completely omitted and not included in the repayment plan.
Excluded Assets: The Technical Member also raised objections regarding the value of personal ornaments and other assets claimed as "excluded assets," which allegedly exceeded the statutory limits prescribed under the applicable Rules.
4. Discrepancy in Net Worth and Lack of Investigation
The Technical Member came down heavily on the RP's failure to investigate the massive divergence in the PG's historical and declared net worth.
Historical vs. Present Net Worth: Historical net worth certificates furnished to RBL Bank (2017) and Canara Bank (2018) recorded the PG's net worth at approximately ₹45,888 crores and ₹40,562 crores respectively. In stark contrast, the PG claimed a current net worth of only ₹31.79 crores.
Failure to Appoint Forensic Auditor: The Technical Member found that the RP accepted the PG's unsubstantiated claim of ₹31.79 crores without substantial scrutiny. Despite repeated requests and objections raised by several creditors, the RP failed to appoint an independent forensic auditor or asset-tracing agency to conduct a comprehensive investigation into the assets, transactions, and actual financial position of the PG.
5. Speculative and Legally Questionable Payment Proposals
The Technical Member scrutinized the financial viability and legality of the repayment plan itself.
Unrelated Entities and Speculative Recovery: The PG's plan proposed to facilitate the payment of ₹1,494 crores through entities that he otherwise claimed were unrelated to him. The Technical Member found this assurance to be legally questionable.
Speculative Recovery: Furthermore, the recovery under this proposal was "indicative" and entirely dependent upon the future sale price of shares, rendering the recovery highly speculative and uncertain.
6. Legal Principles on Substance over Form and Piercing the Corporate Veil
The Technical Member's approach aligns closely with established principles of Indian jurisprudence regarding the primacy of substance over form and the doctrine of piercing the corporate veil.
Lifting the Corporate Veil: In State of U.P. v. Renusagar Power Co., the Supreme Court held that the frontiers of lifting the corporate veil are unlimited and ever-expanding. Similarly, in Balwant Rai Saluja v. Air India Ltd., the Court held that courts are empowered to disregard the separate legal personality of a company to remedy a wrong done by the persons actually in control.
Preventing Evasion of Legal Obligations: In State of Rajasthan v. Gotan Lime Stone Khanij Udyog Private Limited, the Supreme Court recognized that the corporate veil may be lifted where the corporate entity is used as an attempt to evade legal obligations or welfare legislation.
Preventing Fraud and Sham Devices: In Union of India v. ABN Amro Bank, the Court reiterated that authorities can always lift the veil to examine whether parties have entered into any fraudulent, sham, or circuitous device to overcome statutory provisions. In Ajay Surendra Patel v. Dy. CIT, the Gujarat High Court noted that if a complex web is created to defraud or shield the real operator behind a corporate veil, courts must ignore the corporate status and strike at the real beneficiary.
The Technical Member's findings in the Dr. Subhash Chandra case represent a direct application of these principles, arguing that the tribunal must look through the corporate structures of Lemonade, Corpcall, and other entities to identify the real controlling mind (the PG and his associates) and prevent the evasion of statutory voting restrictions under the IBC.
Conclusion
In conclusion, the Technical Member's specific findings regarding the substance of the financial arrangement in Dr. Subhash Chandra's case were:
ü The RP admitted massive, potentially inflated claims of related corporate entities (such as Lemonade and Corpcall, linked to Churu Enterprises LLP) and unverified individuals without proper verification or supporting documentation.
ü Section 79(2)(g) must be purposively construed to prevent the PG from using corporate structures to bypass the statutory definition of "associate" and participate in the voting process.
ü The PG's repayment plan omitted key assets (such as the investment in Subhash Chandra & Sons) and claimed excluded assets beyond statutory limits.
ü The RP failed to investigate the massive drop in the PG's net worth (from over ₹40,000 crores to ₹31.79 crores) by refusing to appoint an independent forensic auditor.
ü The proposal to pay ₹1,494 crores through allegedly unrelated entities was legally questionable and highly speculative.
To sum up:
· Dr Subhash Chandra, the Personal Guarantor to the massive loan of Rs.22,000 crore should have been subjected to detailed and deep forensic audit for his various acts of omission and commission.
· If the 5 Member NCLT Bench is going to be guided by literal interpretation, which in financial and tax evasion matters is not only undeserving but benefits the perpetrators, then it is better not to constitute the Bench in the first place itself.
· This case represents a classic example of how one can hoodwink the system and get away with it.
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