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Appellate tribunal NCLAT has set aside insolvency proceedings against Mack Star Marketing initiated by the NCLT Mumbai after observing that the term-loan provided by Yes Bank to it was an "eye-wash" and "collusive in nature".
A two-member bench held such collusive transactions do not fall within the ambit of the definition of Financial Debt as defined under Section 5(8) of the Insolvency & Bankruptcy Code and therefore Suraksha Asset Reconstruction cannot be termed as a Financial Creditor.
The NCLAT observed that out of Rs 147.6 crore -- sanctioned by Yes Bank in Mack Star's name for the purpose of renovating 'Kaledonia' a two-year-old building constructed at a cost of Rs 100 crore -- more than 99 per cent of the amount was routed back to Yes Bank either on the same day or within a very short period.
"The chequered history of the loan transactions and collusive arrangements indulged by Yes Bank demonstrates that the Term Loans disbursed in the name of Mack Star is an eye-wash' and Yes Bank has disbursed these loans with an ulterior motive," said the National Company Law Appellate Tribunal (NCLAT).
It also set aside the orders of the Mumbai bench of the National Company Law Tribunal (NCLT), which had on October 27, 2021, directed to initiate insolvency proceedings against Mack Star Marketing over a petition from Suraksha Asset Reconstruction, the assignee of the loans given by Yes Bank.
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"We allow this Appeal and set aside the Impugned Order passed by the Learned Adjudicating Authority (NCLT, Mumbai Bench, Court III), on 20.09.2021," said the NCLAT.
In effect, orders passed by the NCLT appointing an interim resolution professional, declaring moratorium, freezing of account and all other orders passed pursuant to the impugned order, are set aside, the appellate tribunal said.
"The Adjudicating Authority will now close the proceedings. The Corporate Debtor' is released from all the rigours of law and is allowed to function independently through its Board of Directors with immediate effect," it added.
The appellate tribunal order came on a petition filed by Ocean Deity Investment Holdings, which holds a majority of 82.17 per cent shares in Mack Star, challenging the NCLT order.
The NCLT had admitted Suraksha's Section 7 application under the Insolvency and Bankruptcy Code, 2016, claiming defaults in payment of four Term Loans, out of the six Term Loan transactions executed between Mack Star and Yes Bank totalling Rs 159.67 crore.
However, challenging this before the NCLAT, Ocean Deity Investment Holdings submitted that the CBI had lodged an FIR on September 23, 2020, against Yes Bank officials, Housing Development Infrastructure Ltd (HDIL), its Promoters, Wadhawans and other individuals, who were collectively accused for cheating Mack Star and the appellant by way of these collusive transactions.
After several months of the Enforcement Directorate having arrested Rana Kapoor, the Promoter of Yes Bank for conspiring with HDIL Promoter to cheat Mack Star, the NCLT passed the order on September 20, 2021.
"Both CBI and ED have independently concluded that there was a criminal conspiracy, pursuant to which act, there was three steps circular flow of funds from Yes Bank, whereby Rs 147 crores have fraudulently been disbursed in the name of Mack Star; the amount was disbursed to Yes Bank accounts of HDIL Group Companies," it said.
These loan amounts of Rs 146 crore from Yes Bank accounts of HDIL Group Companies were used for discharging the earlier loans availed by the financially stressed HDIL Group Companies from Yes Bank.
"These findings were completely ignored by the Adjudicating Authority while passing the Impugned Order," the holding company submitted before the NCLAT.
It was submitted that Rs 140 crore- of these term loans of Rs 147.6 crore was sanctioned by Yes Bank in Mack Star's name for the purpose of renovating and refurbishing Kaledonia' a brand new building that was barely two years old and has been constructed at a total cost of Rs 140 crore.
Moreover, Rs 100 crore was disbursed by Yes Bank to Mack Star even before any of the Related Loan Agreements were signed and a term loan of Rs 40 crore disbursed by Yes Bank in Mack Star's name was credited directly to HDILs Yes Bank account instead of being credited to Mack Star's account, the holding company had submitted.
Yes Bank continued disbursing these term loans in Mack Star's name despite being notified by the appellant in writing that their HDIL affiliate company was not authorised to avail of any loans on Mack Star's behalf.
"It is strenuously argued that 99.18 per cent of the amounts disbursed by Yes Bank in Mack Star's name was routed back to Yes Bank, within a few minutes of their disbursal, by Yes Bank Officials," the NCLAT order said.
Moreover, Suraksha Asset Reconstruction filed a plea to initiate insolvency proceedings against Mack Star on April 22, a month after Ocean had lodged a criminal complaint on March 5, 2019, with the Economic Offences Department of Mumbai Police against Yes Bank, Suraksha and HDIL Promoters in relation to the illegal term-loans.
However, counsel appearing for Suraksha submitted Ocean Deity was fully aware of the borrowings and also authorised the Board of Directors to give effect to such borrowing in the Annual General Meeting of Mack Star held on May 29, 2014.
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