Between July 31, 2015, and August 1, 2017, the promoters of disgraced shipbuilder ABG Shipyard Ltd indulged in several transactions running into hundreds of crores allegedly to “siphon off” money by adopting a “circuitous route for fraudulent purposes with the intent of defrauding the creditors of the company,” according to court documents seen by BusinessLine.

While the promoters and directors of ABG Shipyard, including Rishi Agarwal, Ashwani Kumar, S Muthuswamy and others, allegedly started dabbling in such “preferential and/ or undervalued and/ or fraudulent/ wrongful trading transactions” as far back as 2012, those executed between July 31, 2015, and August 1, 2017, assume significance as they come within a so-called “look back period of two years” before the commencement of insolvency proceedings, according to Section 43 of the Insolvency and Bankruptcy Cide (IBC), 2016.

This is seen as an indication that the promoters and directors of the Gujarat-based shipbuilder “knew there was no reasonable prospect for avoiding the commencement of the Corporate Insolvency Resolution Process (CIRP) and indulged in transactions that were not in the ordinary course of business,” according to sources who have tracked the downfall of what was once India’s biggest private shipyard.

The corporate insolvency resolution process (CIRP) of ABG Shipyard started on August 1, 2017 as the revival of the company suffered a setback due to a severe downturn in the shipping industry, even after a corporate debt restructuring (CDR) in March 2014.

The loan fraud, allegedly committed by ABG Shipyard, has hit a clutch of 28 banks led by ICICI Bank Ltd and including State Bank of India (SBI), with a total exposure of some Rs 22,842 crore.

During insolvency proceedings, the Resolution Professional (RP) overseeing the CIRP of ABG Shipyard submitted to the National Company Law Tribunal (NCLT) details of “certain transactions which are not in the ordinary course of business and the payments appear to be in the form of loans/ advances given to parties”. It appears that ABG Shipyard “may have entered into arrangements involving the concerned parties to fund their financial obligations,” the RP told NCLT.

Prior to CIRP, ABG Shipyard appears to have entered into a “preferential transaction” for the benefit of a creditor, ABG Resources Pvt Ltd (ABGRPL), which was “not in the ordinary course of business and has the effect of putting ABGRPL in a beneficial position than it would have in the event of a distribution of assets”.

The transaction involved ABG Shipyard transferring Rs 15.97 crore vide various transactions between October 26, 2015, and April 6, 2017, to ABGRPL through bank accounts maintained with ICICI Bank and Vijaya Bank. ABGRPL, a company involved in the business of land developers, builders, contracts, etc, only earned revenue of Rs 5.67 crore and had a negative net worth of Rs 158.22 crore for the financial year 2013-14.

Upon review of the amounts transacted, it was ascertained that the said aggregate amount of Rs 15.97 crore was transferred to ABGRPL by ABG Shipyard as ad-hoc loans/ advances.

“The purpose of the ad-hoc loans/ advances made by the Respondent Company (ABG Shipyard) in favour of ABGRPL are not transparent/ clear and appear to be advanced with an intent to defraud the creditors of the respondent company. It is apparent from the financial position of ABGRPL that the said transactions were not in the ordinary course of business and it appears that ABGRPL does not possess the required financial capability to repay the amounts transacted by the respondent company,” the RP told NCLT.

Further, ABG Shipyard had advanced certain amounts to its vendor, Mahavir Distributor Pvt Ltd (MDPL), which appears to be for a fraudulent purpose.

Upon perusal of the books of accounts of ABG Shipyard, it was ascertained that ABG Shipyard had transferred Rs 64 crore to MDPL between April 21, 2014, and April 28, 2014, through its bank account maintained with ING Vysya Bank Ltd.

Over and above the aforesaid transaction, the total outstanding balance as per the books of accounts on August 1, 2017, of ABG Shipyard was Rs 80.44 crore. MDPL, a company involved in the business of commission agent, only earned revenue of Rs 2.09 crore and had a negative net worth of Rs 3.16 crore for the financial year 2015-16.

Moreover, one of the directors of MDPL is also one of the employees of Banal Investments Private Limited, an ABG Group Company. similarly, the ex-directors of MDPL were also common directors in certain ABG Group Companies. “In view of the above, it is clear that the aforesaid business transaction was entered into between the Respondent Company and MDPL for a fraudulent purpose and not in the ordinary course of business,” the RP told NCLT.

Prior to CIRP, ABG Shipyard appears to have entered into a preferential transaction for the benefit of a creditor ABG International Private Ltd (AIPL) which was not in the ordinary course of business and had the effect of putting AIPL in a beneficial position than it would have in the event of a distribution of assets.

Under this transaction, ABG Shipyard transferred Rs 34.67 crore vide various transactions between September 16, 2015, and April 16, 2016, to AIPL through various bank accounts. Out of the Rs 34.67 crore, transactions worth Rs 31 crore were “wrongly recorded” against ABG Energy Himachal Pradesh Ltd’s account in ABG Shipyard. Upon inspection of the amounts transacted, it was ascertained that Rs 34.67 crore was transferred to AIPL by ABG Shipyard as ad-hoc loans/ advances.

The purpose of the ad-hoc loans/ advances made by ABG Shipyard in favour of AIPL are not transparent/ clear and appear to be advanced with an intent to defraud the creditors and/or for fraudulent purposes under the IBC, the RP said.

Between September 2015 and March 2016, ABG Shipyard transferred Rs 199.66 crore and another Rs 125.71 crore prior to April 2015 through various bank accounts in the form of loans and advances to Banal Investments and Trading private Limited (Banal). Banal was a company engaged in the business of an investment company to purchase and sell shares, debentures, bonds, etc, and earned no revenue for the financial year 2011-12 and 2012-13. Further, it was stated that Banal had a negative net worth of Rs 19.06 lakhs.

Further, upon inspection of the records of Banal with the Registrar of Companies (ROC), it was revealed that Banal was struck off from the ROC on April 28, 2017, on the ground that it had not carried on business in the last two years from the date of strike off.

“It is stated that the aforesaid amounts were transferred to Banal during the period when Banal did not carry on business,” the RP submitted to NCLT.

Transactions prior to the look back period

Between October 2012 and September 2014, ABG Shipyard transferred $63,517,662 amounting to Rs 421.42 crore to Varda Seven PTE Ltd (Varada) through its bank account with Royal Bank of Scotland. It is not clear whether such transactions have been carried to service offshore loans availed by group companies of ABG Shipyard.

Further, upon perusal of the Special Audit Report of Desai Saksena & Associates, it is inferred that such loans to the extent of Rs 285.76 crore were used towards payment of novation of shipping contracts. It is also stated in the annual report of the ABG Shipyard for the financial year 2015-16 that the loans and advances were provided interest free, implying that the transactions do not appear to be in the ordinary course of business.

ABG Shipyard appears to have entered into a fraudulent transaction under Section 66 of the IBC with ABG Shipyard Singapore Pte Limited (ASSPL), a wholly-owned subsidiary incorporated on February 8, 2010, in Singapore.

In 2012, ABG Shipyard invested in ASSPL by way of 42,97,100, 1% redeemable preference shares of $1 each at a premium of $9 each amounting to $42,971,000. Further, ABG Shipyard also provided loans and advances to ASSPL of $24,032,329, taking the total amount invested/ funded by ABG Shipyard in ASSPL to $67,003,329.

Subsequently, on December 17, 2012, ABG Shipyard redeemed 85,000 1% redeemable preference shares of ASSPL equivalent to $8,50,000.

The above preference shares were redeemable at par, at the option of ABG Shipyard at any time not later than 3 years from the date of allotment i.e. March 22, 2011 and each holder of preference share was entitled to cumulative dividend at 1% per annum until redeemed and shall be payable on cumulative basis prior to any dividend or other distribution payable to ordinary shareholders. Further, in the event of liquidation or winding up of the company, the paid-up amount of preference shares were to be paid back to the preference shareholders before any payment was made to the ordinary shareholders.

On the basis of this investment/ funding by ABG Shipyard, ASSPL, in 2012, invested in 4,34,645.8558 units of Emerging Markets Diversified Fund of Standard Chartered Trust (Cayman) Ltd of face value of $1001 per unit.

Subsequent to the investment, ABG Shipyard, as per the Master Restructuring Agreement (MRS) dated March 28, 2014, signed with ICICI Bank Ltd (monitoring institution) and a consortium of banks, was to liquidate the investment made by ASSPL and repatriate the proceeds within two months from the date of the Corporate Debt Restructuring (CDR) Letter of Approval of 23 April 2014.

In the joint lenders’ meeting held on September 2, 2014, the promoters of ABG Shipyard had requested an extension till October 31, 2014, to liquidate the investment made by ASSPL in Standard Chartered Trust (Cayman) Ltd.

Thereafter, in the meeting of the monitoring committee held on November 18, 2014, the promoters of ABG Shipyard told the lenders that they had already made an application for the realization of investments and informed that the same was pending with the Standard Chartered Trust. ABG Shipyard further informed the RP that the shipyard had certain outstanding liabilities relating to the above investments made by ASSPL, which were required to be paid-off on realization and further requested for time till 31 March 2015.

Subsequently, in the monitoring committee meeting held on 29 July 2015, ABG Shipyard was directed to obtain a certificate from a concurrent auditor regarding corresponding liabilities, to consider a decision for waiver. However, the said certificate from a concurrent auditor was not obtained by ABG Shipyard, the RP informed NCLT.

The aforesaid investments were to be recovered by ABG Shipyard as recorded in the MRA and minutes of the meeting of the monitoring committee. However, the company failed to liquidate the investment and recover its money despite repeated assurances given to the monitoring committee and no reasonable steps were taken by the erstwhile directors of ABG Shipyard, who were responsible for and were actually carrying on the business of the company to recover the money.

“Thus, this aspect, coupled with the conduct of the erstwhile directors of the Respondent Company in avoiding to offer any response to the legal notices served upon them or otherwise furnishing explanation or details of steps and measures taken and adopted by them as management of the Respondent Company appear to be tainted with malice and fraudulent intent of defrauding the company and the creditors of the company,” the RP told NCLT.

The RP further submitted that that these transactions “do not appear to have been made in the ordinary course of business but appear to have been made for a fraudulent purpose, including intent to divest money from the Respondent Company to erode capital/ assets of the company and thereby frustrate and defeat the legitimate claims of creditors of the Respondent Company with the possible eventual objective of siphoning the money by adopting a circuitous route for fraudulent purpose of causing or reading personal gain as enunciated under Section 66 of the Code”.

“After elaborate discussions, we have decided that impugned transaction is open for investigation to ascertain the nature of the transaction and the intent behind execution of this transaction. The aforesaid transaction has the root and its execution before the look back period of two years before the commencement of Insolvency Proceedings”, NCLT said while ordering liquidation of the shipyard on 25 April 2019.

The account of ABG Shipyard was declared as non-performing asset (NPA) on July 30, 2016 but with effect from November 30, 2013, based on a report submitted by audit firm N V Dand & Associates on April 30, 2016. The audit firm was hired to conduct a stock audit of ABG Shipyard on September 10, 2014.

Between April 2019 and March 2020, various banks in the lending consortium declared the account of ABG Shipyard as fraud based on a forensic audit conducted by Ernst & Young LLP in 2018, which covered the period from 2012 to 2017.

The Central Bureau of Investigation (CBI) filed an FIR on the bank fraud on February 7, 2022, based on a complaint filed by SBI on August 25, 2020.

The fraud, according to the CBI, is primarily on account of huge transfer by ABG Shipyard to its related parties and subsequently making adjustment entries. It is also alleged that huge investments were made in its overseas subsidiaries by diverting the bank loans and funds were diverted to purchase huge assets in the name of its related parties, the CBI said.

Under the approved CDR Scheme finalised in 2014, ICICI Bank was appointed as the Monitoring Institution on behalf of all the CDR lenders. The entire financial control over ABG Shipyard was exercised by ICICI Bank through a Trust and Retention Account (TRA), which was funded by the shipyard’s earnings as well as the finances released under the CDR Scheme, the RP told the bankruptcy court in Ahmedabad.

The question that begs an answer is how did the promoters of ABG Shipyard and its directors pull off such dubious transactions to siphon off money right under the nose of the lenders, who were overseeing the finances of the shipyard through the Trust and Retention Account (RTA) after the company was restructured under the CDR mechanism in 2014 till it was admitted into insolvency in August 2017?

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