NCLAT (13.08.2021) in Panchapakesan Swaminathan Ex. MD of Shri Sakthi Papers India Pvt. Ltd. Vs. R. Raghavendran RP of Shri Sakthi Papers India Pvt. Ltd. [Company Appeal (AT) (CH)(Insolvency) No. 27 of 2021] held that;
Hon’ble Supreme Court in case of Embassy Property Development Private Limited vs state of Karnataka (2020) 13 SCC 308 had considered the aspect of fraud about both initiations of the petition as well as about the fraud committed by the Corporate Debtor and whether the Adjudicating Authority can inquire into it. In the said case, Hon’ble Supreme Court has held that even fraudulent tradings carried on by the Corporate Debtor can be inquired into by the Adjudicating Authority under Section 66. NCLT is vested with the power to inquire into (i) fraudulent initiation of proceedings as well as (ii) fraudulent transactions.
Hon’ble Delhi High Court in case of Venus Recruiters Private Limited vs Union of India, 2020 SCC OnLine Del 1479 held that if the CoC or the RP are of the view that there are any transactions, which are objectionable in nature, the Order in respect thereof would have to be passed before the approval of the Resolution Plan.
Given the judgement of Hon’ble Delhi High Court, the Order in respect of objectionable Transactions would have to be passed before the approval of the Resolution Plan. Based on the above, the Adjudicating Authority ordered that the companies’ Registrar exercise its power as available to it under Sections 206 and 207 of the Companies Act 2013. It is also important to mention that under Section 206 of the Companies Act, the Registrar is empowered to act on any information he receives.
.Excerpts of the order;
This Appeal emanates from the Order dated 25th January 2021 passed by the Adjudicating Authority/National Company Law Tribunal, Chennai Bench, Chennai in IA/539/IB/2020, in Company Petition IBA/370/2019, whereby the Adjudicating Authority had directed the Registrar of Companies to inspect the books and conduct inquiries as provided under Section 206 and Section 207 of the Companies Act, 2013, and to furnish the report to the Appropriate Authority for necessary action under Section 208 of the Companies Act, if any required.
Further, the Adjudicating Authority directed the Respondents to contribute a sum of Rs. 12.31 lakh to the Corporate Debtor’s assets under Section 66 of the IBC, 2016, within four weeks from the date of Order. Accordingly, being aggrieved by the said Order, this Appeal is preferred. However, the original parties status in the Company Petition represents them in this Appeal for the sake of convenience.
# 3. The Forensic Audit was carried by the Forensic Auditor, who submitted its report on 2nd January 2020, who made observations about certain transactions of the Corporate Debtor, which were reported to have been conducted with the intent to defraud the creditors. Based on the Forensic Audit Report, the RP has filed the impugned Application under Sections 25, 43, 45 (2) and 66 (2) of the Insolvency and Bankruptcy Code, 2016, read with Rule 11 NCLT Rules.
# 4. The Adjudicating Authority has made the following observations which are being reproduced for ready reference;
52. In the circumstances, we direct the Registrar of Companies, Coimbatore, to exercise its power as available to it under section 206 and 207 of the Companies Act, 2013 as is the case with reliefs sought for in other clauses of the relief portion, save Clause (c), for which we have held the respondents to be accountable and that they are required to contribute a sum of Rs. 12.31 lakh to the assets of the corporate debtor.
53. To sum up in relation to Clause (a), (b), (d),(e) and (f) of the relief portion as contained in the Application; we direct as follows;
(i) let the Registrar of Companies, Coimbatore under whose jurisdiction the corporate debtor is amenable, to inspect the books and conduct inquiries as provided under section 206 and section 207 of the Companies Act, 2013 and also furnish a report to the Appropriate Authority for necessary action under section 208, if any required;
(ii) we direct the resolution professional to provide a copy of the Forensic Audit Report filed before this Tribunal along with its Application for the purpose of reference.
(iii) in relation to Clause (c) of the relief portion, we return the finding that the respondents are directed to contribute a sum of Rs. 12.31 lakhs to the assets of the corporate debtor, taking into consideration the provision of section 66 of the IBC, 2016 within a period of 4 weeks from the date of this Order.”
# 9. The Resolution Professional contends that the Corporate Applicant has initiated the Corporate Insolvency Resolution Process under Section 10 of the Code. Based on a resolution passed in the 2nd CoC meeting, dated 5th August 2019, during the Corporate Insolvency Resolution Process, the Forensic Auditor was appointed to identify whether any activities were carried out in violation of the provisions of the Code viz, Preferential Transaction, Undervalued Transactions, Fraudulent Transactions or Extortionate Transactions.
# 10. After receiving the Forensic Audit Report, it was evident that the Corporate Debtor had carried on business to defraud the creditors of the Corporate Debtor. Based on the Forensic Auditor Report, five discrepancies were pointed out; these are;
a. The Corporate Debtor has diverted Rs. 41.85 lakhs to a related party: the Trinity Papers India Private Limited & Rs. 378.73 lakh to the related party M/S Sivshakti International attract preferential transaction as per Section 43 of the IBC 2016.
b. Former Directors did not hand over the cash balance of Rs. 12.31 lakhs to the IRP when the CIRP commenced.
c. The receivables written off arbitrarily for Rs. 649.39 lakhs of M/S Sakal Papers Ltd, Pune, must be recovered from the Promoter Directors for causing wrongful loss to the Corporate Debtor.
d. Payments made to customers and written off the sum of Rs. 50.28 lakhs must be recovered from the Promoter Directors for causing wrongful loss to the Corporate Debtor.
e. Loans given to parties and written off amounting to Rs. 43.49 lakhs must be recovered from the Promoter-Director for causing wrongful loss to the Corporate Debtor.
# 24. However, it is made clear that under Sub-section (4) of Section 206 of the Companies Act 2013, if the Registrar is satisfied based on information available or furnished to him or on a representation made to him by any person that the business of a company is being carried on for a fraudulent or unlawful purpose, the Registrar may, after informing the Company of the allegations against it by written Order, call on the Company to furnish in writing any information or explanation the matters as specified in the Order and carry out such enquiry as he deems fit after providing the Company with a reasonable opportunity of hearing.
# 35. It is essential to mention that the proceeding under the Insolvency and Bankruptcy Code, 2016, is initiated by the Corporate Debtor/Corporate Applicant itself. Serious irregularities are reported in the Forensic Audit Report against the Corporate Debtor. However, the power of the NCLT to order an investigation under the Companies Act, 2013 can not be denied. But whether the Adjudicating Authority under the I& B Code is empowered to order inquiry and investigation about affairs of the Company or not is to be observed.
# 58. Learned Counsel for the Appellant has placed reliance on the judgment of this Hon’ble Appellate Tribunal in case of CA (AT) (Ins) No. 498 of 2019 M. Srinivas Vs. Smt. Ramanathan Bhuvaneshwari. In this case, this Appellate Tribunal has held that;
“17. Apart from the power conferred by Section 213 of the Companies Act, 2013, the ‘National Company Law Tribunal’ has inherent powers under Rule 11 of National Company Law Tribunal Rules, 2016. Therefore, in public interest, it is always open to the ‘National Company Law Tribunal’ after giving a reasonable opportunity of being heard to the parties concerned refer the matter to the Central Government for investigation, if the Tribunal/Adjudicating Authority forms a prima facie opinion that acts of fraud have been committed by Company or group of companies or its Director(s) or officers. In the present case ‘Forensic Audit Report’ alleged that the members of the ‘Corporate Debtor’ and its ‘Group Companies’ along with officers of the ‘Bank of Maharashtra’ have committed certain fraud, which, inter alia, suggest that a sum of Rs. 3,172.25 Lakhs are receivable by the ‘Corporate Debtor’. The Appellant and others were given reasonable opportunity of hearing by Adjudicating Authority. As such no interference is called for against the impugned Order.”
# 61. In the instant case, the Applicants/RP filed an Application under Sections 43, 45 and 66 of the I&B Code 2016 but has restricted its relief only to Section 66(2). Therefore, considering the serious nature of the transaction as brought forth in the Forensic Audit Report, the investigation has been ordered to the concerned Registrar of Companies.
# 62. Hon’ble Supreme Court in case of Embassy Property Development Private Limited vs state of Karnataka (2020) 13 SCC 308 had considered the aspect of fraud about both initiations of the petition as well as about the fraud committed by the Corporate Debtor and whether the Adjudicating Authority can inquire into it.
# 63. In the said case, Hon’ble Supreme Court has held that even fraudulent tradings carried on by the Corporate Debtor can be inquired into by the Adjudicating Authority under Section 66. NCLT is vested with the power to inquire into (i) fraudulent initiation of proceedings as well as (ii) fraudulent transactions. Therefore, it is clear that NCLT and NCLAT would have jurisdiction to inquire into fraud questions; they would not have jurisdiction to adjudicate upon disputes.
# 64. The law laid down has been followed in the subsequent decision rendered by the Hon’ble Supreme Court in Beacon Trusteeship vs Eartcon Infracon Private Limited, (2020) 158 CLA 382 (SC).
# 65. Both the above decisions categorically point out that the Tribunal is required to consider the aspect of fraud of which it is vested with the jurisdiction not only about the initiation of CIRP but also of the Corporate Debtor and its Promoter/Management in its dealings that NCLT would have jurisdiction to enquire into questions of fraud, they would not have jurisdiction to adjudicate upon disputes.
# 66. In the instant case, it is evident that CIRP has been initiated by the Corporate Applicant/Corporate Debtor through its Promoters/Directors U/S10 of the Code on 4th March 2019. When the Corporate Debtor applies for Initiation of Corporate Insolvency Resolution Process on its own, the Corporate Debtor is required to make it complete disclosure of its affairs as mandated under the provisions of the I&B Code 2016. The disclosures, in particular, Form 6 of the said Rules and the Annexures filed thereunder, are of significant importance in coming to a conclusion on the existence of insolvency of the Corporate Debtor and initiating the Corporate Insolvency Resolution Process. Thus, furnishing any misleading, wrongful or fraudulent information will in itself vitiates the petition and the proceedings if any initiated thereunder.
# 67. It would not be out of context to mention that the Hon’ble Delhi High Court in case of Venus Recruiters Private Limited vs Union of India, 2020 SCC OnLine Del 1479 held that if the CoC or the RP are of the view that there are any transactions, which are objectionable in nature, the Order in respect thereof would have to be passed before the approval of the Resolution Plan.
# 68. It is also evident that serious irregularities have been found in the forensic audit report. Given the judgement of Hon’ble Delhi High Court, the Order in respect of objectionable Transactions would have to be passed before the approval of the Resolution Plan. Based on the above, the Adjudicating Authority ordered that the companies’ Registrar exercise its power as available to it under Sections 206 and 207 of the Companies Act 2013. It is also important to mention that under Section 206 of the Companies Act, the Registrar is empowered to act on any information he receives. Considering the circumstances of the case, we do not find any irregularity or illegality in passing the impugned Order.
# 69. For the above reasons, we find no merit in this Appeal. The Appeal shall accordingly stand dismissed—no order as to costs.
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