Mrs. Renuka Devi Rangaswamy, RP of M/s. Regen Infrastructure and Services Pvt. Ltd. Vs. M/s. Regen Powertech Pvt. Ltd. - ‘Transfer of Asset’ among / within the ‘Group Companies’, will not partake the character of a ‘Fraudulent Trading’/`Wrongful Trading’, in the teeth of the ingredients of Section 66 (1) of the Insolvency & Bankruptcy Code, 2016.

NCLAT (10.10.2022) in Mrs. Renuka Devi Rangaswamy, RP of M/s. Regen Infrastructure and Services Pvt. Ltd. Vs. M/s. Regen Powertech Pvt. Ltd. [Comp. (AT) (CH) (Ins) No. 357 / 2022 & IA/814/2022] held that;

• In the present case, the reason given by the Respondent in respect to transfer of assets among its group companies appears to be plausible and cannot be brought under Section 66 (1) of IBC, 2016.

• Fraud is a sensitive and serious allegation and the authority claiming such allegation is duty bound to provide the copies of the report concerning the allegations even before issuing the Show-cause notice.

• Therefore, non-disclosure of the report of the transaction audit conducted by the RP of the Corporate Debtor is sufficient for this Tribunal to dismiss the present application since it amounts to gross violation of principles of natural justice.

• It must be borne in mind that whenever a ‘Fraud’ on a ‘Corporate Debtor’ is committed, in the course of carrying ‘business’, it does not necessarily mean that the ‘business’ is being carried on with an intent to ‘defraud’ the ‘Creditors’. 

• In this connection, this ‘Tribunal’ pertinently, points out that if the ‘Directors’ of a ‘Company’ had acted on a bona-fide belief that the ‘Company’ will recover from its ‘Financial Set Back’ / ‘Difficulties’ / ‘Problems’, then, it will not be liable for the ‘Act’ / ‘Offence’ of ‘Fraudulent Trading’, in the considered opinion of this ‘Tribunal’.

• The aspect of `Fraud’ is the cementing platform for a `Liability’. An element of Dishonesty’, is to be `Proved’ and the `Aspect of Dishonesty’, cannot be inferred, when the `Conduct of the concerned Individuals’ is `Receptive’ of more than one explanation,

• A company may actually be insolvent at a given time; but its directors may bona fide hold a different view. Even in a case where they are aware of the true position, they may still think that all was not lost and that they would be able to stem the rot by further borrowings and improving the business.

• ‘Transfer of Asset’ among / within the ‘Group Companies’, will not partake the character of a ‘Fraudulent Trading’/`Wrongful Trading’, in the teeth of the ingredients of Section 66 (1) of the Insolvency & Bankruptcy Code, 2016.

Excerpts of the Order;

The ‘Appellant’ / ‘Resolution Professional’ / ‘Applicant’, has preferred the instant Comp. App. (AT) (CH) (Ins) No.357/2022, before this ‘Tribunal’, as an ‘affected person’, being dissatisfied with the ‘impugned order’ dated 01.07.2022 in IA(IBC)/591(CHE)/2021 in IBA/1424/2019, passed by the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai).

 

# 2. The ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai), while passing the ‘impugned order’ dated 01.07.2022 in IA(IBC)/591(CHE)/2021 in IBA/1424/2019 at Paragraphs 34 to 36, had observed the following:

• 34. “The Applicant in the present case has miserably failed to prove the dishonest intention of the Respondents to defraud the creditors. It was submitted that 02.03.36 hectares of land in the registration District of Morbi in Gujarat State was purchased with RISPL funds of Rs.58,25,050/- for RPPL and the said amount has been transferred from the RISPL’s current account in favour of the seller farmer. It is required to be noted that a transfer of assets within the group companies per se would not constitute ‘fraudulent trading’ as stipulated under Section 66(1) of IBC, 2016. In the present case, the reason given by the Respondent in respect to transfer of assets among its group companies appears to be plausible and cannot be brought under Section 66 (1) of IBC, 2016. Only allegations have been made by the Applicants and no documentary proof has been filed in support of the same, to show that the business of the Corporate Debtor was carried out by the Respondents with a dishonest intention and to defraud the creditors.

• 35. Further, it is also a fact borne on record that the Applicant has also not served the copy of the entire Transaction Audit Report to the Respondents, which left them in lurch and to answer to the contentions raised by the Applicants. In this connection, reliance was placed upon the decision of the Hon’ble Supreme Court in the matter of T. Takano – Vs Securities and Exchange Board of India &Anr; (2022 SCC OnLine SC 210), wherein the Hon’ble Supreme has held that fraud is a sensitive and serious allegation and the authority claiming such allegation is duty bound to provide the copies of the report concerning the allegations even before issuing the Show-cause notice. Further, it has been held that non-disclosure of such reports is not in compliance with the principles of natural justice before the final decision is arrived at. Therefore, non-disclosure of the report of the transaction audit conducted by the RP of the Corporate Debtor is sufficient for this Tribunal to dismiss the present application since it amounts to gross violation of principles of natural justice.

• 36. Thus, the Applicant has not made a case of fraud or dishonest intention on the part of the Respondents except making sweeping allegations and hence Section 66 of IBC, 2016 cannot be invoked under such circumstances.”

 

and dismissed the ‘Application’, without Costs.

 

Appellant’s Contentions:

# 3. Challenging the ‘Order of Dismissal’ in IA(IBC)/591(CHE)/2021 in IBA/1424/2019, passed by the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai), the Learned Counsel for the ‘Appellant’ / ‘Applicant’ submits that the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai) had failed to appreciate that there is no ‘Moratorium’, as per Section 14 of the Insolvency & Bankruptcy Code, 2016, in force, against the `1st Respondent / M/s. Regen Powertech Private Limited’.

 

# 4, According to the Learned Counsel for the ‘Appellant’, the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai) had failed to take into consideration the ‘Documents’, i.e., a) Audited Financial Statement for the year ended 31.03.2020; b) Fixed Assets of the Corporate Debtor; c) Bank Statement of the Corporate Debtor; d) Sale Deed; and e) ‘Record of Rights’ in the Application, bearing in IA(IBC)/591(CHE)/2021 in IBA/1424/2019.

 

# 5. The crystalline stand of the ‘Appellant’ is that the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai) had not considered the ‘Relevant Documents’ (as mentioned supra), notwithstanding the ‘Forensic’ and ‘Transactions Audit Report’.

 

# 6. The ‘prime plea’ of the ‘Appellant’ is that the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai) should have seen that the ‘Sale Consideration’ for the purchase of the ‘Land’ was paid by the ‘Appellant’ / ‘Applicant’ / `RISPL’, but the ‘Land’ was registered in the name of the `1st Respondent / M/s. Regen Powertech Private Limited’, and further that the ‘Respondents’ had indulged in a ‘Fraudulent Transactions’ with an intent to ‘Defraud’ the ‘Creditors’ of the ‘Corporate Debtor’.

 

# 7. The other submission of the Learned Counsel for the ‘Appellant’ is that the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai) had failed to appreciate that the ‘Documents’ submitted by the ‘Appellant’ / ‘Applicant’ establishes the fact that the second and third Respondents, in respect of exercising due ‘Pleadings’, in maximising the ‘Potential Loss’ to the ‘Creditors’ of the ‘Corporate Debtor’ had transferred the ‘Land’ of the ‘Corporate Debtor’ and ‘Registered’ the ‘Land’ in the name of the `1st Respondent / Company’.

 

# 8. The Leaned Counsel for the ‘Appellant’ takes a stand that the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai) had failed to note that the ‘Transfer of Assets’ within the ‘Group Companies’, per se, would constitute a ‘Fraudulent Trading’ / ‘Wrongful Trading’, as per Section 66 of the Insolvency & Bankruptcy Code, 2016. Continuing further, it is the stand of the ‘Appellant’ / ‘Applicant’ that the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai) had committed an error in placing ‘reliance’ heavily on the ‘Forensic’ and ‘Audit Report’, without adverting to the ‘Statutory Documents’, ‘Registers’, ‘Bank Statements’, ‘Records of Rights’ and ‘Sale Deed’, produced along with the ‘Application’.

 

# 9. The Leaned Counsel for the ‘Appellant’ points out that the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai) should have seen that the ‘Fixed Asset’ of the ‘Corporate Debtor’ had clearly mentioned that the ‘Land’ is in the name of the ‘Corporate Debtor’.

 

# 10. While rounding up, the Learned Counsel for the ‘Appellant’ pressed for allowing the instant Comp. App. (AT) (CH) (Ins.) No.357 of 2022, filed by the ‘Appellant’ / ‘Applicant’, by setting aside the ‘impugned order’ dated 01.07.2022 in IA(IBC)/591(CHE)/2021 in IBA/1424/2019, passed by the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai) in the ‘interest of Justice.

 

# 11. This ‘Tribunal’, heard the Learned Counsel for the ‘Appellant’, at the ‘Admission’ stage itself, and noticed his contentions.

 

# 12. It comes to be known that the ‘Appellant’ / ‘Applicant’ (‘Resolution Professional’ of the ‘Corporate Debtor’ / `M/s. Regen Infrastructure and Services Private Limited’ (`RISPL’) had averred that she moved an Application in IA(IBC)/591(CHE)/2021 in IBA/1424/2019, as per Section 19 (2) of the Insolvency & Bankruptcy Code, 2016, seeking a ‘Direction’ to the ‘Suspended Directors’ / ‘second and third Respondents’ to comply with the ‘various requirements’ of this ‘Resolution Professional’, including submission of particulars (a) RISPL Assets on CIRP commencement Date with a copy of ‘Fixed Assets Register’ (FAR), (b) ‘Original Land Documents’ of RISPL and its ‘wholly owned subsidiaries’ with ‘Index of Land Description’, including ‘Leased Land’, ‘Survey Number’, ‘Registered Document Number’, name in which registered, Name / Address and ‘Related Document’ of the ‘Power of Attorney’, if the ‘Land’ is not yet registered in Companies Name, Book Value, Details of ‘Right to Way’ with documents and (c) RISPL Lands in Inventory and Manual.

 

# 13. It is the stand of the ‘Appellant’ / ‘Applicant’ that ‘pending determination’ of the ‘aforesaid Application’ and procurement of the ‘Fixed Assets Register’, the ‘Appellant’ / ‘Applicant’ had perused the ‘Financial Statements’ of the ‘Corporate Debtor’ including the ‘Balance Sheet’ as on 31.03.2020 and the ‘Balance Sheet’ reflects the details of the ‘Land Assets’ of the `Corporate Debtor’, as under:

• “(a) Land in Fixed Assets Category at Rs.7,71,98,398/-

• (b) Land in Inventory and Manual Category at Rs.44,11,76,094/-’’ and that the break-up for the ‘Lands’ in ‘inventory’ and ‘manual’, reveal that various lands situated within the different locations of Tamil Nadu, Gujarat, Maharashtra and Madhya Pradesh were purchased by the `Corporate Debtor’ / `RISPL’.

 

# 14. The plea of the Learned Counsel for the ‘Appellant’ / Applicant’ is that 2.03.36 hectares of ‘Land’ in the ‘Registration District’ of Morbi in Gujarat State was purchased with `RISPL’ funds of Rs.58,25,050/- (including ‘Stamp Duty’, ‘Registration Charges’ etc.,) in February and March 2017 and that the said sum of Rs.58,25,050/- was transferred from RISPL’s SBI CC A/c. No. 31486176855 in favour of the ‘Seller Farmer’. Furthermore, it is represented that the ‘Appellant’ / ‘Applicant’ found that ‘no Documents’ were available in the ‘Records’ of the ‘Corporate Debtor’ and that the ‘Assets’ were to be traced. In fact, the second and third Respondents (Suspended Directors) had never given these details to the ‘Appellant’ / ‘Applicant’, in her endeavours to procure the ‘Asset’ details of the `Corporate Debtor’. Besides this, the `1st Respondent’ / `M/s. Regen Powertech Private Limited’, is a ‘Related Party’ of the ‘Corporate Debtor’, by means of being the ‘Holding Company’ of the ‘Corporate Debtor’, and having a `Common Directorship’ (the second and third Respondents).

 

# 15. The Grievance of the ‘Appellant’/`Resolution Professional/`Applicant’ is that she had arranged to secure the ‘Certified Copy’ of the ‘Registered Sale Deed’ from the ‘Sub Registrar Office’ of Mamlatdar, in the `State of Gujarat’, in particular to the ‘Assets’. Also, it was found that, although, the funds were paid to the ‘Seller’ / ‘Farmer’, directly from the ‘Accounts’ of the ‘Corporate Debtor’, M/s. Regen Infrastructure and Services (P) Ltd. (RISPL), the ‘Sale Deed’ was ‘Registered’ in the name of the `1st Respondent / M/s. Regen Powertech (P) Ltd.’, instead of the same being ‘Registered’ in the name of the ‘Corporate Debtor’.

 

# 16. It is represented on behalf of the ‘Appellant’ that the aforesaid fact, coupled with the ‘Documents’ were placed before the ‘Committee of Creditors’ in their ‘Sixth Meeting’ on 02.02.2021 and discussions were held at length, which mentions the ‘Transactions of Rs.58,25,050/-, which connected land is registered, in the name of `RPPL’. Indeed, no explanations or clarifications were provided by the second and third Respondents. In reality, in the ‘Forensic’ and `Transactions Audit Report’ dated 30.03.2021, the said ‘Transactions’ was pointing out that the ‘Books of Accounts’ are not reliable and that no ‘supporting Documents’ were found, in respect of the entries in SAP, recommending ‘legal action’ against the second and third Respondents. Later, in the `Seventh’ and the `Eighth Committee of Creditors Meetings’, that took place on 26.04.2021 and 06.05.2021, respectively, the matter was deliberated upon and based on the advice of the ‘Committee of Creditors’, the ‘Appellant’ / ‘Applicant’ was instructed to file ‘Petitions’, in recovering the said ‘Land’, etc.

 

# 17. It is the version of the ‘Appellant’ that earlier she had filed IA/487(CHE)/2021, in terms of the ingredients of Section 66 of the Insolvency & Bankruptcy Code, 2016 against `M/s. Lakshmiranga Perumal Renewable Energy (P) Ltd.’ (`Related Party’) in its name, Land measuring 21.35 Acres, in the Morbi Registration District, Gujarat State, were transferred in an illegal manner, with the knowledge and consent of the second / third Respondents and further that `RISPL’ Books, reflected this aspect in ‘Inventory & Manual Caption’.

 

# 18. The forceful stand of the ‘Appellant’ is that the hurdle in identifying `RISPL Assets’, among the unpredictable transactions and circumstances, `fair disclosure of Assets’, not belonging to the 1st Respondent, but to its ‘Subsidiary’ / ‘RISPL’, is to be furnished by the ‘Resolution Professional’ of the `1st Respondent’ / `M/s. Regen Powertech Private Limited’.

 

# 19. On the side of the ‘Appellant’, a contention is raised that the conduct of the ‘Suspended Directors’ of the ‘Corporate Debtor’ from the commencement date of the `Corporate Insolvency Resolution Process’ (`CIRP’) had not furnished the ‘necessary requisite details’ / ‘Documents’, as prayed for, by the ‘Appellant’, and the silence of the second and third Respondents affirm their role in the `Business of Corporate Debtor’, with an intention to ‘defraud’ the ‘Creditors’. Apart from that, the ‘Suspended Directors’ of the ‘Company’ / ‘RPPL’ (`Holding Company’) in `Corporate Insolvency Resolution Process’, from 09.12.2019.

 

# 20. The categorical averment made by the ‘Appellant’ in IA(IBC)/591(CHE)/2021 in IBA/1424/2019, before the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai) is that the ‘Sale’ registered in the name of `RPPL’ (`Holding Company’), instead of `RISPL’, when direct funds ‘Transfer’ was made by the ‘Corporate Debtor’ to the ‘Farmer’ was contemplated by the `Respondents’ in a wilful manner, with a ‘malafide intention’ for satisfying a ‘fraudulent purpose’.

 

# 21. The submission of the ‘Appellant’ is that in reducing the ‘Loss’ to the ‘Creditors’ of the ‘Corporate Debtor’ was not exercised in a ‘conscious manner’ by the ‘Suspended Directors’ of the ‘Corporate Debtor’ / `RISPL’. Furthermore, in as much as the `1st Respondent / M/s. Regen Powertech Private Limited’, was knowingly a party to the carrying on all businesses of the ‘Corporate Debtor’, by means of ‘Transferring’ the Corporate Debtor’s funds towards purchase of ‘Agricultural Land’ and ‘Registering’ it, in the name of ‘Holding Company’ / ‘Related Party’ is an improper one and untenable in `Law’.

 

Contents of 2nd & 3rd Respondents’ Reply:

# 22. Before the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai), the second and third 3rd Respondents, had filed a ‘Reply’ to IA(IBC)/591(CHE)/2021 in IBA/1424/2019, wherein it was mentioned many other things that the ‘Corporate Debtor’ and the `1st Respondent / M/s. Regen Powertech Private Limited’ have several ‘Subsidiaries’ / ‘Entities’, which comprise the ‘Regen Group’.

 

# 23. The stand of the second and third Respondents, before the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai), as evident from their ‘Replies’, indicate that depending upon the ‘Business Requirements’ and various ‘Rules and Regulations’ prevailing at that point of time, in numerous stages, the ‘Lands’ were required either by the ‘Appellant Company’ / ‘Subsidiary Company’, because each ‘State’ had different ‘Rules’. As a matter of fact, the `1st Respondent / M/s. Regen Powertech Private Limited / Holding Company’ of all Companies, it was the ‘Prime Holding Company’, many times for the ‘most Long Term Assets’.

 

# 24. On behalf of the second and third Respondents, a plea is taken, before the `Adjudicating Authority’ (in its `Reply’ to IA/591/IB/2021 in IBA/1424/2019) is that in the `State of Gujarat’, a mandatory condition was that, the ‘Land’ ought to be ‘owned’ / ‘Leased’ by an individual, making an ‘Applicant’ for ‘Eviction Approval’. According to the second and third Respondents of all ‘Transactions’ between the ‘Companies’ as well as the ‘Assets’ details were all maintained in a ‘complete transparent manner’ on an ‘SAP’ system (including the Fixed Assets Register) and ‘Intra Group Transaction’ were also maintained in ‘SAP’. In fact, there was no ‘Fraudulent Transaction’, as averred by the ‘Appellant’.

 

# 25. According to the second and third Respondents that all the ‘Transactions’ of the ‘Corporate Debtor’ and the `1st Respondent / M/s. Regen Powertech Private Limited’, were added every year with a particular focus on ‘Related Party Transactions’ (being the issue in IA(IBC)/591(CHE)/2021 in IBA/1424/2019) and not ‘one clarification’ was made in respect thereof and this indicates that the ‘Transactions’ are legitimate one.

 

# 26. The ‘Prime’ stand of the second and third Respondents, before the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai) is that the ‘Two Resolution Professionals’ have complete control over the ‘Employees’, ‘Records’ and ‘Books of Accounts’ and among them, they have to find a way to give access to each, they need.

 

# 27. As a matter of fact, it is the case of the second and third Respondents that everything in both the Companies shall benefit with the knowledge of the respective ‘Bankers’ and the ‘Resolution Professionals’ can refer to the relevant ‘Documents’, being available at the ‘Registered Office’ of both the Companies. For any clarification, relating to the ‘Transaction’ questioned and the same were not in their possession.

 

# 28. The second and third Respondents in their ‘Replies’ to IA(IBC)/591(CHE)/2021 in IBA/1424/2019, before the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai) had categorically mentioned that on perusal of the ‘Statements of Accounts’ of the ‘Corporate Debtor’, at the relevant point of time, will exhibit as to how the ‘Amount’ was received from ‘RPPL’ and further it would disclose the ‘Amounts’ received by the ‘Corporate Debtor’ from the ‘Regen customers’, till date. Also, the second and third Respondents do not have any ‘Access’ to the ‘Records’ and only the ‘Appellant’ / ‘Applicant’ and the ‘1st Respondent’ / ‘Resolution Professional’ are in possession of the same and, therefore, the IA(IBC)/591(CHE)/2021 in IBA/1424/2019, filed by the ‘Appellant’ / ‘Applicant’ is liable to be ‘dismissed’.

 

# 29. This ‘Tribunal’ relevantly points out that the ‘Appellant’ / ‘Applicant’ had filed IA(IBC)/591(CHE)/2021 in IBA/1424/2019, before the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai) under Section 25 of the Insolvency & Bankruptcy Code, 2016 and 66 of the Insolvency & Bankruptcy Code, 2016, in respect of ‘Fraudulent Trading’ / ‘Wrongful Trading’. Indeed, Section 23 of the I & B Code, 2016, provides for the `Resolution Professional’, to conduct `Corporate Insolvency Resolution Process’. Section 25 of the Insolvency & Bankruptcy Code, 2016, speaks of a ‘Resolution Professional’, to conduct `Corporate Insolvency Resolution Process’, in `managing the affairs of the `Corporate Debtor’, during the ‘Resolution Process’ period and not at a subsequent point of time.

 

# 30. It must be borne in mind that whenever a ‘Fraud’ on a ‘Corporate Debtor’ is committed, in the course of carrying ‘business’, it does not necessarily mean that the ‘business’ is being carried on with an intent to ‘defraud’ the ‘Creditors’. In this connection, this ‘Tribunal’ pertinently, points out that if the ‘Directors’ of a ‘Company’ had acted on a bona-fide belief that the ‘Company’ will recover from its ‘Financial Set Back’ / ‘Difficulties’ / ‘Problems’, then, it will not be liable for the ‘Act’ / ‘Offence’ of ‘Fraudulent Trading’, in the considered opinion of this ‘Tribunal’.

 

# 31. A `Director’ of a `Company’, can be proceeded against, for a `Wrongful Trading’, on account of `Negligent Failure of Management’. `An Individual’, knowingly being a `Party’ to a `Fraudulent Trading’ by the Company concerned, may be subject to the `Proceeding’.

 

# 32. To put it succinctly, a `High Level Proof’, is very much required in regard to a ‘Fraudulent Intent’. Even for an ‘Isolated’ / ‘Single Fraud’, against an `Individual’, the action, in ‘Civil Wrong’ (Tort) will lie. Furthermore, a ‘Creditor’, who was ‘Defaulter’ has a `viable’, `effective’, an `efficacious’, `alternate remedy’ in ‘Civil Law’. In this connection, this `Tribunal’, pertinently points out that it is not open to the `Directors’ of a `Company’ accused of `Fraudulent Trading’ to allege that the `Company’s Claim’ for recovery in `Tort’, are barred.

 

# 33. The ‘Yardstick’ / ‘Tape’ i.e., to be pressed in to service to determine, the ‘Liability’, is whether a ‘Director’ had exercised the `General Knowledge’, `Skill’ and `Experience’, to be expected of a person, in carrying out the functions of his duties, as per decision `In re Produce Marketing Consortium Ltd. 1989 BCLC 520’. The aspect of `Fraud’ is the cementing platform for a `Liability’. An element of Dishonesty’, is to be `Proved’ and the `Aspect of Dishonesty’, cannot be inferred, when the `Conduct of the concerned Individuals’ is `Receptive’ of more than one explanation, as per decision `In re M. Kushler Ltd., reported in 1943 Ch D 248 (CA)’.

 

34. At this juncture, this `Tribunal’ worth recalls and recollects the decision of the Hon’ble High Court of Kerala, in the matter of South India Paper Mills Pvt. Ltd. v. Sree Rama Vilasam Press Publications (P) Ltd., reported in (1982) 52 Comp Cas 145 (Ker.), whereby and whereunder at Paragraph 10, it is observed as under:

• 10. “This is a far cry from the ” false representations ” or the ” false pretence ” alleged in the affidavit, and I have not been referred to any authority to hold that the carrying on of business after the presentation of a winding-up petition, without disclosing the pendency of the proceedings, should by itself be presumed to be fraudulent. Mr. Vyasan Potti argued that where such presentation is actually followed by a winding-up order, even if it be nearly four years later as in this case, the effect of it is to hold that the company was unable to pay its debts at the time the petition was presented, and that the directors should be presumed to know even at that time that there was no reasonable prospect of repayment. A proposition so wide has not received judicial recognition so far. A company may actually be insolvent at a given time; but its directors may bona fide hold a different view. Even in a case where they are aware of the true position, they may still think that all was not lost and that they would be able to stem the rot by further borrowings and improving the business. In re F.L.E. Holdings Ltd. [1967] 1 WLR 1409 ; [1968] 38 Comp Cas 214 (Ch D) is a case in point. Mr. Brown who was in de facto control of the company had borrowed some amounts from a bank in July, 1965, by deposit of title deeds. But the mortgage was not registered. By September, 1965, two other creditors had obtained decrees against the company and it was fairly clear that it had become insolvent. Thereafter, he gave a legal mortgage to the bank by registering the charge and this transaction was attacked as a fraudulent preference. Pennycuick J. held that there was no fraud at all because Mr. Brown had faint hopes that by keeping good faith with the bank he could get further advances from it to revive the company. As already seen from Exs. A-1 and A-2, the company was indebted to the applicant to the tune of Rs. 28,000 even before winding up had commenced in January, 1973. During the year 1973, the company purchased paper worth Rs. 9,496 but paid Rs. 15,486 to the applicant. That is, during the first year after the commencement of winding-up, it paid not only the full value of its purchases, but something more. Exhibit A-4 indicates that paper was supplied to the company only once during 1974, i.e., in the month of June; and by that time the outstandings had been brought down to around Rs. 11,000. No supply was made at all in 1975, but still the company paid Rs. 7,760 during that year. These facts do not fit in with a presumption that the directors of the company were aware, at the time the purchases were made, that there was no reasonable prospect of repayment at all. The inference referred to by Maugham J. in William C. Leitch Bros.’ case [1932] 2 Ch 71 (Ch D) is one to be drawn when knowledge on the part of the directors is shown to exist; it is not an inference to be drawn about such knowledge itself.’’

 

# 35. It is the `Obligatory Duty’, on the part of the ‘Appellant’ to prove the subjective satisfaction of this ‘Tribunal’ that 1) `An Individual’, must be knowingly carrying on the business with the ‘Corporate Debtor’, 2) Such an `Individual’, ought to have a ‘Dishonest Intent’, to `Defraud’ the ‘Creditors’.

 

# 36. No wonder, the ingredients of Section 66 (1) and 66 (2) of the Insolvency & Bankruptcy Code, 2016, operate in a different field. It must be borne in mind, that for `Fraudulent Trading’ / `Wrongful Trading’, `Relevant Facts’ / `Acceptable Materials’, are to be pleaded by a `Party’, by providing requisite `details’ / adequate `facts, to fall within the parameters of Section 66 of the I & B Code, 2016.

 

# 37. In the instant case on hand, this `Tribunal’, points out that the second and third Respondents had repudiated the Appellant’s plea, in their ‘Replies’, before the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai) in IA(IBC)/591(CHE)/2021 in IBA/1424/2019, by taking a clear cut stand that depending on the ‘Business’ requirement and numerous ‘Rules and Regulations’, at that point of time, in different States, ‘Lands’ were acquired either by the ‘Appellant Company’ or the ‘Subsidiary Company’, at each State had different ‘Rules’ and it was a mandatory condition of the `State of Gujarat’ that the ‘Lands’ should be ‘Owned’ or ‘Leased’ by the person making such an ‘Application’ for ‘Evacuation Approvals’ and in fact, the ‘Lands’ were acquired either by the ‘Appellant Company’ or the ‘Subsidiary Company’, but `primarily’, for the benefit of ‘Regen Group’ and added further, all ‘Transactions’ between the ‘Companies’ and the ‘Asset’ details were maintained in a ‘Transparent Manner’ of `SAP System’ (including the `Fixed Asset Register’) and therefore, there was no ‘Fraudulent Transaction’.

 

# 38. Also that, it is the plea of the ‘Respondents’ that they had not derived any gain in a personal manner, from any such transactions and any benefit derived that was always received and retained within the `Regen Group’. Therefore, in the light of the definite stand taken by the `Respondents’ as mentioned in the preceding paragraph, this `Tribunal, is of the earnest opinion that a ‘Transfer of Asset’ among / within the ‘Group Companies’, will not partake the character of a ‘Fraudulent Trading’/`Wrongful Trading’, in the teeth of the ingredients of Section 66 (1) of the Insolvency & Bankruptcy Code, 2016.

 

Result:

# 39. Be that as it may, in the light of detailed upshot, this ‘Tribunal’, on going through the ‘impugned order’ in IA(IBC)/591(CHE)/2021 in IBA/1424/2019, passed by the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai) dated 01.07.2022, keeping in mind the facts and circumstances of the case and the stand taken by the respective parties, comes to a ‘Resultant Conclusion’ that the ‘Transfer of Assets’ among the ‘Group Companies’ ex-facie is not a ‘Fraudulent Trading’, as per Section 66 (1) of the Insolvency & Bankruptcy Code, 2016. Moreover, because of the fact that all ‘Transactions’ between the Companies as well as the ‘Asset’ details were maintained in a ‘Transparent Manner’ on an `SAP System’ (including the `Fixed Assets Register’) and further the ‘Transactions’ of the ‘Corporate Debtor’ and the ‘1st Respondent’ were `Audited’, every year, the ‘Plea’ of ‘Fraudulent Trading’ as projected by the ‘Appellant’ / ‘Applicant’ is not proved, to the subjective satisfaction of this ‘Tribunal’, in a ‘convincing manner’. Apart from that, mere ‘Averments’ / ‘Allegations’ made in IA(IBC)/591(CHE)/2021 in IBA/1424/2019, before the Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai) are not good enough to exhibit that the ‘business’ of the ‘Corporate Debtor’ was carried out by the ‘Respondents’ either with a ‘mala-fide intent’ for achieving a ‘Fraudulent Purpose’ or with a ‘dishonest intent’ to ‘Defraud’ the ‘Creditors’.

 

# 40. Looking at from any point of view, this `Tribunal’, comes to an inevitable and irresistible conclusion that the view arrived at by the ‘Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai), in dismissing IA(IBC)/591(CHE)/2021 in IBA/1424/2019, does not suffer from any `material irregularity’ or `patent legality’, in the `eye of Law’. Consequently, the ‘Appeal’ is devoid of merits.

 

In fine, the instant Comp. App. (AT) (CH) (Ins.) No. 357 of 2022 is ‘Dismissed’. No Costs. The connected IA/814/2022 (for ‘Stay’) is Closed.

 

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Prasant Chandra Rath (Suspended Director of Corporate Debtor) Vs. Surya Kanta Satapathy (RP) - There may be genuine and valid reasons for Resolution Professional not to file application for avoiding the transactions within time prescribed which are question relating to each case and has to be examined on case to case basis and if there are reasons due to which Resolution Professional could not file the Application within time the same has to be examined on merit.

NCLAT (23.09.2022) in Prasant Chandra Rath (Suspended Director of Corporate Debtor) Vs. Surya Kanta Satapathy (RP). [Company Appeal (AT) (Insolvency) No. 850 & 869 of 2022] held that;

• When the Corporate Debtor did not have sufficient reserve funds of its own to invest in another company, diversion of part loan amount received from the Financial Creditors to any other Company and that too for a purpose which was not approved by the Creditor amounted to wrongful diversion of funds to defraud creditors and fraudulent trade practice.

• Hence, we are of the view that timeline prescribed in Regulation 35A of the CIRP Regulations is only directory and any action taken by the Resolution Professional beyond the time prescribed under Regulation 35A of the CIRP Regulations cannot be held to be non-est or void only on the ground that it is beyond the period prescribed under Regulation 35A of the CIRP Regulations. There may be genuine and valid reasons for Resolution Professional not to file application for avoiding the transactions within time prescribed which are question relating to each case and has to be examined on case to case basis and if there are reasons due to which Resolution Professional could not file the Application within time the same has to be examined on merit.

• We hold that Regulation 35-A is directory and in the present case the application filed by the Resolution Professional cannot be rejected only on the ground of delay in filing beyond 135 days of ICD in view of explanation offered before the Adjudicating Authority justifying the delay. 

• Corporate Debtor not having sufficient surplus funds of its own and having borrowed a loan along with interest, diverted such borrowed funds which is not permitted under the Companies Act and amounts to violation of bank lending norms. 

• The TAR further mentions that such diversion of funds is against prudent business practice as instead of yielding better returns, it saddled the Corporate Debtor with huge interest loss.

• On the other hand, the TAR raised suspicion about the write-offs on the ground that the damaged stock was not shown separately in stock register and that the write-off started all of a sudden coinciding with the beginning of CIRP. 

• Moreover, it has been noted that the carry over the damaged stocks/inventory have not been done across the years which was warranted by the accounting standards.

• We also find credence in the TAR that there is convergence in the timing of the loss of inventory and the initiation of CIRP and cannot be viewed as mere coincidence. 

• Coupled with this, the Adjudicating Authority has also observed that the Appellants have failed to record the outputs from milling of raw paddy and to add them to the finished product inventory.

• That such suppression of information with regard to finished product in the inventory is a fraudulent trade practice aimed at defrauding the creditors. 

• In sum, we agree that the Adjudicating Authority has not erred in coming to the conclusion that the Appellants had indulged in this fraudulent act to siphon off the amount and defraud the creditors of the Corporate Debtor.

• The TAR, however, finds that these advances were made at a time when the Corporate Debtor was completely eroded with hardly any turnover/business and hence these transactions cannot be perceived to have been made in the usual course of business.

• The upshot of the above is that we find that the Adjudicating Authority had sufficient and valid reasons to hold that these undervalued transactions were done with the intent to siphon off the amounts on the false pretext of advance.

Excerpts of the Order;

# 2. Put briefly, the factual matrix of the present case, necessary for deciding the appeal are as follows:

Maa Durga Rice Products Pvt. Ltd./Corporate Debtor having come under Corporate Insolvency Resolution Process (‘CIRP’ in short), the Interim Resolution Professional (‘IRP’ in short) was appointed on 04.09.2019 and later confirmed as Resolution Professional on 07.11.2019.

As part of CIRP proceedings, the Resolution Professional with the approval of Committee of Creditors (‘CoC’ in short) appointed a Transaction Auditor (‘TA’ in short) on 18.11.2019 of the Corporate Debtor, that is, on the 75th day of CIRP. The TA submitted the Transaction Audit Report (‘TAR’ in short) on 23.09.2020.

During the CIRP process, 16 meetings of CoC were held. The CoC in it’s 16th meeting held on 17.11.2020 approved the Resolution plan submitted on 11.11.2020 by the Resolution applicant/Appellant no. 2 who is also the suspended Director of the Corporate Debtor.

The application for approval of the Resolution Plan was filed by the Resolution Professional in IA No 337/2020 before the Adjudicating Authority on 11.12.2020 under Section 240-A of the IBC alongwith eligibility affidavit of Resolution Applicant under Section 29- A of the IBC and MSME certificate.

The Resolution Professional, after examination of the TAR found four transactions to be fraudulent transactions in terms of Section 66 of IBC and 7 other transactions in the nature of avoidance of undervalued transactions in terms of Section 45 of the IBC. Hence the Resolution Professional also filed IA No 276/2020 on 09.11.2020 against the Resolution Applicant and two other suspended Directors of the Corporate Debtor/ Appellants No. 2 & 3 under Section 66 of the IBC for indulging in fraudulent and under-valued transactions.

In IA No 276/2020, the Adjudicating Authority on 26.04.2022 after considering the matter found the Resolution Applicant and two other suspended Directors of the Corporate Debtor to have indulged in fraudulent and under-valued transactions and directed them to jointly and severally refund an amount of Rs. 13.45 crores which was invested with sister concern of Corporate Debtor, Maa Durga Thermal Power Company Ltd. (MDTPCL); refund Rs. 89,70,000/- as interest expenses on the diversion of funds to MDTPCL; refund the two write-offs of Rs. 9,45,250 and Rs. 2,71,45,710/- declaring them as fraudulent transactions; pay Rs. 1,67,79,000/- as advances paid and return Rs. 1,39,27,875/- understatement value amount altogether totalling an amount of Rs. 20,22,67,835/- alongwith interest if not paid up within 60 days from date of order.

Consequent upon the orders of the Adjudicating Authority in IA no 276/2020, the Adjudicating Authority in IA No 337/2020 held the Resolution Applicant not to be eligible to submit a Resolution Plan and rejected the Resolution Plan under Section 29-A(g) of the IBC. The Adjudicating Authority also discharged the Resolution Professional on finding his conduct inconsistent and disturbing since he had moved two applications, one, for approval of the Resolution Plan and, the other, against the Resolution Applicant and two other suspended Directors of the Corporate Debtor under Section 66 of the IBC for indulging in fraudulent transactions at the same time.

# 3. Aggrieved by this order of the Adjudicating Authority in IA No 276/2020, the Appellants have come up in appeal.

# 4. The Learned Counsel for the Appellant submitted that the Adjudicating Authority had failed to consider that the application filed on 09.11.2020 by the Resolution Professional under Section 66 of IBC was not within the time limit prescribed under Regulation 35-A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulation, 2016 (‘CIRP Regulations’ in short) and hence, not maintainable and thus liable to be rejected. It has been submitted that CIRP Regulation 35-A prescribes clear timelines. It requires the Resolution Professional to form an opinion as to whether the Corporate Debtor has been subjected to any transaction under Section 43, 45, 50 or 66 of the IBC on or before the 75th day of the Insolvency commencement date (“ICD” in short). It further provides that if the Resolution Professional is of the opinion that the Corporate Debtor has been subjected to any such transaction covered under the aforementioned sections of IBC, he shall make such determination on or before 115th day of ICD and shall apply to the Adjudicating Authority for relief on or before 135th day of ICD. It has also been pointed out that the time-line prescribed by the Regulation 35-A is of special significance in the present matter since here the promoters are eligible to act as Resolution Applicant for the Corporate Debtor being MSME. It has been further pointed out that the Resolution Professional in the present case has filed the Section 66 application before the Adjudicating Authority after 432 days from ICD and 265 days after approval by the CoC to conduct the transaction audit and hence barred by limitation. It has also been submitted that applications for flagging such fraudulent and under-valued transactions should be made before the approval of the Resolution Plan by the CoC.

# 5. Challenging the impugned order, the Appellants have further submitted that the diversion of funds of the Corporate Debtor to the extent of Rs.13.45 crores to MDTPCL, a sister concern has been wrongly treated by the Resolution Professional as a fraudulent transaction. It has been contended that the said investment of funds in the sister concern was done with the knowledge of Respondent Nos 2 and 5 who are the Financial Creditors. Further, this amount has been disclosed in the audited balance sheet of the Corporate Debtor and was a commercial decision taken by the Corporate Debtor with good intentions.

# 6. It has also been contended that the Adjudicating Authority has wrongly held that stocks were unusually written off suddenly after initiation of CIRP of Corporate Debtor. Only damaged stock was written off and the stock damage had occurred for reasons of absorption of moisture of paddy, high temperature due to stacking, pest attack etc. Moreover, the stocks as per the books and physical position stood reconciled and, therefore, in the absence of any discrepancy between stock register and physical stock, no charge of fraudulent transaction can be made. It has also been pointed out that the Adjudicating Authority had erred in questioning that 2352 quintals of paddy amounting to 87% of stock holding on 03.05.2019 were damaged due to arrival of storm of ‘FANI’. Further it has been submitted insurance was not only claimed but claim relief also received for the damage suffered which have been adjusted against CIRP costs. The damage caused to stocks being legitimate, it was thus necessary to write off the damaged stocks.

# 7. As regards the advances made by the Corporate Debtor to certain persons, it has been submitted that this was done during the course of ordinary business without any malafide intention to harm the creditors. Being genuine business transactions and advances made towards purchase of paddy, such transactions have been wrongly classified as transactions defrauding creditors by the Resolution Professional.

# 8. Pointing out anomaly in the TAR, it has been submitted that the damaged stock of paddy has been incorrectly included in calculating the Milling Output. Since the said damaged stock was never utilized for milling purposes, it was incorrect on the part of TA to record this in ‘estimation of loss’ and in identifying the transaction as avoidable.

# 9. On the issue of undervaluation of the income of the Corporate Debtor to the extent of Rs. 2,79,18,940/-, it has been pointed out that this has happened because TAR included the market value of written off/damaged stock in calculating the revenue yield which was inappropriate. It has been further added that the TA has proceeded on certain assumptions which do not conform to business dynamics and this has led to their misplaced findings of understatement of revenue.

# 10. The Learned Counsel for the Appellants has submitted that the Resolution Professional had filed an application u/s 66 of the IBC before the Adjudicating Authority based on misconstrued facts and in a mechanical manner relied on the TAR without doing due diligence on his part. In support of his contention, the judgement of the Hon’ble Supreme Court in the case of Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. Vs. Axis Bank Ltd. has been cited pointing out that the Resolution Professional should have pleaded specific material facts if any transaction is sought to be brought under the mischief sought to be remedied by Sections 45, 46, 47 or 66 of the IBC. It has been further stated that the failure of the Resolution Professional in this regard is substantiated by the fact that the Adjudicating Authority had discharged the Resolution Professional for dereliction of duties.

# 11. The Learned Counsel for the Resolution Professional refuting these submissions stated that the delay in the filing of the avoidance application beyond 135 days from the date of initiation of CIRP was due to the fact that a proposal of One Time Settlement (‘OTS’ in short) of the Appellants with the Respondent No. 2 had led to stalling of CoC proceedings besides non-cooperation on the part of Appellants in timely submission of the accounts. It was therefore strenuously contended that the issue of delay raised by the Appellants against the Resolution Professional in filing the avoidance application needs to be disregarded as it amounts to their taking undue advantage of their own mistake.

# 12. It was also pointed out that the malafide and fraudulent intention of the Appellants is clearly established from the diversion of funds to the tune of Rs. 13.45 crores of the Corporate Debtor to the sister concern which also led to further loss due to incurring of interest. It was further stated that when the Corporate Debtor did not have sufficient reserve funds of its own to invest in another company, diversion of part loan amount received from the Financial Creditors to any other Company and that too for a purpose which was not approved by the Creditor amounted to wrongful diversion of funds to defraud creditors and fraudulent trade practice. It was also pointed out that the Appellants had indulged in the fraudulent act of unusual write off of inventory particularly the write-off of 2352 quintals of paddy on a single day by attributing it to the storm ‘FANI’, though this storm had landed 70 kms. away from the godown location. It was also stated that the Resolution Professional had arrived at these conclusions of fraudulent and undervalued transactions after study and appreciation of the TAR and that the Adjudicating Authority had also affirmed these findings.

# 13. We have heard the submission and rival contentions of Learned Counsel for both the parties and perused the records carefully.

# 14. The main points which need to be addressed for determination are:-

• (i) Whether the application filed by the Resolution Professional under Section 66 of the IBC before the Adjudicating Authority was barred by limitation; and

• (ii) Whether the Appellants had indulged in fraudulent trade transactions and certain avoidance transactions and in the light of the findings thereon whether the Adjudicating Authority had committed any error while passing the impugned order dated 26.04.2022.

Point no 1.

# 15. To analyse this issue it would be in order to go through the provisions contained in Section 66 of the IBC and Rule 35-A of the CIRP Regulations. Section 66 of IBC reads as follows:

66. Fraudulent trading or wrongful trading-

(1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.

(2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if—

(a) before the insolvency commencement date, such director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor ; and

(b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor.

Explanation – For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonable expected of person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor.

(3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under subsection (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10A.

Regulation 35-A of IBC reads as follows: –

35-A Preferential and other transactions –

(1) On or before the seventy-fifth day of the insolvency commencement date, the resolution professional shall form an opinion whether the corporate debtor has been subjected to any transaction covered under section 43,50 or 66.

(2) Where the resolution professional is of the opinion that the corporate debtor has been subjected to any transactions covered under sections 43,45, 50 or 66, he shall make a determination on or before the one hundred and fifteenth day of the insolvency commencement date,

(3) Where the resolution professional make a determination under sub-regulation (2), he shall apply to the Adjudicating Authority for appropriate relief on or before the one hundred and thirty-fifth day of the insolvency commencement date, whichever is earlier.

# 16. A reading of Regulation 35-A cited above shows that the Resolution Professional “shall make a determination” on whether the Corporate Debtor had been subjected to any transaction covered under Section 43, 45, 50 and 66 of the IBC on or before 115th day of ICD during and “shall apply to the Adjudicating Authority” on or before 135th day of ICD for appropriate relief. The Learned Counsel for the Appellant has contended that the Adjudicating Authority had committed a mistake in allowing the Section 66 application to be filed beyond 135 days as the application was already time-barred. Having regard to the use of the expression “shall” and stipulation of time period of number of days from ICD for the Resolution Professional while undertaking any of the actions permitted under the said Regulation, it is necessary for us to address whether there is any scope for the Resolution Professional to take any action beyond the time-line stipulated under Regulation 35-A.

# 17. We find that this issue has been deliberated at length by this Tribunal in Company Appeal (AT)Insolvency No. 583 of 2021 as to whether the time-period prescribed in Regulation 35-A is mandatory or directory. This Tribunal held therein that the rules of statutory interpretation for finding out true nature of statutory provisions, whether the mandatory or directory, are well settled, and in doing so, relied on the observations of the Hon’ble Supreme Court in ‘State of Uttar Pradesh Vs. Manbodhan Lal Shrivastava’ AIR 1957 SC 912 at page 917 as under:-

• “…Hence, the use of the word ‘shall’ in a statute, though generally taken in a mandatory sense, does not necessarily mean that in every case it shall have that effect, that is to say, that unless the words of the statute are punctiliously followed, the proceeding, or the outcome of the proceeding, would be invalid. On the other hand, it is not always correct to say that where the word “may” has been used, the statute is only permissive or directory in the sense that non-compliance with those provision will not render the proceeding invalid. In that connection, the following quotation from Crawford on ‘Statutory Construction’.art.261 at p. 516, is pertinent:

• “The question as to whether a statute is mandatory or directory depends upon the intent of the legislature and not upon the language in which intent is clothed. The meaning and intention of the legislature must govern, and these are to be ascertained, not only from the phraseology of the provisions but also by considering its nature, its design, and the consequences which would follow from construing it the one way or the other……”

Going further, this Tribunal in the same judgment also relied on the observations of the Hon’ble Apex Court in (2016) 11 SCC 31 in “Lalaram Vs. Jaipur Development Authority” as below:

• “106. As noticed hereinabove, it is affirmatively acknowledged as well that where provisions of a statute relate to the performance of a public duty and where the invalidation of acts done in neglect of these have the potential of resulting in serious general inconvenience or injustice to persons who have no control over those entrusted with duty and at the same time would not promote the main object of the legislature, such prescriptions are generally understood as mere instructions of the guidance of those on which the duty is imposed and are regarded as directory. It has been the practice to hold such provisions to be directory only, neglect of those, though punishable, should not, however, affect the validity of the acts done. At the same time where however, a power or authority is conferred with a direction that certain regulation or formality shall be complied with, it would neither be unjust nor incorrect to exact a rigorous observance of it as essential to the acquisition of the right of authority.”

Thereafter drawing further support from the judgment of the Hon’ble Supreme Court in (2017) 16 SCC 143 in “Surendra Trading Company vs Juggilal Kamlapat Jute Mills Company Limited and Ors”, the Tribunal has held that timeline prescribed in Regulation 35-A of CIRP is directory and not mandatory. The relevant extracts are as reproduced below:

• “11. Questions I & II

• ***** ***** *****

• …….. One of the objective of the Code is to maximize the assets of the Corporate Debtor. In event the actions taken by the Resolution Professional after the timeline prescribed in Regulation 35A of the CIRP regulations are to be annulled, the undervalued and fraudulent transactions will go out of the reach of the Resolution Process, reach of the Court and shall cause great inconvenience and injustice to Corporate Debtor. Hence, we are of the view that timeline prescribed in Regulation 35A of the CIRP Regulations is only directory and any action taken by the Resolution Professional beyond the time prescribed under Regulation 35A of the CIRP Regulations cannot be held to be non-est or void only on the ground that it is beyond the period prescribed under Regulation 35A of the CIRP Regulations. There may be genuine and valid reasons for Resolution Professional not to file application for avoiding the transactions within time prescribed which are question relating to each case and has to be examined on case to case basis and if there are reasons due to which Resolution Professional could not file the Application within time the same has to be examined on merit.”

# 18. We may now proceed to examine the present case on merit. The salient time mile-stones of this case are herein noted. The CIRP was initiated on 04.09.2019. The TA was appointed on 18.11.2019 which was the 75th day of CIRP. The TA submitted the TAR on 23.09.2020. Prior to submission, the draft TAR was shared by the TA with the Appellants on 26.07.2020 and 08.08.2020 as at pages 346-347 of Appeal Paperbook. The Resolution Professional filed the Section 66 application on 09.11.2020. There is, therefore, a clear delay beyond 135 days in filing the Section 66 application from the date of initiation of CIRP. From material on record, we have reasons to believe that some part of this delay was on account of the CIRP proceedings having been stalled on the ground of the Appellants entering into OTS with one of the creditors, Bank of India. The creditor had informed the Resolution Professional on 09.12.2019 during the 3rd CoC meeting asking the Resolution Professional not to proceed further in the transaction audit as they were going to file withdrawal application having entered into OTS. On 17.12.2019, a letter was also issued by them to hold back the said audit work. The Resolution Professional was permitted to recommence transaction audit on 18.02.2020. It is also noted that the Appellants/Suspended Board of Directors of Corporate Debtor had taken time to provide reconciled account. There was lack of cooperation by the Suspended Directors as documents and registers were not handed over on time. The tallied accounts were submitted on 03.12.2019 which was the 90th day of CIRP and hence constituted another factor for delay. There has been delay on the part of the Corporate Debtor to also furnish requisite documents/registers to the TA to complete his appraisal as may be seen from pages 328-345 of Appeal paperbook. The Adjudicating Authority has also noted that another reason attributed for delay has been the Covid pandemic. The Adjudicating Authority in the present case also took a view that the time-line mentioned in Regulation 35-A of CIRP Regulations is directory in nature because no consequential effect is mentioned therein for non-compliance of time limit and has relied on Madras High Court Judgement in Shahji Purushutom Vs. UOI. Adjudicating Authority has therefore held that the Appellants themselves took time to provide accounts and gained time on the pretext of OTS proposal which led to the delay and hence the Appellants should not be allowed to take advantage of their own wrong-doing. The delay has therefore been condoned by the Adjudicating Authority on the ground that the delay is properly and satisfactorily explained by the Resolution Professional even though there is no formal application for delay condonation. Given the above facts, and also the law laid down by the Hon’ble Supreme Court, we find no reason to interfere with the delay condonation allowed by the Adjudicating Authority in filing of the application beyond 135 days by the Resolution Professional. We hold that Regulation 35-A is directory and in the present case the application filed by the Resolution Professional cannot be rejected only on the ground of delay in filing beyond 135 days of ICD in view of explanation offered before the Adjudicating Authority justifying the delay.

Point No. 2

# 19. We begin with the issue of diversion of funds to the sister concern by the Corporate Debtor. We find that it is an undisputed fact that the Corporate Debtor had invested an amount of Rs.13.45 crores in its sister concern MDTPCL. The Learned counsel for the Appellant has, however, argued that it cannot be termed as a fraudulent act since it was a commercial decision taken by the Corporate Debtor with good intention. It has also been stated that the bonafide of the transaction is validated by the fact that the investment of funds in the sister concern was done with the knowledge of the Financial Creditors and that it has been reflected in the audited balance sheet of the Corporate Debtor. On the other hand, the TA has furnished detailed reasoning for holding the above transaction to be a case of diversion of funds for the reason that the Corporate Debtor not having sufficient surplus funds of its own and having borrowed a loan along with interest, diverted such borrowed funds which is not permitted under the Companies Act and amounts to violation of bank lending norms. The TAR further mentions that such diversion of funds is against prudent business practice as instead of yielding better returns, it saddled the Corporate Debtor with huge interest loss.

# 20. Given the above facts, on balance of consideration, we are inclined to agree with the Adjudicating Authority that the defence taken by the Appellants cannot detract from the plain truth that the Appellants had wrongfully diverted funds which in turn had aggravated the financial liability of the Corporate Debtor and thus an unethical act to defraud creditor tantamounting to fraudulent trade practice.

# 21. The other fraudulent transaction, which the Resolution Professional had pointed based on the TAR was the unusual write-off of inventory of Rs. 3,65,90,960/- by the Appellants. The TA also raised question marks on the write-off of 2352 quintals of paddy on a single day due to the storm ‘FANI’ since the cyclone had made its fall at Puri which was 70 kms. away from the rice mill. Moreover, the godown was a fully covered one and there being prior prediction of the arrival of the cyclone, doubts have been raised on the version of cyclone related stock damages. In their defence, the Appellants have submitted that only damaged stock were written off and that the stocks as per the books and the physical position stood reconciled. The stock write-off, according to them, was done to present the true and fair view of the financial statements. It has been further stated that the Corporate Debtor had claimed insurance on damaged stock on account of ‘FANI’ storm and even received claim relief and hence it is a legitimate write-off. On the other hand, the TAR raised suspicion about the write-offs on the ground that the damaged stock was not shown separately in stock register and that the write-off started all of a sudden coinciding with the beginning of CIRP. Moreover, it has been noted that the carry over the damaged stocks/inventory have not been done across the years which was warranted by the accounting standards. Hence, the write-off was held to be unusual in nature.

# 22. Given the above facts, we are however inclined to agree with the Adjudicating Authority that there has been an unusual write-off of inventory as a fraudulent act and that such huge losses should have been reflected in a proper register for damaged stock. The impropriety of simply reducing the stock opening balance in the stock register to write off such staggering inventory loss is glaring. We also find credence in the TAR that there is convergence in the timing of the loss of inventory and the initiation of CIRP and cannot be viewed as mere coincidence. Coupled with this, the Adjudicating Authority has also observed that the Appellants have failed to record the outputs from milling of raw paddy and to add them to the finished product inventory. This also finds mention in the TAR which has particularly noted that this particular trend saw its beginning since October 2018. The TAR further notes that due to this understatement, the loss estimation is to the tune of Rs. 1,39,27,875/- and that such suppression of information with regard to finished product in the inventory is a fraudulent trade practice aimed at defrauding the creditors. In sum, we agree that the Adjudicating Authority has not erred in coming to the conclusion that the Appellants had indulged in this fraudulent act to siphon off the amount and defraud the creditors of the Corporate Debtor.

# 23. The Learned Counsel for the Appellant has also held that the under-valuation of the income of the Corporate Debtor to the extent of Rs. 2,79,18,940/- is not correct as the TA while calculating the revenue had also included the market value of written off stocks/damage stocks and this is not a correct accounting principle. It is found that the TA in its report has found that the Corporate Debtor during the period 2009-2013 clocked a gross profit ratio of around 20% which fell precipitously to a negative figure except for financial year 2017-2018. The Adjudicating Authority has not accepted the contention of the Corporate Debtor that decrease in profit margin was due to changes in the fixed cost like increased cost of paddy, increased tariffs etc. The sudden fall in the gross profit from around 20% to a negative figure has been found to be unreasonable.

# 24. On the issue of undervalued transactions, it has been admitted by the Appellants that advances were made to nine parties including one related party amounting to Rs 1,68,29,280/-. It has, however, been contended by them that these transactions were made during the course of ordinary business and included advances made towards purchase of paddy. The TAR, however, finds that these advances were made at a time when the Corporate Debtor was completely eroded with hardly any turnover/business and hence these transactions cannot be perceived to have been made in the usual course of business. Moreover, keeping in mind the fact that the Appellants failed to furnish detailed particulars of such entities to whom advances were made inspite of the TA having sought it repeatedly and that no records were submitted to establish regular business transactions with these parties in the past, there is not much to substantiate by the Appellants that these transactions of routing advances were part of an undistinguished and undisputed common flow of business. The upshot of the above is that we find that the Adjudicating Authority had sufficient and valid reasons to hold that these undervalued transactions were done with the intent to siphon off the amounts on the false pretext of advance.

# 25. We now summarise our findings on the two issues which we had delineated for our consideration. On the first issue, we are of the considered opinion that CIRP Regulations 35-A is not mandatory and the requirement for approaching the Adjudicating Authority for appropriate relief on or before 135th day of the ICD is only directory. Keeping in view the facts of this case, we hold that there were sufficient and genuine reasons, for the application under Section 66 to be considered by the Adjudicating Authority, even though it was filed beyond 135th day of ICD. As regards the second issue, we find that the Resolution Professional having appraised the TAR, through his detailed and specific pleadings before the Adjudicating Authority has made out a proper case substantiating that the appellants have carried out certain fraudulent and under-valued transactions for fraudulent purposes and to defraud the creditors of the corporate debtor. In such circumstances, the IBC empowers the Adjudicating Authority to take decisions to maximise the assets of the Corporate debtor and in the present case, the Adjudicating Authority having been satisfied that the assets of the Corporate Debtor have been subjected to undervalued transactions/fraudulent transactions/ transactions to defraud the creditors, it has rightly issued directions for recovery of amounts from the Appellants jointly and severally for the benefit of the corporate debtor.

Company Appeal (AT) (Insolvency) No. 850 of 2022

# 26. The present appeal, filed under Section 61 of the IBC by the Appellants arise out of order dated 26.04.2022 passed by the Adjudicating Authority in I.A. No. 337/CB/2020 arising out of TP No. 36/CTB/2019 connected with CP(IB) No. 1292/KB/2019. By the said order, the Adjudicating Authority on an application filed by Resolution Professional under Section 30(6) of the IBC rejected the Resolution Plan of the Resolution Applicant in view of the bar provided under Section 29-A(g) of the IBC and, inter-alia, ordered liquidation of the Corporate Debtor, which has been challenged.

# 27. The factual matrix of IA No. 850/2022 is the same as in IA No. 869/2022 which has been outlined at Para 2 above. Recapitulating the salient points therefrom in the context of this appeal, the Resolution Applicant submitted a Resolution Plan under Section 240-A of the IBC along with eligibility affidavit under section 29-A of IBC. The said Resolution Plan was placed before the Adjudicating Authority by the Resolution Professional under Section 30(6) of the IBC. However, the Adjudicating Authority having come to the conclusion in IA No. 276/2020 that this Resolution Applicant along with two other directors of the Corporate Debtor had indulged in fraudulent and undervalued transactions, it held that the Resolution Applicant is not eligible to submit resolution plan in view of the bar placed by Section 29-A (g) of IBC and further ordered the Corporate Debtor to be liquidated.

# 28. For better appreciation, we may now refer to Section 29-A (g) of IBC which reads as follows:

• “29-A. Persons not eligible to be resolution applicant – A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person –

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• (g) has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the Adjudicating Authority under this Code:

• Provided that this clause shall not apply if a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place prior to the acquisition of the corporate debtor by the resolution applicant pursuant to a resolution plan approved under the Code or pursuant to a scheme or plan approved by a financial sector regulator or a Court, and such resolution applicant has not otherwise contributed to the preferential transaction, undervalued transaction, extortionate credit transaction and fraudulent transaction;”.

# 29. We have already concurred in the findings of the Adjudicating Authority and upheld the impugned order in IA No. 276/2020 holding that the Corporate Debtor had been subjected to undervalued transactions/fraudulent transactions/transactions to defraud the creditors by the Resolution Applicant and two other directors of the Corporate Debtor. Thus, we find no merit in the contention of the Appellants and no reasons to disagree with the findings of the Adjudicating Authority that the Resolution Applicant is not eligible for approval of Resolution Plan in view of the bar provided under section 29-A (g) of IBC and for directing the liquidation of the Corporate Debtor.

# 30. In view of the above discussions, facts and circumstances, we therefore affirm the findings of the Adjudicating Authority and are of the considered opinion that there are no convincing reasons to interfere with the impugned orders in IA Nos. 276/2020 and 337/2020. We are, thus, unable to accept the contention of the Appellants. In the result, both the appeals having no merit are dismissed. No Costs.

 

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