NCLT Mumbai-III (2024.06.14) in Mr. Brijendra Kumar Mishra, RP Vs. Vijay Narayan Athalye & Anr. [IA/796/2023, IA/4354/2023 and IA/4272/2023 In C.P.(IB)/3141(MB)/C-III-2018] held that;
However, there is no deeming fiction under section 45 of IBC. Under section 45, it should be proved that the Corporate Debtor has entered into the transaction for transfer of its asset(s) for a consideration which is lesser than the market value. Then only any transaction can be classified as undervalued.
Therefore, if any such amount when becomes irrecoverable and then written off due to passage of time cannot be termed as fraudulent.
However, no opinion has been formed by RP under sub-regulation 35A and no determination has been made by RP under sub-regulation (2). He has merely expressed his suspicion over the transactions.
Therefore, one of the essential ingredients of section 66 is that there must be “intent to defraud creditors” of the corporate debtor or “any fraudulent purpose”.
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.”
It is settled position of law that to prove the transaction to be fraudulent in nature, the degree of proof and evidence required should be of unimpeachable nature and not based on mere suspicion that too when reasonable explanation has been offered for the write offs.
Excerpts of the Order;
1. Three Interlocutory applications are proposed to be disposed of by this common order. IA 796/2023 has been filed by the Erstwhile Resolution Professional of M/s Lakeland Chemicals (India) Ltd. (Corporate Debtor) Mr. Brijendra Kumar Mishra, (referred to as “the Applicant/RP”) under Section 45 and 66 of the Insolvency & Bankruptcy Code, 2016 (“IBC/ Code”) against Mr. Vijay Narayan Athalye and M/s Chemical Brothers Enterprise Private Limited For the ease of reference Mr. Vijay Narayan Athalye is referred to as “the Suspended Director/Respondent no. 1” and M/s Chemical Brothers Enterprise Private Limited is referred to as “CBEPL/Respondent no. 2” in this common order.
# 2. Instead of filing reply to the above Interlocutory application, both the respondents have filed separate applications challenging the maintainability of the said application under section 45 and 66 of the IBC. Respondent No.1 has filed IA No. 4272/2023 and Respondent No.2 has filed IA No. 4354/2023 raising similar grounds on the authority of the Erstwhile RP to file application under section 45 and 66 of the Code. As all the three applications have same set of facts and similar legal issue, we have taken up and heard them together with the consent of the parties and are disposing of by this common order.
IA 796/2023:
# 3. The instant application has been filed by the Erstwhile Resolution Professional of M/s Lakeland Chemicals (India) Ltd. seeking following reliefs: a. That this Hon’ble Tribunal, be pleased to declare aforesaid transactions as avoidable transactions under Section 45 & 66 of the Insolvency and Bankruptcy Code.
b. That this Hon’ble Tribunal, be pleased to declare that the Sale transaction entered into by the Corporate Debtor with the Respondent No. 2 as an undervalued transaction.
c. That this Hon’ble Tribunal, be pleased to direct the Respondent No.1 to remit a sum of Rs. 56,03,88,970/- towards the receivables written off by the Suspended Management of the Corporate Debtor.
d. That this Hon’ble Tribunal, be pleased to direct the Respondent No.1 remit a sum of Rs. 3,05,81,790/- towards the Advances written off by the Suspended Management of the Corporate Debtor.
e. To condone the delay, if any, in filing the present Application;
f. To mention the matter to seek urgent listing for the said Interlocutory Application, for urgent reliefs:
g. Costs
Brief Facts as per the Application:
# 4. The Corporate Debtor was admitted into Corporate Insolvency Resolution Process vide Order dated 23.09.2019 and Mr. Rajeev Nandkishore Bhatia was appointed as Interim Resolution Professional (“IRP”).
# 5. Subsequently, the Applicant was appointed as the Resolution Professional vide order dated 24.01.2020 passed in Miscellaneous Application No. 267 of 2020.
# 6. M/s Bagaria and Co. was appointed as the Transaction Auditor vide email dated 17.09.2020 and the Auditor submitted the Forensic/Transactional Audit Report on 10.06.2021.
# 7. The Resolution Plan submitted by M/s. KLJ Resources Ltd. was approved by 96.38% of the voting share of the members of committee of creditors. Accordingly, the said resolution plan was approved by this Tribunal vide Order dated 19.09.2022.
Submissions of the Resolution Professional/RP:
# 8. The Transactional Audit Report was provided to the Applicant on 10.06.2021. It is submitted by the Applicant that the Transactional Auditor in its Report, has reported certain transactions, which in the opinion of the Resolution Professional, casts a serious doubt that the same may be avoidable transactions. The Applicant vide it emails dated 08.10.2020, 19.10.2020, 28.10.2020, 04.11.2020, 25.11.2020, 30.11.2020, 15.04.2021, 01.05.2021, 21.05.2021 and subsequent correspondences had sought clarifications from the suspended director. However, the response received from him was not satisfactory and was not supported by any documentary evidence. The RP not being satisfied with the explanation provided by the Suspended Management requested the Transaction Auditor to re-ascertain as to whether the responses made by the Suspended director is satisfactory to hold that the transactions as appropriate. However, the Transaction Auditor did not respond to the same.
# 9. After reviewing ledgers and records of the Corporate Debtor and the Audit Report, the Applicant determined that alleged transactions, would be falling under the category of avoidable transactions – undervalued transactions under section 45 and fraudulent transactions under section 66 of IBC for the reasons and given below.
10. Undervalued Transactions
a. As per the Transaction Audit Report, the Corporate Debtor and Respondent no. 2, have common Promoters. Therefore, Respondent No.1 is a related party of the Corporate Debtor as contemplated under Section 5(24) of the Code.
b. During the look back period, the Corporate Debtor sold various items of speciality chemicals to its related parties at significantly low prices as compared to the market rate.
c. Vide email dated 08.10.2020, an explanation was sought from the erstwhile management of the Corporate Debtor, however the justification provided by the Director of the suspended board was not satisfactory. It mentioned that the said transaction has been done at competitive rates but no evidence was provided. Therefore, the said transaction does not appear to have been carried out in the ordinary course of business and creates suspicion over the conduct of erstwhile management.
d. Further, the erstwhile management has failed to establish the monetary or any other benefits accrued to the Corporate Debtor or its creditors on the account of such sale. Hence, the same also falls under the purview of undervalued transaction under Section 45 of the Code.
e. The Corporate Debtor was having liability to the tune of Rs.32.82 crore to pay off the creditors and a liability to the tune of over Rs.141.33 crore to Secured Creditors as per the audited balance sheet of the Corporate Debtor as on 31.03.2019 (including current liabilities and Secured Loans from Finailcia1 Institution). Further, the Corporate Debtor was also declared as an NPA.
f. Therefore, the instant transaction, appears to be an undervalued transaction as contemplated under Section 45 of the Code, as firstly, the said goods were sold by the Corporate Debtor to its related party at a significantly less price especially when the Corporate Debtor was into severe liquidity crunch.
g. Had the goods sold in the open market, the same would have fetched a better value thereby the transaction appears to have been done to defraud the creditors. Hence, it prima facie appears that the transaction were grossly undervalued since it is made without any consideration or economic gain and such transaction has not been made in the ordinary course of business.
# 11. Fraudulent Transactions
a. In relation to Fraudulent Transactions, the RP has submitted that within a period of 2 years prior to the commencement of the CIRP date of the Corporate Debtor, the Debtors of the Corporate Debtor have been written off to the tune of Rs.56,03,88,970/- and Rs. 3,05,81,790/-.
b. Vide an email dated 08.10.2020 an explanation was sought from the suspended director of the Corporate Debtor, but the response was not satisfactory.
c. The suspended director failed to establish the contractual terms entered into with such Debtors and the steps taken by the Corporate Debtor to recover the said sums, especially when the Corporate Debtor was facing a severe Liquidity crunch. Instead of taking any steps for recovery from the Debtors, the Corporate Debtor has simpliciter written off the same.
d. Any steps qua the recovery of the said sums would have enabled the Corporate Debtor to pay off the dues owed to the Secured Financial Creditors amounting to the tune of Rs.56.03 Crore and Rs. 3.05 Crore. Therefore, this conduct amounts to syphoning of the legitimate funds of Creditors. Hence, the said transaction falls under the purview of the Fraudulent Transaction under Section 66 of the Code.
IA/4272/2023:
# 12. The Suspended Director has filed the IA/4272/2023 under Rule 11 of NCLT Rules, 2016 for summary dismissal of the IA/796/2023 (“Avoidance Application”) challenging maintainability of the Avoidance Application on following grounds:-
a. The Corporate Debtor was admitted into CIRP by Order dated 23.09.2019 and the Resolution Plan of the successful resolution applicant was approved by this Tribunal on 19.09.2022. During the three years period of CIRP, the Applicant did not file any avoidance application nor was this issue was ever raised before the CoC.
b. The Respondent no.1 was permitted by this Tribunal to participate in the resolution process as a resolution applicant and at that stage too the RP did not raise any objection.
c. The Avoidance Application has been filed by the Erstwhile RP after the resolution plan was approved by this Tribunal on 19.09.2022 making the RP functus officio.
d. Regulation 35A of the CIRP Regulations prescribed timelines for the RP to form an opinion regarding any fraudulent preferential transactions and further prescribes timelines for filing the Avoidance Application and the present application is not filed within time limit.
# 13. The Respondent no.1 has relied on the judgment of the Hon’ble Delhi High Court in Tata Steel BSL Ltd. Vs Venus Recruiters Ltd. 2023 SCC Online Del 155 to contend if avoidance application was filed before approval of the resolution plan, only then the RP is entitled to pursue such application and he does not become functus officio in that case.
IA/4354/2023:
14. This application has been filed by M/s Chemical Brothers Enterprise Pvt. Ltd./Respondent no.2 (CBEPL) in Interlocutory Application No. 796 of 2023 challenging the maintainability of the application raising following objections:
I. Resolution Professional has become Functus Officio:
a. That once the Resolution Plan is approved, the Corporate Debtor is managed by a new management and the Resolution professional becomes functus officio. No Fresh Application can be filed by the resolution professional after CIRP is concluded.
b. The Applicant of I.A. 796 of 2023 ceased to act as the Resolution Professional of the Corporate Debtor on 19.09.2022 and the I.A. 796 of 2023 came to be filed on 02.12.2022. Thus, on 02.12.2022, the Resolution Professional has no locus standi to file any such application.
II. Resolution Professional has no authorisation to file this Application:
a. During the CIRP, the RP is authorised in law. However, after the CIRP is concluded, there is no authorization provided in law and no power is given to the resolution professional to file an application. No authorisation has been shown either by way of board resolution or CoC minutes to file such application.
b. The order dated 19.09.2022 passed by the Tribunal thereby approving the resolution plan permits the resolution professional only to pursue pending application and he was given no authority to file and fresh application.
c. The judgment of Hon’ble Delhi High Court in the matter of Venus Recruiters Private Limited v. Union of India and Ors. deals only with applications which were filed before the approval of resolution plan by the Adjudicating Authority.
III. Applicant herein has wrongly been sought to be categorized as related party of the Corporate Debtor.
a. The Resolution Professional has failed to provide the basis on which the Applicant is termed as the related party of the Corporate Debtor. It is imperative to clarify that the Applicant do not share any relational affiliation with the Corporate Debtor. The Applicant is not a related party of the Corporate Debtor as per Section 5(24) of the Code. This misclassification raises uncertainties regarding the basis of the captioned Interlocutory Application.
b. That one Mr. Sunil Tikekar was neither a shareholder nor a Director of the Corporate Debtor at any given juncture. He was working as a Consultant and was involved in marketing team of the Corporate Debtor. It is evident from the records of the Corporate Debtor as available on the public domain that neither the Respondent no.2 nor the Directors of the Respondent no.2 held any Directorship within the Corporate Debtor. Moreover, Mr. Sunil Tikekar does not hold any capacity within the Respondent no. 2 either. These details unequivocally establish that there exists no affiliation between the Applicant and the Corporate Debtor.
IV. I.A. 796 of 2023 filed by the Resolution Professional is contrary to the transactional audit report and is based on vague statements without producing a single invoice or documentary evidence to show that transaction is undervalued:
a. Mere reading of the Transactional Auditors Report demonstrates that the transaction entered between CBEPL and the Corporate Debtor is not an undervalued transaction.
b. The Resolution Professional has failed to mention any specific transaction which is to be considered as undervalued transaction. A mere reference to term “Sale Transaction” has been made but have failed to specifically mention the details of such sale transactions.
c. That the Resolution Professional has failed to show any documents and relevant comparisons. Every transaction in specialty chemical has to be seen differently as price is dependent on several factors like:
a. Date of sale and price of chemicals on that date.
b. Comparable quantities.
c. Comparable distance.
d. Indian sales vs. foreign sales.
e. Regular customers vs. ad hoc customers.
f. Discounts on advance payments g. Indian customers vs. foreign companies.
g. Availability or scarcity of chemicals at the relevant point of time.
Reply filed by RP in both the aforesaid IAs:
# 15. In response to this, the Resolution Professional has filed replies in both the IAs and has submitted that the said Resolution Plan which was approved by this Tribunal has mentioned that the RP would continue to prosecute the applications filed for avoidance transactions and has also dealt with the treatment of such proceeds in accordance with the applicable provisions of the Code.
# 16. Clause 2.18 of the said Resolution Plan is reiterated below for ease and reference:
“2.18. the Resolution plan shall in no way affect the validity and continuation of any proceedings filed by the Resolution Professional under Section 43, Section 44, Section 45, Section 46, Section 47, Section 50, Section 51, Section 66 and Section 67 of the IBC, 2016 (“Avoidance & Other Transactions”). All receivables along with all rights of the Corporate Debtor in respect of Avoidance & Other Transactions shall deemed to be assigned by the Corporate Debtor in favour of the secured financial Creditor (“SFC”). If requested by the SFC, the Corporate Debtor shall execute such documents as may be required for purpose of such assignment. Mr. Brijendra Mishra shall continue to prosecute and represent in any proceedings filed by him in respect of Avoidance & Other Transactions after NCLT Approval Date on behalf of the SFC, any and all payments received in respect of such transactions from any counter-parties shall be held in trust by him/Corporate Debtor and shall be passed through to the SFC. The SFC shall be entitled to take all steps and remedies and recourse available to it in respect of Avoidance & Other Transactions. All litigation costs in pursuing Avoidance & Other Transactions shall be borne by the Corporate Debtor and can be set off by the CD against any recoveries made in respect of such transactions.”
# 17. Further, during the course of hearing of IA 2464 of 2021, the RP had duly apprised this Hon’ble Tribunal the decision of the CoC allowing the Respondent to pursue Applications filed under Section 43, 45 and 66 of the Code and accordingly, this Tribunal was pleased to grant liberty to the RP to pursue Applications filed under Sections 43, 45 and 66 of the Code pursuant to the approval of the said Resolution Plan and the same was duly recorded in the order dated 19.09.2022.
# 18. Upon the bare perusal of the Forensic Auditors’ Report, the Respondent was not satisfied with the report and neither the responses received from the suspended directors. Thus, the Respondent formed his own opinion and also addressed an email dated 25.12.2022 to the Forensic Auditor to provide clarifications with regards to the vulnerable transactions. However, as the Forensic Auditor did not respond to the said email, the Respondent, based of his formulated opinion proceeded to file I.A. 796 of 2023 to bring on record the vulnerable transactions that the Corporate Debtor was involved in before this Hon’ble Tribunal for adjudication.
Analysis and Findings
# 19. Heard Ld. Counsel for the parties and perused the record.
# 20. The Resolution Professional had appointed the Transactional Auditor for performing the Transaction Audit of the Corporate Debtor. The Transactional Auditor in its Report, has reported certain transactions which in the opinion of the Resolution Professional casts a serious doubt that the same may be avoidable transactions. In view thereof, the Erstwhile Resolution Professional has filed IA 796/2023 under section 45 and 66 of IBC.
# 21. The Resolution Professional has stated that sales transaction with Respondent No. 2 appears to be undervalued transaction under section 45 of the Code.
# 22. The Resolution Professional has further stated that Rs. 56,03,88,970/- and Rs. 3,05,81,790/- have been written off while no steps have been taken to recover the same and therefore this conduct of the management amounts to syphoning of the funds of the Corporate Debtor and fall under the purview of the fraudulent transactions under section 66 of the Code.
# 23. Respondent No. 1 and Respondent No. 2 have filed Interlocutory Applications bearing No. 4272/2023 and 4354/2023 respectively challenging the maintainability of this I.A./796/2023. The grounds of challenge by both the Respondents are similar as detailed below:-
a. Regulation 35A of CIRP Regulations prescribed timelines for the Resolution Professional to form an opinion regarding any avoidance transactions and for filing applications for avoidance transactions. In the present case no application was filed within the prescribed timeline.
b. After the sanction of the resolution plan by the Adjudicating Authority on 19.09.2022, the applicant, Resolution Professional had become functus officio. No avoidance application was filed during the CIRP.
c. The Resolution Professional had no authority to file avoidance applications unless specifically authorized by competent person.
d. Applicant has wrongly categorized the Respondent No. 2 as related party of the Corporate Debtor.
e. The application is based on vague statements without providing any documentary evidence and is contrary to the findings of the transactional audit report.
# 24. Having gone through the pleadings carefully, we note certain striking features about this application, as follows: -
a. that the present application has been filed by the Erstwhile Resolution Professional on 05.12.2022, two and a half months after the resolution plan was approved by the Adjudicating Authority on 19.09.2022.
b. On the date of approval of the resolution plan by the Adjudicating Authority, no avoidance application was pending with it.
c. No details whatsoever have been provided as to how regarding the alleged sale transactions are labelled as being undervalued transactions.
d. No details have been provided as to what is the market value of the alleged transaction and at what value the sale transactions were entered into. No evidence/invoice etc. is placed on record relating to the valuation of the goods.
e. The Forensic Auditor has not concluded that the alleged transactions are undervalued transactions.
f. As far as the alleged fraudulent transactions of written off balances are concerned, the Forensic Auditor has stated that the management has provided reasons justifying the write offs as such these are not avoidable transactions.
g. Resolution Professional has merely expressed its suspicion that the alleged transactions may be avoidable.
# 25. First, we will deal with each of the objections raised by the Respondents.
Whether Regulation 35A of CIRP Regulations is mandatory
# 26. It is correct that Regulation 35A of CIRP Regulations prescribed timelines for forming an opinion, for making a determination and for filing application. We refer to Regulation 35A of CIRP Regulations, 2016:
Regulation 35A. 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 sections 43, 45, 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 makes a determination under sub-regulation (2), he shall apply to the Adjudicating Authority for appropriate relief on or before the one hundred and thirtieth day of the insolvency commencement date.
# 27. Thus, as per the above sub-regulation (1), the RP is required to form an opinion, within 75th day of insolvency commencement date (ICD), whether a corporate debtor has been subjected to any transaction covered under sections 43, 45, 50 or 66. Thereafter, under sub-regulation (2), the RP is required to make a determination on or before 115th day of ICD. Under sub-regulation (3), where the RP makes a determination under sub-regulation (2), he has to apply to Adjudicating Authority within 130th day of ICD (as amended vide Notification no. IBBI/2022-23/GN/REG 093, dated 16.09.2022 w.e.f 16.09.2022).
# 28. Relying on its earlier judgment in Company Appeal (AT) Insolvency No. 583 of 2021, the Hon’ble NCLAT in the case of Prasant Chandra Rath (Suspended Director of Corporate Debtor) vs. Surya Kanta Satapathy (RP), (2022) ibclaw.in 789 NCLAT has held that
“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.” (emphasis provided)
# 29. Hence we reject the contention of the Respondents that instant avoidance application should be rejected on the ground of not filing within the prescribed time limit.
Resolution Professional had become functus officio
# 30. It is observed that the Resolution Plan of the Corporate Debtor was approved on 19.09.2022 and IA/796/2023 was filed on 05.12.2022, nearly two and a half months after the sanction of the Resolution Plan by the Adjudicating Authority. In relation to this, the RP as well as Respondents have relied on the judgement of Tata Steel BSL Ltd. vs. Venus Recruiters Ltd. 2023 SCC Online Del 155. Therefore, it would be profitable to refer to the relevant paragraphs of the judgment at this juncture.
# 31. The relevant paragraph of the said judgment is as under:
“77. Secondly, while Regulation 35A endeavours to ensure that an avoidance application is determined and filed at the earliest to facilitate resolution of the Corporate Debtor, it does not envisage a situation where the RP is not able to form an opinion, make a determination or file an application as per the prescribed timeline. In the peculiar facts of this case, the RP did not have the requisite records to do so as per such timelines. The intent behind the insertion of clause 3A and 4 to Regulation 35A in fact appears to be that a resolution applicant is able to take cognizance of the avoidable transactions at the earliest. The duty cast by the IBC under Section 25(2) (j) is with respect to the RP filing the application before conclusion of the CIRP. The said obligation has been discharged. The premise of 35A timelines not being mandatory itself, adherence to Regulation 35A timelines cannot be required so strictly as to render the provisions of avoidable transactions redundant.” [Emphasis provided]
# 32. In the above judgement, the Hon’ble Division Bench of Delhi High Court has held that Resolution Professional can file the avoidance application under Section 25(2) (j) only before conclusion of CIRP. In the matter of Venus Recruiters, the RP filed an application under Section 25(2)(j), Sections 43 to 51 and Section 66 of the IBC on 09.04.2018 and NCLT approved the Resolution Plan of Tata Steel filed by RP on 15.05.2018. The avoidance application having been filed before approval of the resolution plan, it was held that the RP is entitled to pursue the said application even after approval of the Resolution Plan and the RP does not become functus officio with regard to the avoidance applications in that case.
# 33. However, in the present case, IA/796/2013 was filed on 05.12.2022 after the Resolution Plan was approved by this Tribunal on 19.09.2022. The Learned Single Judge of Delhi High Court in Venus Recruiter Pvt. Ltd. vs. Union of India & Ors. W.P.(C) 8705/2019 & CM APPL. 36026/2019 case has held that CIRP comes to an end with a successful resolution plan having being approved. The mandate of the RP is extended till approval of the plan or appointment of liquidator. Thus the RP’s authority is limited as per proviso 23(1) of the IBC which sets outer limit for RP’s authority and functioning. This part of the Ld. Single Judge’s decision has not been set aside by the Hon’ble Division Bench of Delhi High Court in TATA Steel case (supra). The Hon’ble Division Bench has observed that “the duty cast by the IBC under Section 25(2) (j) is with respect to the RP filing the application before conclusion of the CIRP.”
# 34. In view of the above discussions, we are fully convinced with Respondents’ submission that RP had become functus officio after the resolution plan was approved on 19.09.2022.
# 35. It is argued on behalf of RP that liberty was granted to the RP in the plan approval order dated 19.09.2022, to pursue applications filed under Sections 43, 45 and 66 of the Code. It is imperative to refer to the relevant para of the said resolution plan approval order :
“vii. In line with the judgement of Hon'ble Delhi High Court in the matter of Venus Recruiters Private Limited vs. Union of India and Ors. and as proposed by the Resolution Professional during the course of hearing of the Resolution Plan, the Resolution professional will pursue application u/s. 43, 45, 60 & 66 with the Adjudicating Authority.
viii. In line of the above the Bench as decided by COC approves that, even subsequent to the approval of the Resolution plan any other application under Section 43, 45, 49, 50, 66, 68, 70, 71, 72, 73 and 74 of the Insolvency and Bankruptcy Code, 2016, pending would be pursued by the COC.”
# 36. From the bare reading of the aforesaid paras, it is clear that firstly, the liberty was granted to pursue pending applications under section 43, 45, 49, 50, 66, 68, 70, 71, 72, 73 and 74 of IBC. Secondly, liberty was granted to CoC. There is no express liberty to file any fresh avoidance application. It would be pertinent to note that the Adjudicating Authority has referred to the judgement of Hon'ble Delhi High Court in the matter of Venus Recruiters Private Limited vs. Union of India and Ors. and liberty is granted in line with the above judgment. The judgements of Ld. Single Judge and Division Bench of Delhi High Court have been discussed in detail in preceding paragraphs. Therefore, we reject the submission of the RP that he was authorised to file such avoidance application by this Tribunal.
# 37. We could have dismissed the I.A. 796/2023 on above technical grounds only. However, since the scheme of the IBC is to ensure maximum recovery by corporate debtor for the benefit of its creditors, no person should be allowed to go scot-free deriving benefits from the avoidance transactions causing unjust harm to the corporate debtor, we also examined the alleged avoidance transactions.
# 38. First we deal with the alleged undervalued transactions. As already noted, no details of the said transactions are provided, no specific transaction is pointed out, general statements are made without placing on record any kind of evidence to indicate the market value and the value at which transaction was entered. The resolution professional has not shown even a single invoice with comparable invoices to show the transaction as undervalued. The Resolution professional’s claim of undervalued transactions is merely based on surmises and conjuncture.
# 39. At this juncture, we may refer to section 45 of IBC as follows:-
“45. Avoidance of undervalued transactions. –
(4) If the liquidator or the resolution professional, as the case may be, on an examination of the transactions of the corporate debtor referred to in sub-section (2) determines that certain transactions were made during the relevant period under section 46, which were undervalued, he shall make an application to the Adjudicating Authority to declare such transactions as void and reverse the effect of such transaction in accordance with this Chapter.
(5) A transaction shall be considered undervalued where the corporate debtor–
(a) makes a gift to a person; or
(b) enters into a transaction with a person which involves the transfer of one or more assets by the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor, and such transaction has not taken place in the ordinary course of business of the corporate debtor.”
# 40. Under Section 45(2) of the IBC, a transaction is considered to be undervalued if the corporate debtor:
(a) makes a gift to a person; or
(b) enters into a transaction with a person which involves the transfer of one or more assets by the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor, and such transaction has not taken place in the ordinary course of business of the corporate debtor.
# 41. The scope of avoidance application under section 45 is distinguishable from the scope of avoidance application under section 43 of IBC. Under section 43(2) there is deeming fiction if conditions under 43(2)(a) and 43(2)(b) are satisfied with exception of the transactions mentioned in sub-section (3) of section 43 of IBC. However, there is no deeming fiction under section 45 of IBC. Under section 45, it should be proved that the Corporate Debtor has entered into the transaction for transfer of its asset(s) for a consideration which is lesser than the market value. Then only any transaction can be classified as undervalued.
# 42. The “sales transactions” are prima facie in the ordinary course of business of the corporate debtor. The RP has failed to demonstrate how these sales transactions are not in the ordinary course of business. Secondly, whether a transaction is undervalued or not would be a fair market value and the actual value of the transaction. However, the RP has failed to even refer to the valuation aspect altogether.
# 43. Further, the Respondent No. 2 has stated that The Resolution Professional has failed to provide the basis on which the Respondent No. 2 is termed as the related party of the Corporate Debtor. It was further clarified by Respondent No. 2 that it does not share any relational affiliation with the Corporate Debtor and is not a related party of the Corporate Debtor as per Section 5(24) of the Code. This aspect has not been rebutted by the RP. However, even considering the transactions with the related party the Auditor has analysed the management response to the undervalued transactions. The detailed response given by the management has been reproduced in the Transaction Audit Report. The sale price to Chemical Brothers have been explained in detail. After considering the same, the Auditor has concluded that “Management has provided reasons justifying the above mentioned sales are not undervalued transactions or preferential transactions.”
# 44. Considering all aspects, we have no hesitation to conclude that the RP has failed to prove the undervalued transactions.
# 45. Now, we deal with the alleged fraudulent transactions. The Resolution Professional has stated that the Corporate Debtor has written off to the tune of Rs. 56.04 Crore (approx.). It is submitted that the director of the suspended board of the Corporate Debtor decided to write off the said sum during the look back period instead of taking any steps to recover the said sum. According to RP this amounts to siphoning of the legitimate fund of the Creditors.
# 46. He has further submitted that Corporate Debtor has also written off to the tune of Rs. 3.06 Crore (approx.). According to the RP, the management of the Corporate Debtor, without any reasonable explanation, simpliciter decided to write off the said sum during the look back period. Therefore, the said transaction creates the suspicion over the conduct of the management.
47. We have gone through the relevant portion of the Transaction Audit Report and given our thoughtful consideration. We refer the extract from the Transactional Audit Report:
“Clause 3.4 of the Report states-
“Impairment of Debtors/receivables
During FY 19, the Company has written off Debtors/receivables of Rs. 56,03,88,970.
Management has provided reasons justifying that the above mentioned write offs are not avoidable transactions. Considering the same there is no material element of transactions to be rated as avoidable transactions u/s 46 of IBC, 2016.”
# 48. The Report has further referred to the “Management Response” as follows:-
“Lakeland’s partnership with Dr. Petry began in April 2007. Lakeland was responsible to market their products and establish Petry brand in India with their marketing network in India and all expenses were to be borne by Lakeland.
In return Petry were to transfer technology in stages so all the products will be produced at Lakeland plant to make them cheaper which will push the sales higher. The partnership was successful and sales grew and the Petry brand was established in two years. When the time came to get return on investment from Petry, they started delaying the transfer of technology to Lakeland by giving reasons and extending the timeline. Petry’s ambition to takeover control of the market and goodwill established by Lakeland led to a serious legal battle for two years that took negative turn and the partnership was terminated in July 2013. Subsequently Petry and its representatives started selling the products directly in the Indian market by tarnishing Lakeland’s image, brand value, market control and goodwill as Lakeland had established Petrys products at customers as per agreement. This led to customers making counter claims of quality, performance, stopping payments after the split which was instigated by Petry representatives in India. This lets to Lakeland having such large sums of money getting stuck with key customers at that time.”
“The companies faced severe problems when common effluent treatment plants were shut down across Industrial areas in India due to pollution boards, High Courts, Environment ministry changing norms and asking to have zero discharge facilities or face closures. Basically textile companies in Southern Indian areas Tripur, Erode, Coimbatore and North Ludhiana, West Vapi faced closures. Many of them our were customers and resulted in bad debts over night as these customers could not set-up zero discharge facilities over nigh and had to close down and the resulting effects resulted in them not being able to restart operations and us facing bad debts.”
# 49. Clause 3.4 of the Report in relation to “Impairment of Advances to suppliers” states-
“During FY 19, the Company has written off Advances to suppliers worth Rs. 3,05,81,790.
# 50. The Report has further referred to the “Management Response” as follows: -
“Prior to 4-5 years we had given advances to suppliers to buy raw materials and advances were outstanding in the books of accounts. Since these advances were not recoverable, we had written them off in 2019.”
# 51. Thereafter the Auditor has analysed and given its remarks as follows: -
“Management has provided reasons justifying that the above mentioned write offs are not avoidable transactions. Considering the same there is no material element of transactions to be rated as avoidable transactions u/s 46 of IBC, 2016.”
# 52. The Transaction Auditor has mentioned in his report that there is no material element of transactions to be rated as avoidable transactions u/s 46 of IBC. From the above statement, it is clear that these are not preferential or undervalued transactions, which means the transactions when undertaken were at market rate and at arm’s length. Therefore, if any such amount when becomes irrecoverable and then written off due to passage of time cannot be termed as fraudulent.
# 53. We also note that duty is cast on RP to first form an opinion, within 75th day of ICD, whether a corporate debtor has been subjected to any transactions covered under sections 43, 45, 50 or 66. Thereafter, where the RP forms an opinion then he has to make a determination and then apply to Adjudicating Authority. However, no opinion has been formed by RP under sub-regulation 35A and no determination has been made by RP under sub-regulation (2). He has merely expressed his suspicion over the transactions.
# 54. Moreover, it would be appropriate to refer, Section 66 of the IBC, 2016: 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 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 contributions 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 the 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.
(3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10A.”
# 55. From the bare reading of Section 66 of IBC it can be seen that to attract the provision of section 66, RP is required to demonstrate that the business of corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose. Therefore, one of the essential ingredients of section 66 is that there must be “intent to defraud creditors” of the corporate debtor or “any fraudulent purpose”.
# 56. Firstly, RP has failed to demonstrate that the business of the corporate debtor has been carried on with intent to defraud the creditors or for any fraudulent purpose. Secondly, the forensic auditor has commented that reasons justifying the write offs has been offered by the management. Thirdly, we note that the application under section 66 of the IBC has been filed by the RP after the corporate insolvency resolution process.
# 57. We further refer, the case of Mrs. Renuka Devi Rangaswamy vs. in M/s. Regen Powertech Private Limited & Ors. Comp. (AT) (CH) (Ins) No. 357 / 2022 & IA/814/2022, wherein, Hon’ble NCLAT has held that-
“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.”
# 58. It is settled position of law that to prove the transaction to be fraudulent in nature, the degree of proof and evidence required should be of unimpeachable nature and not based on mere suspicion that too when reasonable explanation has been offered for the write offs. Therefore, we are of the considered view that the applicant has not able to establish the transactions questioned in the application are fraudulent in nature. In the light of the same, the IA No. 2907/2021 is dismissed being without any merits.
# 59. We are puzzled with the conduct of the RP that during CIRP from 23.09.2019 to 19.09.2022 he did not take any steps either for recovery of the amounts written off or for filing avoidance application. It was only after he became functus officio after resolution plan was approved by Adjudicating Authority that he has half-heartedly filed the present application on the basis of suspicion while the forensic auditor has stated in audit report that reasonable explanation has been offered.
# 60. Conclusion:
a. The Corporate Insolvency Resolution Process period ends with the approval of the resolution plan by the Adjudicating Authority.
b. At the end of Corporate Insolvency Resolution Process, the resolution Professional becomes functus officio for the purpose of corporate insolvency resolution process but he is not functus officio for prosecuting avoidance applications provided such applications are filed by Resolution Professional during corporate insolvency resolution process period and not after end of corporate insolvency resolution process period.
c. The RP has to prima facie form an opinion about avoidance transactions. After formation of opinion, he has to make a determination, which means he has to quantify the amount with supporting evidence, documents/material to prove the transactions are covered under section 45 or 66 of IBC.
d. Merely write-off in the books of accounts of Corporate Debtor does not necessarily amount to carrying on business with fraudulent intent as the degree of proof and evidence required should be of impeccable nature and not based on suspicion.
e. Scope of Section 66 of the Insolvency and Bankruptcy Code, 2016 requires the Resolution Professional/Liquidator to demonstrate that business of Corporate Debtor was carried with intent to defraud the creditors or for any fraudulent purpose.
# 61. For all the reasons discussed above, we conclude that the Applicant/Resolution Professional has failed to establish that the alleged transactions in the present application are undervalued under section 46 or fraudulent under section 66 of IBC. We find no merit in the present application which deserves to be dismissed.
# 62. Accordingly, we dismiss IA/796/2023, allow IA/4354/2023 and IA/4272/2023. All applications are thus disposed of.
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