CA Manish Sukhani Vs. Shri Amit Lodha & Others - Sharing of common infrastructure, for which the costs has been borne by the Corporate Debtor, certainly results into undue benefit having been given to the related parties at the cost of the Corporate Debtor, and such benefit certainly has an element of fraudulent intent.

NCLT Mumbai-1 (07.12.2023) in CA Manish Sukhani Vs. Shri Amit Lodha & Others [I.A. 1552 OF 2020  in C.P.(IB) No. 4697/MB/2018  ] held that;

• Sharing of common infrastructure, for which the costs has been borne by the Corporate Debtor, certainly results into undue benefit having been given to the related parties at the cost of the Corporate Debtor, and such benefit certainly has an element of fraudulent intent.

• Since, the Applicant has estimated the quantum of personal benefit to the persons other than corporate debtor, at the cost of corporate debtor, on the basis of submissions of the Respondent no. 1, we do not find any infirmity therein.

Excerpts of the Order;     

1. This Application IA 1552/2020 is filed in C.P.(IB) 4697/MB/2018 by Sh. Manish Sukhani, Resolution Professional (“Applicant”) in the Corporate Insolvency Resolution process (“CIRP”) in the matter of M/s Indsur Global Limited (“Corporate Debtor”0 in terms of section 66 read with Section 60(5)© of the Insolvency & Bankruptcy Code, 2016 (“Code”) to seek following relief – 

• a. an Order U/s. 66 (1) of the Code directing Sh. Amit Lodha (Respondent No. 1 or R-1) to remit the amount of 3,75,000 towards the rent for the using premise of the Corporate Debtor for his personal use; 

• b. an Order U/s. 66 (1) of the Code directing the Respondent No. 1 to remit to the Corporate Debtor's account an amount of 37,80,000/- towards the lease rental of the flat which is being used by the R-1 for his residential purpose only; 

• c. an Order U/s. 66 (1) of the Code directing M/s STE MET (India) Private Limited (Respondent No. 4 or R-4) to remit to the Corporate Debtor's account an amount of 2 7,50,000/- towards the rent for the using premise of the Corporate Debtor for its business use; 

• d. an Order U/s. 66 (1) of the Code directing M/s Indsur Gears Limited (Respondent No. 5 or R-5) to remit to the Corporate Debtor's account an amount of 27.50,000/- towards the rent for the using premise of the corporate debtor for its business use; 

• e. an Order U/s. 66 (1) of the Code directing the R-1, Smt. Indu Lodha (Respondent No. 2 or R-2) and Shri Suresh Mal Lodha (Respondent No. 3 or R-3) to remit the afore-mentioned amounts to the Corporate Debtor's account in case the R-1, R-4 and R-5 fails to adhere the directions as mentioned in clause (a) to (d) above. 

# 2. The CIRP in the matter of the Corporate Debtor commenced w.e.f. 24.09.2019 vide an Order of this Tribunal. The said Order was communicated to the Applicant vide an E-mail by the Registrar on 12.10.2019. Thereafter, immediately on 14.10.2019 the Applicant took charge of the affairs of the Corporate Debtor and further cause public notice inviting claims by the Stakeholders of the Corporate Debtor on 15-10-2019. 

2.1. The R-1 to R-3 are the Directors (with Suspended Powers) of the Corporate Debtor and were in charge of the affairs of the Corporate Debtor before commencement of CIRP. R-4 is a company under Companies Act, 1956 under the management of the R-1 & R-2, therefore is a related party in terms of Section 5(24) of the Code. R-5 is a company incorporated under the Companies Act, 1956 owned by the management of brother of R-1 along with R-2 & R-3 as shareholders, therefore, is a related party in terms of Section 5(24) of the Code. 

2.2. Based on the received claims the Applicant constituted a Committee of Creditors (“CoC”) of the Financial Creditors of the Corporate Debtor on 22.11.2019 and re-constituted it on 18- 01-2020, and convened as many as 7 (seven) meetings of the CoC for the functioning of the CIRP. In the 3rd CoC meeting held on 22-01-2020, the CoC moved resolution to appoint M/s. Amit Ray and Co.. Chartered Accountants (hereinafter referred as the Auditor) to perform the "Forensic Audit of the Corporate Debtor and was approved in the e-voting concluded on 30-01-2020. 

3. It is stated by the Applicant that the Auditor has evaluated the transactions carried out by the Corporate Debtor within the period starting from 24.09.2017 to 24.09.2019 for classifying the transactions as Preferential or Undervalued or Transaction defrauding creditors or fraudulent transaction, as the case may be, and submitted its final report to the Applicant on 12.06.2020 with the observations over the reviewed transactions. 

3.1. Thereafter, the Applicant on perusal of the Report requested the Auditor to revisit and comment on some specific points. 16. The Auditor submitted its Supplementary Report to the Transaction Audit Report on 18-08-2020. The Auditor has observed in its report that the Corporate Debtor has performed a Preferential Transaction as per the provisions of the S. 43 of the Code with its related parties i.e. the Respondents. 

3.2. It is stated that the address of the Registered office of the Corporate Debtor and the address of the Registered office of the R-4 is one and same. The same premise was being lease hold premise taken by the Corporate Debtor from July 2018 for a monthly lease amount rental amount of Rs. 5,00,000/-. Further, the same premise was being used by the RI for his personal office use and also by the R5 for its business purpose 

3.2.1. It is stated and submitted that the 25% of the said premise is being used by the entities other than the Corporate Debtor i.e. R-1, R-4 and R-5. However, from these parties no rentals have been booked by the Corporate Debtor for use of the said premise and the Corporate Debtor alone had borne all the rentals. As per the seating ratio of the officials of the entities other than the Corporate Debtor, as confirmed by the R-1 himself, the proportionate lease rental for the usage by the R-1 comes to an amount of Rs. 25,000/- per month, and that for R-4 and R-5 comes to an amount of 50,000/-, each, per month. 

3.2.2. Accordingly, for the period from Jul. 2018 to Sep. 2019 the R1 was supposed to pay an amount of 3.75,000/- and R4 and R5 were supposed to pay an amount of 7.50.000/- each for the use of the Corporate Debtor's premise. However, not a single penny has been paid by these parties. 

3.2.3. In respectful submission of the Applicant since, the RI, R4 and R5 are the related parties of the Corporate Debtor; the Corporate Debtor, fraudulently, has not booked the amount of the rentals from the said Respondents. This act of the Corporate Debtor is clearly in violation of the provisions of the S. 66 (1) of the Code. 

3.3. A lease agreement pertaining to one flat situated at Tower A, Omkar 1973, Pandurang Budhkar Marg, Worli, Mumbai has been entered by the Corporate Debtor, and R-1 signed the said lease agreement on behalf of the Corporate Debtor and this flat is being used solely by the R-1 for his residential purpose along with his family. The lease amount of the said flat is Rs. 2,70,000/- per month which is being paid from the account of the Corporate Debtor since Aug. 2018 till Sep. 2019. So. in total till the commencement of the CIRP, the Corporate Debtor has paid an amount of 37,80,000/- towards the lease rental of the said flat. This transaction had been entered by the Corporate Debtor is only for the benefit of the R-1 and family of the R-1 and for the said fraudulent purpose the Financial Asset of the Corporate Debtor has been used. 

3.3.1. Therefore, in respectful submission of the Applicant the amount which has been spent by the Corporate Debtor, fraudulently, for the afore-mentioned purposes has to be contributed back to the account of the Corporate Debtor from the Respondents. 

3.4. The afore-mentioned acts of the Corporate Debtor are clearly fraudulent in nature and performed only to give benefit to the related parties of the Corporate Debtor and therefore the Respondents are liable to make their contributions as per the provisions of the sec 66 of the code to the account of the Corporate debtor. 

4. The Respondents R1 to R5 have filed a joint reply stating that the states transactions are not covered u/s 43 of the Code. It is further stated that 

5. 6. The Applicant states in point no. 18 that the registered address of Corporate Debtor and R4 - STE MET (1) Pvt. Ltd is the same. Also the same premise was lease held by the Corporate Debtor since July 2018. In point 19 it is stated that R1 - Amit Lodha used the premises for his personal purpose. Also in point no. 20, the Applicant states that the same premise was used by R5- Indsur Gears Ltd. 

5.1. It is interesting to note here that the email explanation to the above sitting arrangement exhibited and annexed as Annexure II in the Application is provided by R-1 - Amit Lodha. And R1 has stated that R4 used to occupy only TWO seats for which the rent is claimed to be Rs. 7,50, 000/-. The basis of such calculations is on the percentage usage of the seats. It is not acceptable and not logical as well. The Applicant has considered only one statement out of said Annexure II that "approximately 25% seats were used by Non IGL (i.e.. non Corporate Debtor persons) entities. Hence the said claim is baseless. 

5.2. It is further explained in Annexure II that Indsur Gears Ltd had provided one expert accountant during the forensic audit by one of the Financial Creditors prior to CIRP. It is on record in the report of that forensic audit. It was the understanding that as the accountant was on record of R-5- Indsur Gears Ltd. and nothing was not paid separately by the Corporate Debtor for his services to R5; RS-Indsur Gears Ltd will be allowed to use two seats in the office. This understanding is in the commercial prudence and hence should/need not be ignored. 

5.3. The allegations that R1 Mr. Amit Lodha used this office for personal use. When R1 is an NRI by status and also the Director (Currently Suspended) of the Corporate Debtor, his presence in the said office becomes unquestionable. It is bound that he will use the office for all/any purpose. The claim of the Rent from him is lack of knowledge of mundane commercial transactions which are obvious. 

5.4. Further, the Applicant states that the flat addressed at Tower A, Omkar 1973, Pandurang Budhkar Marg, Worli, Mumbai was used by R1- Amit Lodha and his family as residence the rent of which was paid by the Corporate Debtor. R-1 states and submits that it was part of the Remuneration as Director of the Corporate Debtor. This again is part of commercial practices approved by Companies Act 2013. As stated in the Auditor's report exhibited as Annexure I, this has been considered as due because the same  is not mentioned in the Director's Report or other Annual filings. It must be noted that the Corporate Debtor is compliant till 2018 as per records with ROC on the MCA website. (Master data exhibited as Ex. A) It is important to note that the rent claimed in amounting to Rs. 37,80,000/- is for the period of August 2018 to September 2019. The Annual filing would have taken place by August/September 2019 and August / September 2020 in which the said details would have been updated. But the initiation of CIRP led to suspension of R1. Hence this is not a noncompliance at all by R1 - Amit Lodha for which he is been made answerable in the said Application. Moreover, Being an NRI, he needs a residential accommodation here in India and the end recipient of the rent for the said flat was paid to an unrelated third party owner of the said flat. Hence, this transaction does not even fall within the category of "Related Party Transaction". 

6. We have heard the Counsel and perused the material on record. 

6.1. At the outset, we find that the Respondents have filed their reply basis section 43, however, the applicant has sought prayers in terms of section 66 of the Code, which provides that “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”. 

6.2. Section 66 of the Code stipulates that the business of the Corporate Debtor is caried out with intent to defraud creditors or for any fraudulent purpose. Accordingly, there has to be an element of fraudulent intent to bring the transactions within four corners the Section 66 of the Code. Sharing of common infrastructure, for which the costs has been borne by the Corporate Debtor, certainly results into undue benefit having been given to the related parties at the cost of the Corporate Debtor, and such benefit certainly has an element of fraudulent intent. Accordingly, we find that the transactions fall under the ambit of section 66 of the Code, and an appropriate relief ought to be granted. 

6.3. The R-1 has pleaded that he was non-resident Indian, and in such case, he could not have used the office premises of the Corporate Debtor for his personal purpose and has also relied upon the disclosures made in the annual filings with the MCA wherein no personal expenditure has been attributed to the Respondents. We also find that the R-1, on the one hand, has pleaded that he was non-resident, and at the same time, has pleaded that residential house at the cost of the Corporate Debtor provided to him and his family was part of the Remuneration as Director of the Corporate Debtor. 

6.4. We find from the Forensic Auditor’s report that the there is clear finding of usage of 25% of the office of the Corporate Debtor by persons other than the Corporate Debtor, which has been demonstrated that the said office premises was having 20 seats out of which 5 seats were occupied by the persons other than the Corporate Debtor for their own purpose, not connected or related to the purpose of business of the Corporate Debtor. The Auditor has also brought on the record that Respondent no. 4 was having common registered office address. Further, it is not denied by the Respondent that Respondent no. 5’s staff was occupying the office of the Corporate Debtor for the purpose of business, however, the same has been defended on the basis that Respondent No. 5 was bearing the cost of one accountant, who was rendering the services to the Corporate in return. However, there is nothing on record to indicate that these intra-group transactions were accounted for in the books and were at arm’s length as mandated u/s 188 of the Companies Act, 2013. The fact of common usage of office is apparent from the records, in so far as Respondent no. 4 & 5 are concerned. 

6.5. As regards usage of the office and Residence by the Respondent no. 1 for personal purpose, we find that the Respondent No. 1 has defended this stating that he was a non-resident and could not have carried on any business from the premises of the Corporate Director and the residence was provided as part of his Director’s remuneration., however no evidence has been filed to substantiate that the Respondent No. 1 was subjected to Income Tax on provision of rent free accommodation as part of the remuneration or such provision of rent free accommodation at cost of Corporate Debtor was approved by the Corporate Debtor in accordance with the Companies Act, 2013. 

6.6. We find from the email of Respondent No. 1, forming part of this Application, that the Respondent no. 1 has admitted usage of 25% of office space by persons other than Corporate Debtor, however, he also stated in the same e-mail that Respondent No. 5 had provided availability of qualified accountant for 6 months and did not charge any fees, which is stated to be in accordance with the understanding to compensate the corporate debtor for usage of their office. It is further stated in the said email that Respondent No. 5 had no staff in office premises at Lower Parel office, which was occupied from September, 2017 to July, 2018, thereafter all companies, including Corporate Debtor, were shifted to Pinnacle BKC office from August, 2018 to September, 2018. 

6.7. Since, the Applicant has estimated the quantum of personal benefit to the persons other than corporate debtor, at the cost of corporate debtor, on the basis of submissions of the Respondent no. 1, we do not find any infirmity therein. In the absence of any other evidence refuting the findings of the Auditor’s except that the Lower Parel office had 18 seats, and not 20 seats, we are of the considered view that an order in terms of Section 66(1) can be passed directing the Respondent No. 1, Respondent No. 4 & Respondent No. 5 to contribute in terms of prayer (a), (b), & (c) within 30 days of communication of this Order. It is further directed that Respondent no. 1 to Respondent no. 3 shall be liable to contribute, severally or jointly, to the Corporate Debtor, to the extent any money due from the Respondent No. 1, Respondent No. 4 & Respondent No. 5 in terms of prayer (a), (b), & (c) is not recovered within 30 days of communication of this Order, as the Respondent no. 1 to Respondent no. 3, being responsible for management of Corporate Debtor, were knowingly parties to these transactions. It is clarified that the sums due under this Order shall be a charge, in terms of section 67 of the Code, on any debt or obligation due from the corporate debtor to him, or on any mortgage or charge or any interest in a mortgage or charge on assets of the corporate debtor held by or vested in him, or any person on his behalf, or any person claiming as assignee from or through the person liable or any person acting on his behalf. 

7. With aforesaid directions, this IA 1552/2020 is disposed of as allowed. 

----------------------------------------------

Nav Jyoti Agro Foods Private Limited Vs. Rajinder Kumar & Ors. - Arbitrarily writing off debts within a short span just before the incidence of CIRP without making any effort to realise the amounts leads to a drastic reduction in the market value of the Corporate Debtor.

NCLT Chandigarh (08.12.2023) in Nav Jyoti Agro Foods Private Limited Vs. Rajinder Kumar & Ors. [IA No.909/2019 In CP (IB) No. 337/Chd/Hry/2018 ] held write-offs of the receivables just before DOC as fraudulent transactions and observed as under;

• The fraudulent intent of the respondents becomes obvious as correct figures of receivable and write-offs have not been reflected in the Income Tax return filed by the CD under the management of the respondents- suspended directors in the relevant assessment years.

• Arbitrarily writing off debts within a short span just before the incidence of CIRP without making any effort to realise the amounts leads to a drastic reduction in the market value of the Corporate Debtor.

Blogger’s Comments; Write-offs by a company can be classified in two categories; 

• First category is the write-off pursuant to a settlement with the debtor, where waiver of receivables/debts is granted by the company. 

• Second category is the technical write-off by the company. Write-off by a company is also recognised under section 36(2) of the “The Income Tax Act.”

What is technical write-off?

Technical write-off is a normal practice undertaken by the Companies to cleanse the balance sheets of bad debts which are either considered unrecoverable or whose recovery is likely to consume disproportionate resources. However, such technical write-offs do not entail any waiver of receivables/debts and thus the company’s right to recovery is not undermined in any manner. Therefore, the defaulting debtors are not benefited in any manner and their legal obligation as well as the costs of such defaults for them remain unchanged vis-à-vis the position prior to technical write-offs.

In technical write-off, the debt is removed from the company's books but a shadow account is created to pursue the recovery of debt though it is written off. When non recoverable debt/receivable is removed from the assets of the company, there will be no further need to make provisions against it. Technical write-off does not in any way adversely affect the interests of the creditors.

Excerpts of the Order;    

The present application has been filed under Section 66 of IBC, 2016 by the corporate debtor against the respondent being the suspended director of the corporate debtor for seeking directions to declare transactions amounting to Rs. 23,17,29,643/- as wrongful transactions under Section 66 of IBC and pass necessary orders.

# 2. The transaction auditor in his report has identified the following three categories of transactions on the basis of their modus operandi as falling within the purview of Section 66 of the Code.

• A. Writing off receivables without taking any effective recourse and contrarily showing those receivables as recoverable debt in the stock statement filed with bankers to defraud the creditors.

• B. Excessive cash discount given to buyers, which has resulted in excess losses to the corporate debtor.

• C. Sale of commodity to Cargil Agro International-Delhi on credit, at below the least purchase price, and abandon the recovery process.

# 3. The facts as stated by the applicant are as under:

3.1 In the present case the CIRP was initiated on 12.02.2019 and then the moratorium was declared. During the CIRP proceedings, the Resolution Professional got a transaction audit of the accounts of the corporate debtor initiated and the transaction audit report (TAR) dated 09.07.2019 was submitted by the Transaction Auditor. In the said audit report, fraudulent transactions totalling to Rs. 23,17,29,643/- were determined mainly on the three following accounts:

• A. Writing off receivables without taking any effective recourse and contrarily showing those receivables as recoverable debt in the stock statement filed with bankers to defraud the creditors. (Rs.17,42,22,739/-)

• B. Excessive cash discount given to buyers which has resulted in excess losses to the Corporate Debtor.(Rs. 23,61,435.11)

• C. Sale of commodity to Cargil Agro International- Delhi oncredit, at below the least purchase price, and abandon the recovery process. (Rs. 10,79,460/- + Rs.5,40,66,009/-)

# 4. The three categories of transactions as pointed out by the transaction auditor are analysed in the subsequent paragraphs.

4.1 Write off debit balances

4.1.1 The transaction auditor has pointed out that debit balances in the name of the following parties have been written off on 31..03.2018 as identified below:

Name of Party	Amount Written off (In Rs.)
A.G. Enterprises-Delhi	2,42,01,516.00/-
Haryana Agro Foods Product- Delhi	88,56,143.55/-
Nakul Trading Company-Delhi	2,77,89,713.00/-
Shiv Shakti Agro Foods-Delhi	17,35,011.80/-
Shiv Mahadev Food Product-Delhi	2,60,82,600.00/-
Taj Trading Company-Delhi	1,14,77,781.00/-
Vijay Luxmi Enterprises	4,94,85,250.00/-
Vrindavan Trading Company-Delhi	2,34,42,383.00/-
Vrindavan Trading Company-Delhi	8,41,731.00/-
Kishan Kumar Pawan Kumar	3,10,610.00/-
TOTAL	17,42,22,739.35/-

4.1.2 It has been pointed out by the Transaction Auditor that an excessive rebate and cash discount of Rs. 23,17,29,643/- have been given to the aforementioned 9 parties on a sampling basis. It is stated that the same is not in the discounts or justified in normal business practice. It is further pointed out that the gross profit as per the financial statements of the corporate debtor, is only 2.30%. The discounts are given for the range of 4.69% to 19.28. Even after giving such huge discounts, the corporate debtor has written off the debt in many accounts, giving rise to the suspension of fraudulent transactions.

4.1.3 It has also been pointed out by the Transaction Auditor that the corporate debtor made a total sale of Rs. 5,51,45,469/- to Cargil Agro International In the financial year 2017-18 on the basis of the credit sales after granting discounts. The said sale proceeds have not been recovered from Cargil Agro International and no document has been provided to suggest that any serious effort or legal action is taken against the said debtor for non-payment of outstanding amounts.

4.1.4 Regarding the write-off of debit balances, the party-wise observations made by the transaction auditor are summarised below:

a. A.G. Enterprises: In the F.Y. 2016-17 Branch Office-Delhi made sales to AG Enterprises on 15.06.2016 and 16.06.2016 totalling Rs 1,16,86,118/- which means that Branch Office-Delhi had to receive Rs.1,16,86,118/- from A.G. enterprises resulting into total Debit balance of Rs.2,42,01,516/- as on 31.03.2017. At the end of FY 2016-17, Nav Jyoti Agro Foods Private Limited had to receive Rs.2,42,01,516/- from A.G. Enterprises. It is stated that no serious efforts were taken to recover the due amount by the CD and the amount of Rs 2,42,01,516 /- was written off within a year on 31.03.2018 and transferred to a bad debt account against the sale which was made just a year before i.e. in FY 2016-17.

b. Haryana Agro Foods Product- Delhi: Rs 88,56,144/- which was simply paid in excess of what was actually outstanding on 01.04.17 has been debited to a bad debt account in the FY resulting in the diversion of Co.'s funds as well as resulting in an increment of loss to the Co. by Rs 88,56,144/-in FY 17-18. Since this transfer of funds was done from the CC account PB A/c No. 4073008700003585, interest was payable by Nav Jyoti Agro Foods Private Limited which has again played a role in the increment of losses incurred by the company in FY 17-18.

c. Nakul Trading Company-Delhi: In FY 2017-18, a total of Rs. 3,26,14,340/- was realized in PNB CIC Account 4073008700003585 on various dates through RTGS. The remaining amount, which was Rs. 2,77,89,713/- was written off as bad debts as on 31.03.18. Further, no serious efforts were taken to recover the due amount by the CD, and the amount of Rs 2,77,89,713/- was written off within a year on 31.03.2018 and transferred to a bad debt account against the sale which was made just a year before ie in FY 16-17.

d. Shiv Shakti Agro Foods Delhi: A Balance of Rs 17,35,011.80/- has been debited in Bad Debts on 31.03.18. Without any liability to pay, CD has paid Rs 30,00,000.00/- from the same CC account held in Punjab National Bank which has increased the expenses in the form of interest on CC A/c that Nav Jyoti Agro Foods Private Limited had to pay to the bank for using this Rs 30,00,000.00. Therefore, a total loss of Rs. 17,35,011.80 plus the interest on Rs 30,00,000 has played a role in the increment of losses for the Co. in FY 17-18. The amount was not recovered in the FY 2017-18 and was shown as a bad debt. On further review, it was observed that no serious efforts were made to recover the amount which was paid unnecessarily and the same was written off within the same FY.

e. Shri Mahadev Food Product Delhi: An amount of Rs. 2,60,82,600/- was brought into the books of Head Office and then it was debited to the bad debts account on 31.03.18. Further, no serious efforts were made to recover the due amount by the CD, and the amount of Rs 2,60,82,600 /- was written off on 31.03.2018 and transferred to a bad debt account. This is alleged as a careless approach on the part of CD for not making efforts to recover the said amount. Also this writing off of Rs 2,60,82,600/- has led to the increase in Net loss for Nav Jyoti Agro Foods Pvt Ltd in FY 17-18.

f. Taj Trading Company - Delhi: On review of the books of accounts, it was observed that in FY 2017-18, out of Rs 5,22,27,181/-, a total of Rs. 4,07,49,400/- was realized in PNB CC Account 4073008700003585 on various dates through RTGS. The remaining amount of Rs. 1,14,77,781/- was written off as bad debts as on 31.03.18. Further, it is stated that no serious efforts were made to recover the due amount by the CD, and the amount of Rs 1,14,77,781 /- was written off within a year on 31.03.2018 and transferred to bad debt account against the sale which was made just a year before ie in FY 16-17. This amount could have been realized easily as Taj Trading Co-Delhi has paid CD Rs 4,07,49,400/- also in the same FY. Also, writing off of Rs 2,77,89,713/- has led to the increase in Net loss for Nav jyoti Agro Foods Pvt Ltd in FY 17-18.

g. Vijay Luxmi Enterprises: As per the transaction audit report, it was observed that an amount of Rs. 4,94,85,250/- was debited to bad debts account on 31.03.18 for which no serious efforts were made to recover the due amount by the CD and the amount of Rs 4,94,85,250/- was written off on 31.03.2018 and transferred to bad debt account. It is stated the above transaction is not in the interest of the business and not justified as normal business practice. This writing off of Rs 4,94,85,250/- has led to the increase in Net loss for Nav Jyoti Agro Foods Pvt Ltd in FY 17-18. 

h. Virndavan Trading Company-Delhi: As per the transaction audit report, an amount of Rs. 2,89,42,383/- was receivable from Virndavan Trading Company - Delhi, and on a review of books of accounts, it was observed that in FY 2017-18, out of Rs 2,89,42,383/-, a total of Rs. 55,00,000/- was realized in PNB C/C Account 4073008700003585 on 04.01.18 through RTGS. And the remaining amount of Rs. 2,42,84,114/- was written off as bad debts as on 31.03.18. It is stated that no serious efforts were made to recover the due amount by the CD and the amount of Rs 2,42,84,114/- was written off on 31.03.2018 and transferred to the bad debt account. It is stated that this writing off of Rs 2,42,84, 1 14/- has led to the increase in Net loss for Nav jyoti Agro Foods Pvt Ltd in FY 17-18. During the further review of documents, it clearly shows the wrong intention of the corporate debtor to avail/enhance the limit from the bank by incorporating those debtors in the debtors list as on 30.04.18 which has been booked as ‘bad’ in the books of accounts 31.03.18, and is alleged to be wrongful trading under Section 66 of IBC 2016.

i. Kishan Kumar Pawan Kumar: On review of Books of Account, a balance of Rs 1,80,610/- remained due to be received. It was found that during the same F.Y. 17-18 payments of Rs.1,30,000/- were also made to Kishan Kumar Pawan Kumar on various dates from PNB Account No-4073002100008469 which was not required as CD was making sales to Kishan Kumar Pawan Kumar and part payment was also received. Also Rs 3,10,610/- was transferred to a bad debt account on 31.03.18. Hence paying Rs 1,30,000 which was not actual liability for the company to pay and not recovering back and then writing it off in the same FY is a clear case of diversion of co.'s funds by CD and is a fraudulent transaction under Section 66 IBC. This writing off of Rs 3,10,610/- has led to the increase in Net loss for Nav jyoti Agro Foods Pvt Ltd in FY 17-18.

4.1.5. In their replies with respect to the aforementioned transactions, the respondent has furnished the following clarifications:-

4.1.5.1. In the collective reply filed by Respondent No. 1, 2, and 3  contentions that have been brought forward are as follows:

a. A.G. Enterprises: The respondents have exercised due diligence by issuing demand notices on several dates on behalf of the corporate debtor and moreover legal notice through counsel was served to A.G. Enterprises The demand notice and legal notice were replied to by A.G. Enterprises and dispute regarding the quality of goods was raised by them. The respondents made all the bona fide efforts to recover the amount outstanding against A.G. Enterprises but due to the immense amount of court fees required to file a suit for recovery, the respondents were unable to file the suit as they were facing financial difficulties.

b. Haryana Agro Foods Product- Delhi: The sale and purchase made through Haryana Agro Foods Product, Delhi were in the ordinary course of business and an advance of Rs. 88,56,144/- was made to the Haryana Agro Foods Product, Delhi for the purchase of goods and the corporate debtor to recover the balance outstanding against Haryana Agro Foods Product, Delhi. The respondents have exercised due diligence by issuing demand notices on several dates on behalf of the corporate debtor, served to the Haryana Agro Foods Product, Delhi. The demand notice and legal notice were replied to by Haryana Agro Foods Product, Delhi, and a dispute regarding deficiency in the amount advanced against the amount of the purchase order was raised. The respondents made all the bona fide efforts to recover the amount outstanding against Haryana Agro Foods Product, Delhi but due to the immense amount of court fees required to file suit for recovery, the respondents were unable to file the suit as they were facing financial difficulties. The observation of the applicant that Haryana Agro Foods Product, Delhi has been shown as a Good Debtor on 30.04.2018 and 31.03.2018 as per stock statements submitted to the bank with the wrong intention to avail the limit from the bank by incorporating those debtors in the debtors’ list as on 30.04.2018 is totally incorrect whereas the above-said debtor was booked as bad debts on the recommendation of the statutory auditors on their observation till then the respondents were making all the efforts to recover the said amount from the debtors.

c. Nakul Trading Company-Delhi: In the ordinary course of business Nakul Trading Company, Delhi, and the corporate debtor to recover the balance outstanding against Nakul Trading Company, Delhi the respondents have exercised due diligence by issuing demand notice on several dates on behalf of the corporate debtor and moreover legal notice through counsel were served to the Nakul Trading Company, Delhi(The demand notice and legal notice was replied by Nakul Trading Company, Delhi and dispute regarding the quality of goods was raised by them the same was duly replied by the respondents to their best knowledge and belief. The respondents made all the bona fide efforts to recover the amount outstanding against Nakul Trading Company, Delhi but due to the immense amount of court fees required to file suit for recovery, the respondents were facing financial difficulties.

d. Shiv Shakti Agro Foods Delhi: The demand notice and legal notice were replied to by Shiv Shakti Agro Foods, Delhi and it was alleged by the debtor that the goods have to be collected by the corporate debtor against which the advance payment of Rs. 30,00,000/- was made to the Shiv Shakti Agro Foods, Delhi and due to non-cooperation of the corporate debtor the goods stored against the purchase order were deteriorated and were not remain fit for human consumption and a settlement as alleged by the Shiv Shakti Agro Foods, Delhi was made according to which Rs. 12,64,988.20/ - was refunded by the Shiv Shakti Agro Foods, Delhi which is totally incorrect, no such settlement was ever made between the corporate debtor and Shiv Shakti Agro Foods, Delhi and the same was duly replied to the Shiv Shakti Agro Foods, Delhi by the respondents. The respondents made all the bona fide efforts to recover the amount outstanding against ShivShakti Agro Foods, Delhi but due to the immense amount of court fees required to file suit for recovery, the respondents were unable to file the suit as they were facing financial difficulties.

e. Shri Mahadev Food Product - Delhi: The demand notice and legal notice were replied to by Shri Mahadev Food Product, Delhi and it was alleged by the above-mentioned debtor that the goods were not of that quality which was shown at the time of making the purchase order as sample and further asked for the statements of accounts for the reconciliation of accounts and the same was duly replied and the fresh statement of accounts was provided to the Shri Mahadev Food Product, Delhi by the respondents. The respondents made all the bona fide efforts to recover the amount outstanding against Shri Mahadev Food Product, Delhi but due to the immense amount of court fees required to file suit for recovery, the respondents were unable to file the suit as they were facing financial difficulties.

f. Taj Trading Company - Delhi: After the issue of the first demand notice on 10.01.2018 the Taj Trading Company, Delhi made a payment of Rs. 91,49,880/- on 16.01.2018 and further made a payment of Rs. 66,99,880/- as on 07.02.2018 and sent a reply dated 08.02.2018 whereby issue regarding quality was raised by the Taj Trading Company, Delhi and the same was reply under the second demand notice by the respondents and demand of balance amount was also made there-under but due to immense amount of court fees required to file suit for recovery the respondents were unable to file the suit as they were facing financial difficulties.

g. Vijay Luxmi Enterprises: The demand notice and legal notice issued by the applicant were replied to by Vijay Lakshmi Enterprises and a dispute regarding the quality of goods was raised by them the same was duly replied to by the respondents to the best of their knowledge and belief. The respondents also alleged that all the bona fide efforts to recover the amount outstanding against Vijay Luxni Enterprises but due to the immense amount of court fees required to file the suit as they were facing financial difficulties.

h. Virndavan Trading Company-Delhi: After the issue of first demand notice on 01.01.2018 the Vrindavan Trading Company, Delhi made a payment of Rs. 46,00,000/- and Rs. 9,00,000/- on 04.01.2018 and sent a reply dated 25.01.2018 whereby issue regarding quality and mismatch of books accounts was raised by the Vrindavan Trading Company, Delhi and the same was reply under the second demand notice by the respondents and demand of balance amount was also made there under. The respondents made all the bona fide efforts to recover the amount outstanding against Vrindavan Trading Company, Delhi but due to the immense amount of court fees required to file the suit for recovery, the respondents were unable to file the suit as they were facing financial difficulties.

i. Kishan Kumar Pawan Kumar: It is stated that the issue regarding quality and mismatch of books account was raised by Kishan Kumar Pawan Kumar and the same was replied to under the second demand notice by the respondents and demand of balance amount was also made thereunder. Due to financial difficulties on the side of the respondents, the respondent could not file the suit for recovery of the said amount.

4.2 Excessive Rebate

4.2.1 The transaction audit report at Paragraph No. 18 refers to rebates in cash transactions with the following entities which were considered excessive by the transaction auditor:

4.2.2 It is stated by the Transaction Auditor that the gross profit ratio of the company was 2.30% to the sales whereas the corporate debtor has given discounts ranging up to 19.28% to the above parties. He has also pointed out that in view of the gross profit of 22.45% in the FY 2018-19, the discounts given to these parties ranging upto 12.61% looks suspicious.

4.3 Transactions with Cargil Agro International- Delhi

It is pointed out by the Transaction Auditor that the total amount due from the aforementioned party from Cargil Agro International in FY 2017-18 is Rs. 10,79,460/- in the head office account and Rs. 5,40,66,009/- in the Branch Accounts totalling to Rs. 5,51,45,469/-. It is further pointed out that the said amount outstanding in the FY 2017-18 has not been collected in the FY 2018-19 upto the declaration of moratorium period dated 12.02.2019. It is further submitted that not receiving the amount even on discount price sale looks suspicious. It is also submitted that there is a wrong representation in the ITR for the assessment Year 2018-19. There is no debtor of the corporate debtor under the category of bad debt written off for an amount of Rs. 1 Lakh. 

# 5. We have carefully perused each of the aforementioned accounts, and also observations made by the Transaction Auditor along with the explanation furnished by the respondents in this regard.

# 6. We have carefully gone through the compliance affidavit vide Diary No. 01081/4 dated 19.09.2023 containing the communication with the ten parties mentioned in Para 4 above. We noted the fact that these amounts represented either monies not paid for the sale affected by the corporate debtor or goods not delivered despite the advance of amounts being made by the corporate debtor. We note the fact that the corporate debtor is an established player in the market and these write-offs appear to be very unusual compared to similar transactions carried out by the corporate debtor in the earlier years. It is also seen that the corporate debtor has not taken effective steps apart from sending communications to these parties to recover the amounts and the corporate debtor has written off these amounts after a lapse of a short period, i.e., within 1-2 years. Arbitrarily writing off debts within a short span just before the incidence of CIRP without making any effort to realise the amounts leads to a drastic reduction in the market value of the Corporate Debtor.

# 7. As regards the right of debts, we are of the view that this is contrary to the general business practice, where a businessman is expected to make all efforts to collect their dues from the parties to whom sales are made or advance for purchase has been given. A time period of two years is a short span for making all efforts to recover the dues of the corporate debtor. In the course of the present proceedings, a claim was made that legal notices have been sent to the debtors, on the direction of this Bench through its Administrative order, the same was placed on record. The claim of the respondents that they could not file a recovery suit and the corporate debtor has faced financial difficulties does not appear to be convincing, especially when the corporate debtor in the same financial year 2017-18 had invested surplus funds of nearly Rs.3.73 Crores in two immovable properties.

# 8. The respondent could not rebut the statement made by the applicant that the Income Tax return of the corporate debtor for the assessment year 2018-19, corresponding to the previous year 2017-18, does not indicate any bad debts written off for an amount of more than Rs. 1 lakhs. It is noticed that under the head ‘Non-current Asset’ in the Income Tax Return in the Assessment Year 2018 relating to the financial year 2017-18, the doubtful Trade Receivables are stated to be NIL. In this context, there is no plausible explanation for such writing off of the debts in the Books of the Corporate debtor. In the present case, the fraudulent intent of the respondents becomes obvious as correct figures of receivable and write-offs have not been reflected in the Income Tax return filed by the CD under the management of the respondents- suspended directors in the relevant assessment years.

# 9. In this connection, we refer to the decision of the Hon’ble NCLAT in the matter of Shri Baiju Trading and Investment Pvt. Ltd. Vs. Mr. Arihant Nenawati (Liquidator for Royal Refinery Pvt. Ltd.) & Ors., Company Appeal (AT) (Ins.) No. 699 of 2021 [Arising out of Order dated 29.01.2021 passed by NCLT, Mumbai Bench in I.A. No. 1125 of 2020 in C.P. No. 2556/MB/2019.], wherein it is observed as under:

• “On a serious note, this Appellate Tribunal observes that in 2019 such huge loan was all of a sudden written off by the Respondent Nos. 2 & 3 from the books of the Corporate Debtor and evidently the Appellant is the principal/sole beneficiary. The plea of the Appellant made before us that it is a Corporate Debtor who has written off and not by the Appellant and therefore the Appellant should not be held liable for fraudulent transactions under Section 66 is not convincing at all. It is a matter of common prudence that if the money is written off from the books of the Corporate Debtor, there is hardly any chance for the management/ successor/ Resolution Professional to recover the same from the Appellant. There is no explanation which we can take into account either from the submissions of the Appellant or Respondent Nos. 2 & 3 as to why such write off was necessary and circumstances which led to this write off. Such transactions of giving huge amount to unconnected/unrelated parties and apparently without any security interest or bank guarantee as collateral security in favour of the Corporate Debtor and subsequently writing off the same from the book can only be termed nothing else but as fraudulent transactions done with the intent to defraud the creditors of the Corporate Debtor. From the averments as well from the records made available, this Appellate Tribunal tend to agree with the Adjudicating Authority that the nature of the transactions are covered squarely under Section 66 of the Code, 2016.

# 10. In view of the aforementioned facts, we are of the view that the corporate debtor has hastily written off the outstanding debts in respect of the aforementioned 10 parties mentioned in the Transaction Audit Report only to defraud the creditors.

# 11. With regard to the allegation of excessive discounts given to buyers. We note that several recourses including legal ones are available with the Corporate Debtor for recovery. We also note the fact that the corporate debtor was going through a financially challenging period. In the line of business of the corporate debtor giving discounts to sell the product is an established business practice. The auditor’s observations are not supported by any concrete evidence of giving high rebates to any related parties nor does it give comparative figures in the same line of business. In view of these facts, we hold that these objections are based more on surmises and cannot be treated as fraudulent transactions under Section 66 of the Code. 

# 12. With regard to the sales of Cargil Agro Enterprise and the non-recovery of an amount of Rs. 5,51,45,469/-, we note that the fact that the transactions have taken place has not been denied by the transaction auditor. It is only stated that the amounts have not been recovered by the corporate debtor till the initiation of the CIRP on 12.02.2019. It is not the case of the auditor that these amounts have been written off. These transactions are comparatively of a recent period i.e. pertaining to F.Y 2017-18 and there is every likelihood that, if pursued, the same can be recovered. We are, therefore, of the view that a mere delay in the realization of the amount would not render these transactions fraudulent under Section 66 of the Code.

# 13. In view of what is stated above we find that this is a fit case to grant the reliefs sought for by the liquidator with respect to the write-off of Rs. 17,42,22,739/-. We hereby declare Rs. 17,42,22,739/- shown in the financial statement of the Corporate Debtor as fraudulent transactions. The respondents are personally liable to pay the aforesaid amount to the account of the liquidator. Respondents 1 to 3 are therefore directed to pay the above amount Rs. 17,42,22,739/- to the account of the liquidator within a period of three months for distribution under Section 53 of I&B Code.

# 14. In view of the above, IA No. 909/2019 is partly allowed and stands disposed of accordingly.

----------------------------------------------