Mr. Ashish Arjunkumar Rathi RP For Ind-Barath Power (Madras) Ltd Vs Kanumuru Raju Raghu Rama Krishna & Ors. - If we take note of the above Disclaimer declared by the Auditor, then we have to hold that this Audit Report, on the basis of which the Resolution Professional wanted us to infer that the transactions in dispute are fraudulent in nature, etc., is too inconclusive report.

 NCLT Hyderabad (2021.04.09) in Mr. Ashish Arjunkumar Rathi RP For Ind-Barath Power (Madras) Ltd  Vs Kanumuru Raju Raghu Rama Krishna & Ors. [IA No. 157 of 2019 in CP IB No.150/9/ HDB/ 2017.] held that;

• "In view of the above discussion this Adjudicating Authority is of the considered view that sufficient material is not placed on record by the resolution applicant to give a finding that the controversial transactions in this case amounts to fraudulent trading with intent to defraud creditors of the corporate debtor."

• If we take note of the above Disclaimer declared by the Auditor, then we have to hold that this Audit Report, on the basis of which the Resolution Professional wanted us to infer that the transactions in dispute are fraudulent in nature, etc., is too inconclusive report. The Auditor himself is not confident about the finding recorded by him for want of sufficient material before him. If we keep out of our consideration such inconclusive Audit Report, we have to hold that there is no additional and sufficient material brought on record by the Resolution Professional so as to enable us to record a different finding on the disputed transaction which this Adjudicating Authority has already recorded in its order dated 08.05.2018

• It is not in dispute that the Liquidator (then Resolution Professional) has sold the Corporate Debtor as a going concern. It means that the Corporate Debtor was a going concern throughout the CIRP period and hence it has to be held that the entire loan amount has not been misused as alleged by the RP.

• The expressions 'fraud' or fraudulent transaction' have not been defined in I&B Code, 2016. Hence as per section 3(37) of the I&B Code, 2016, we have to consider the definition of 'fraud' as it appears in section 17 of the Indian Contract Act, 1872,

• The Financial creditors are having knowledge of the controversial transactions, did not choose to initiate any legal action except writing letters, sending notices. .…  “

• Before we conclude with this order, there is one more aspect which needs our serious consideration. It is not in dispute that now some members of the Consortium of Lenders have filed an F.I.R. against the respondents and officers of the Axis Bank alleging that the disputed transactions are fraudulent in nature. Central Bureau of Investigation (CBI) has registered a crime and has started investigation into the matter. Now at this stage, can this Adjudicating Authority, in its limited jurisdiction, record finding that the transaction in dispute is per se fraudulent in nature. In our considered opinion it would be against the cannons of justice. Let the prime investigating agency investigate into the allegations. Let the competent court, during the trial, record findings of fact.

Excerpts of the Order;

# 1. Mr. Ashish Arjunkumar Rathi, Resolution Professional, now  Liquidator of the Corporate Debtor/ M/s. Ind- Barath (Madras) Limited  filed this application under section 66 of the Insolvency and Bankruptcy  Code, 2016 directing the respondents herein to make contributions to  he assets of the Corporate Debtor on the allegations that the ex-  management of the Corporate Debtor and related parties carried on the  affairs of the Corporate Debtor in a fraudulent manner with intent to  defraud its creditors. 

# 2. It is not in dispute that respondents no.1 to 4 are the suspended  Directors of the Corporate Debtor, whereas respondents no.5 to 13 are  related parties. It is alleged that the related parties are the beneficiaries  of such fraudulent transactions being carried by the suspended  management of the Corporate Debtor. 

# 3. The following facts are not in dispute: 

3.1 One M/s Rohan Varma Constructions Private Limited Operational Creditors of the Corporate Debtor had filed application under section 9 of the I&B Code, 2016 against the Corporate Debtor to initiate Corporate Insolvency Process (CIRP) of the Corporate Debtor. On 14.08.2017 the Corporate Debtor was admitted in CIRP. Initially, one Mr. Kranti Kumar Kedari, Resolution Professional having Registration No.IBBI/ IPA-001-IP-P00173/ 2017-18/ 10342 appointed as Interim Resolution Professional (IRP). He took over the management and affairs of the Corporate Debtor suspending its Directors. Thereafter, Committee of Creditors (CoC) was formed. The CoC, in its first meeting held on 25.09.2017 appointed the applicant as Resolution Professional replacing the IRP. On 16.01.2018, the Resolution Professional had filed application (bearing IA No.40 of 2018) under section 66 of the I&B Code, 2016 against the same respondents. This Adjudicating Authority by speaking order dated 08.05.2018, rejected the said application observing in para 71 that: 

• "This Adjudicating Authority is of the considered view that in order to give a finding under section 66 of the Code there must be a clinching and conclusive evidence, mere opinions or prima facie evidence is not sufficient." 

3.2 It has further been observed in para 80 that, 

• "In view of the above discussion this Adjudicating Authority is of the considered view that sufficient material is not placed on record by the resolution applicant to give a finding that the controversial transactions in this case amounts to fraudulent trading with intent to defraud creditors of the corporate debtor." 

3.3 In para 82 of the order, this Adjudicating Authority, however, gave liberty to the Resolution Professional to file a fresh application under section 66 of the I&B Code, 2016 in the following words: 

• "The Resolution Professional is also at liberty, at any subsequent stage to place sufficient material on record, relating the controversial transactions under appropriate provisions of the IB Code." 

3.4 This Adjudicating Authority was pleased to reject the first application of the Resolution Professional under section 66 of the I&B Code, 2016 against the same respondents holding that there was no  sufficient evidence on record to direct the respondents to make  contribution to the assets of the Corporate Debtor, because of lack of  evidence that they had carried the business of the Corporate Debtor in a  fraudulent manner with intent to defraud its creditors. 

# 4. At this stage, it would be proper to look into as to what were the controversial transactions allegedly done by the respondents and (i) Whether they can be said to be fraudulent and done with intent to  defraud the creditors? and (ii) What was the material then placed before this Adjudicating Authority by the RP, which this Adjudicating Authority  found to be insufficient? 

# 5. The Resolution Professional has called in question two transactions, namely, Joint Lenders had granted and disbursed in favour of the Corporate Debtor some of the loan amounts. Those amounts were kept in a Trust and Retention Account (for short TR Account') bearing No.9100020017066895, maintained with Axis Bank. There was agreement entered into by and between the Corporate Debtor and the Consortium of Lenders, known as, Trust and Retention Agreement (for short TR Agreement'). As per the terms of the said TR Agreement, the Corporate Debtor was supposed to utilize the loan amount subject to the conditions mentioned in that Agreement dated 24.02.2011. The terms of the Agreement were amended on 19.01.2015. As per some of the terms and conditions of TR Agreement, the Corporate Debtor was obliged to use the amount for construction and implementation of 660 MV coal-based Thermal Power Project at Sasthavinallur and Pallakkurichi villages, Sattankulam Taluk, Tuticorin District in the State of Tamil Nadu. As per the Resolution Professional's own assertion, the Corporate Debtor was engaged in the business of generation and distribution of electricity (Para 9 of the application). 

# 6. According to the RP, the suspended management of the Corporate Debtor, in the year 2016, used some amount from the TR Account and created Fixed Deposits from that account. They pledged those Fixed Deposits with Bank of India and UCO Bank and allowed its subsidiary companies, viz. Respondents no.6 to 11 to raise loan against those Fixed Deposits. The Resolution Professional alleged that this act of Ex- Management of the Corporate Debtor is amounting to siphoning off the loan amount in contravention of the terms of the TR Agreement dated 19.01.2015. The Resolution Professional alleged that it is a fraudulent transaction carried by the suspended management of the Corporate Debtor while doing its business and it was done with intent to defraud the creditors. 

# 7. There is no dispute to the fact that the suspended management of the Corporate Debtor had created Fixed Deposits using the amounts in TR Account and sought loan to its subsidiary companies pledging those Fixed Deposits. The real question is whether it can be called a 'fraudulent transaction' with intent to defraud the creditor while doing business or it was breach of the terms of the loan agreement? 

# 8. The above admitted facts were also available on record when this Adjudicating Authority rejected the first application of the Resolution. Professional under section 66 of the I&B Code holding that there was no enough material on record. The Resolution Professional was allowed to file second application under section 66 of the Code provided he gets sufficient material and if so advised. 

# 9. After rejection of the Resolution Professional's first application under section 66 of the Code, the Resolution Professional collected and produced on record some additional evidence in the form of Forensic Audit Report dated 24.12.2018 prepared by M/s Haribhakti & Co. We have gone through that report. We have heard the learned counsel for the Resolution Professional and the learned senior counsel for the respondent at length. We perused the additional material which was brought on record by the RP. 

# 10. It is seen from the perusal of the Forensic Auditor's Report that the report is in the form of opinion having number of riders. The Forensic Auditor recorded his conclusion against each transaction which he has examined as follows: 

• "Disclaimer 

• 1. As it is practically not possible to study all aspects of a process in its entirety thoroughly during the limited time period of an audit, based on our methodology for conducting Special review of business processes, we conducted a review of the process and held discussions with the process owners and other key people in the process during the planning stage of audit which helped us in identifying specific areas where control weaknesses & process gaps may exist. 

• 2. The identification of the issues in the report is mainly based on the review of records, sample verification of documents/ transactions and physical observation of the events. As the basis of sample selection is purely judgmental in view of the time available, the outcome of the analysis may not be exhaustive and representing all possibilities, though we have taken reasonable care to cover the major eventualities. 

• 3. This report does not comment upon any change/ development taken place in the process and functioning of processes after the last date of our field work. 

• 4. Our observations are based on data provided to us by Resolution Professional." 

# 11. If we take note of the above Disclaimer declared by the Auditor, then we have to hold that this Audit Report, on the basis of which the Resolution Professional wanted us to infer that the transactions in dispute are fraudulent in nature, etc., is too inconclusive report. The Auditor himself is not confident about the finding recorded by him for want of sufficient material before him. If we keep out of our consideration such inconclusive Audit Report, we have to hold that there is no additional and sufficient material brought on record by the Resolution Professional so as to enable us to record a different finding on the disputed transaction which this Adjudicating Authority has already recorded in its order dated 08.05.2018. We cannot review our own order in absence of cogent and sufficient material. 

# 12. Apart from the above, still we examine these disputed transactions to find out whether they constitute ingredients stated under section 66 of the I&B Code. Section 66 of the Code reads as under: 

• "Fraudulent trading or wrongful trading. 

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

• (2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or Appeal to Supreme Court. Civil court not to have jurisdiction. Expeditious disposal of applications. Fraudulent or malicious initiation of proceedings. Fraudulent trading or wrongful trading. 5 10 15 20 25 30 35 40 4536 partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if— 

• (a) before the insolvency commencement date, such director or partner knew or ought to have known that 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. Explanation. For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor." 

A perusal of the above provision makes it clear that, 

• (a) The Resolution Professional has to form an opinion that the ex- management of the Corporate Debtor carried business of the Corporate Debtor in a fraudulent manner to defraud the creditors.

• (b) This Adjudicating Authority while passing order has to record its finding that before commencement of insolvency of the Corporate Debtor, such Directors ought to have known that there was no reasonable prospects of avoiding CIRP of the Corporate Debtor.

• (c) Such Directors did not exercise due diligence to minimize the potential loss in respect of such Corporate Debtor. and 

• (d) There is a presumption of fact that such Directors had exercised due diligence that there was reasonable prospect of a person carrying out same transaction as carried out by such Directors. 

# 14. The presumption of fact as noted above appears to be based on a principle that no one wishes to put his business in CIRP at the cost of his losing control thereon. 

# 15. In view of the above, if we examine the transaction in dispute, we find that from the loan amount, the Corporate Debtor had created Fixed Deposits and sought loan to its subsidiary companies pledging those Fixed Deposits. It was done in the year 2016, viz. almost five years after the Consortium of Lenders granted and disbursed the Corporate Debtor some amounts of loan. The Resolution Professional has averred that under section 25(1) of the I&B Code the Corporate Debtor has issued notice dated 19.02.2014 for withdrawal of an amount of Rs. 1452 crores in order to invest the said amount in plant and machinery, for carrying some civil work, to invest some amount in fixed assets for laying transmission lines, etc. In view of this it was for the Resolution Professional to put on record the material indicating that though the Corporate Debtor has shown the above expenses, in fact, those amounts were not spent at all for the purpose for which it is shown to have been spent. 

# 16. It is not in dispute that the Liquidator (then Resolution Professional) has sold the Corporate Debtor as a going concern. It means that the Corporate Debtor was a going concern throughout the CIRP period and hence it has to be held that the entire loan amount has not been misused as alleged by the RP. 

# 17. Section 66 of the I&B Code speaks about fraudulent transaction. The expressions 'fraud' or fraudulent transaction' have not been defined in I&B Code, 2016. Hence as per section 3(37) of the I&B Code, 2016, we have to consider the definition of 'fraud' as it appears in section 17 of the Indian Contract Act, 1872, in order to understand what does 'fraud' or 'fraudulent transaction' mean. Section 17 of the Indian Contract Act, 1872 reads as under: 

• "17. 'Fraud' defined.-'Fraud' means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract: 

• (1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true; 

• (2) the active concealment of a fact by one having knowledge or belief of the fact; 

• (3) a promise made without any intention of performing it; 

• (4) any other act fitted to deceive; 

• (5) any such act or omission as the law specially declares to be fraudulent. Explanation.-Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak2, or unless his silence, is, in itself, equivalent to speech. 

• Illustrations 

• (a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse's unsoundness. This is not fraud in A. 

• (b) B is A's daughter and has just come of age. Here the relation between the parties would make it A's duty to tell B if the horse is unsound. 

• (c) B says to A-"If you do not deny it, I shall assume that the horse is sound". A says nothing. Here, A's silence is equivalent to speech. 

• (d) A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B's willingness to proceed with the contract. A is not bound to inform B." 

# 18. It suggests that while entering into any contract/ agreement, if any party to the contract or its agent with intent to deceive another party, conceals some material facts thereto or promises something without any intention to perform that promise or does some act during the contract, which is specifically declared to be fraudulent, it is fraud. In this case, the fact that the Corporate Debtor (its suspended management) had used some amount from TR Account to create Fixed Deposits. The material on record certainly indicate that it was done within the knowledge of the Consortium of Lenders. Not only that TR Account holder Bank, viz. Axis Bank allowed the management of the Corporate Debtor to use some amount from that account to create Fixed Deposits. In our considered opinion such a transaction cannot be termed to be a fraudulent one within the meaning of section 66 of the I&B Code, 2016. 

# 19. In fact, this Adjudicating Authority, in its earlier order dated 08.05.2018 passed in ΙΑ No.40 of 2018 in C.P.(I.B.) No. 150/9/HDB/2017, has recorded finding that, 

• "77. The Financial creditors are having knowledge of the controversial transactions, did not choose to initiate any legal action except writing letters, sending notices. .…  “

# 20.  It is not in dispute that the transaction of withdrawal of the amount to create Fixed Deposits had taken place in the year 2015. It cannot be said that in the year 2015, the suspended management of the Corporate Debtor had foreseen that the I&B Code would be promulgated in the year 2016 and with intent to push the Corporate Debtor in CIRP, the suspended management of the Corporate Debtor took a decision to create Fixed Deposits from that loan account. 

# 21. Despite all above, we now consider the allegations of the Resolution Professional that by creating Fixed Deposits by using the amount lying in the loan account, the suspended management had siphoned off that amount. It is not in dispute that those Fixed Deposits were pledged with Bank of India and UCO Bank to get loan for some of its subsidiary companies. It is also not in dispute that since those debtor-companies did not pay loan, the lender banks had encashed those pledged Fixed Deposits and adjusted the loan amount. The Resolution Professional did not bring on record any material to show that the loan raised by those subsidiary companies was used by the suspended management of the Corporate Debtor for their own benefit with intent to defraud the creditors. 

# 22. It is submitted by the learned counsel for the Resolution Professional that the Comptroller and Auditor General of India in his Report has stated that as per the guidelines of the Reserve Bank of India, if any loan availed from Bank or financial institution or utilised for a purpose unrelated to the operations of the borrower, it would be termed as siphoning off the funds. We have examined the transactions in dispute with the above angle. Still it cannot be said that creating Fixed Deposits. by using some part of the loan amount to raise funds for subsidiary companies, which were also related in business and in co-related activities of the Corporate Debtor. In our considered opinion, for want of sufficient material it cannot be said that it was an act of siphoning off the amount. 

# 23. Second transaction called in question by the Resolution Professional is that the Corporate Debtor gave advance to M/s Sokeo Power Pvt Ltd in 2014. It was independent transaction carried out by the Corporate Debtor and the creditors having no relations thereto except the allegation that the Corporate Debtor ought not to have advanced such amount and the amount was given in advance to defraud them. In fact, this Adjudicating Authority in para 76 of its earlier order dated. 08.05.2018 passed in IA No.12 of 2018 in C.P.(I.B.) No. 150/9/HDB/2017, has recorded finding that, 

• "76. Therefore, the transaction relating to advance money paid to Sokeo Power Private Limited was nearly four years prior to the commencement of the IB Code and such transactions can never be termed as a fraudulent transaction ..   …  “

# 24. We do not find any reason to record any finding other than the finding of fact recorded by this Adjudicating Authority while rejecting the earlier application filed by the RP. 

# 25. Before we conclude with this order, there is one more aspect which needs our serious consideration. It is not in dispute that now some members of the Consortium of Lenders have filed an F.I.R. against the respondents and officers of the Axis Bank alleging that the disputed transactions are fraudulent in nature. Central Bureau of Investigation (CBI) has registered a crime and has started investigation into the matter. Now at this stage, can this Adjudicating Authority, in its limited jurisdiction, record finding that the transaction in dispute is per se fraudulent in nature. In our considered opinion it would be against the cannons of justice. Let the prime investigating agency investigate into the allegations. Let the competent court, during the trial, record findings of fact. 

# 26. In view of the evidence and the material on record and the submissions made at the Bar, we are of the considered opinion that the RP/ Liquidator could not establish that the transactions in dispute are fraudulent in nature. This finding is recorded for want of sufficient material before us and hence the respondents cannot be called upon to contribute to the assets of the Corporate Debtor as per section 66 of the I&B Code, 2016. We pass the following order. 

# 27. The application is rejected. 

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Mr. Hari Babu Thota, Vs Mr. Abdul Asif & Ors. - Accordingly, the Applicant has failed to prove that the Respondent entered into transactions with dishonest intentions to defraud the Corporate Debtor and the Applicant in his Application/pleadings nowhere contended that the conditions of Section 66 (2) were applicable.

 NCLT Bengaluru (2023.06.23) in Mr. Hari Babu Thota, Vs Mr. Abdul Asif & Ors. [I.A NO. 269/2022 in C.P (IB) No. 26/BB/2021] held that;

• That the essential condition in accordance with U/s. 66(1) of the IBC, 2016 that the business of the Corporate Debtor should have been carried on with intent to defraud Creditors of the Corporate Debtor; and the Respondents responsible for such transactions should have been the parties ‘knowingly’ to the carrying on of the business in such a manner.

• For concluding that it was ‘knowingly’ done there has to be some independent evidence even if there was no such transaction audit carried out RP. The RP has got enough powers to collect such information and furnish a detailed analysis before this Adjudicating Authority showing that the provisions of section 66(1) were attracted.

• In Section 66(2), the requirement is that the Director or Partner of the Corporate Debtor was liable, in case before the CIRP commencement date, he was aware of the fact that there was no reasonable prospect of avoiding commencement of CIRP, if such Director or partner did not exercise due diligence in minimizing the potential loss to the creditors of the Corporate Debtor. In this case no such finding and evidence has been furnished so as to arrive at the conclusions that the conditions mentioned in the Section 66(2) were satisfied.

• Accordingly, the Applicant has failed to prove that the Respondent entered into transactions with dishonest intentions to defraud the Corporate Debtor and the Applicant in his Application/pleadings nowhere contended that the conditions of Section 66 (2) were applicable.

Excerpts of the Order;

# 1. This application is filed on 28.06.2022 by Shri Hari Babu Thota, the Resolution Professional of M/s. Rich Fruits Private Limited/Corporate Debtor, under Section 66 of the I & B Code 2016 read with Rule 11 of the NCLT Rules, 2016 inter alia seeking to declare the identified transactions as fraudulent as per section 66 of the Insolvency and Bankruptcy Code, 2016 and to direct Respondents 1 to 3 to contribute to the assets of the Corporate Debtor a sum of Rs. 6,03,30,643.37/- jointly or severally as per section 66(1) of the code.

# 2. Brief facts of the case, as mentioned in the application and written submission filed vide diary no 1396 dated 10.03.2023 which are relevant to the issue in question, are as follows:

a) It is stated that this Adjudicating Authority initiated CIRP process of the Corporate Debtor on 02.02.2022 in CP (IB)No.26/BB/2021.In the 3rd CoC meeting held on 20.05.2022, the liquidation of the Corporate Debtor was approved along with the appointment of the RP as the liquidator; who filed an I.A for liquidation before this Tribunal.

b) The Corporate Debtor had supplied goods to Safa Fruits (Rs.5,46,15,818.00) and SMGK Agro Products (Rs.57,14,825.37), from Financial Year 2013-2014 onwards and is yet to recover a sum of Rs. 6,03,30,643.37/-, as per the provisional financial statements as on 2nd February 2022.The Applicant sought the invoices and the ledger statements of Safa Fruits and SMGK Agro Products and observed that there exists a significant difference between the amount accounted for as per the ledger statements and the invoices made available by the promoter directors. The accounts of the Corporate Debtor do not depict the true status of affairs and ultimately are meant to manipulate the suppliers and lenders by inflating its net worth.

c) It is stated that the manner in which business of the Corporate Debtor has been carried out, raises a question on the validity of the amount of receivables. Though the amounts were pending over a long time, the same weren’t written off as bad debts neither were recovered. Though the Corporate Debtor has an outstanding liability of Rs. 7,77,85,486.18/-, the promoter directors have not made any considerable efforts to recover the dues.

d) During CIRP, the applicant sent notices to the debtors for recovery of dues. The speed post to Safa Fruits was returned and applicant has not received any reply from SMGK Agro Products. The promoter also did not make available the latest address of Safa Fruits. It is pertinent to note that the debtors are the only assets as per the provisional Financial Statements, the proceeds of which can be utilized for payment of CIRP costs and settle the claims of the creditors. Even though the Corporate Debtor was bearing losses since the Financial Year 2018-2019, no serious legal or commercial actions were taken by the promoter directors of the Corporate Debtor. The applicant has opined and further determined that the business of the Corporate Debtor has been carried on with intent to defraud to creditors of the Corporate Debtor.

# 3. The Respondents No.1 & 3 have filed the statement of objections vide Diary No.1036 dated 22.02.2023 and written submission vide diary no 1632 dated 21.03.2023 inter alia contending as follows:

i. The respondent no 3 was not involved in the day to day affairs of the Corporate Debtor. It is submitted that the Liquidator has erroneously scrutinised the ledger statements of the Corporate Debtor and opined that the accounts do not present the true state of affairs of the Corporate Debtor, without clarifying the entries with the Corporate Debtor.

 

ii. The mismatch in the ledger statement of ‘Safa Fruits’ is due to the fact that the Liquidator has failed to consider a vital aspect in the accounting entries i.e., the Liquidator has failed to account for excess payments made towards invoices which has not been accounted in the ledger statements furnished by the Liquidator. Further, supplies made by the Corporate Debtor to ‘Safa Fruits’ perished, and the advance payment made by ‘Safa Fruits’ was refunded. The advance amount paid by ‘Safa Fruits’ was reflected in the ledger statement which the Liquidator has considered as excessive payment.

iii. Further, the Liquidator has erred in not considering the arrangement between the Corporate Debtor and SMGK Agro Products, in which they were engaged in a mutually consented arrangement for supply and purchase of goods. It is also submitted that SMGK Agro Products were supplying fruit pulp to the Corporate Debtor. The applicant failed to consider the aspect that money owed by the Corporate Debtor was adjusted with the payables to SMGK Agro Products based on their arrangement at the convenience of both the parties.

iv. Hindustan Tin Works limited is the only creditor of the Corporate Debtor. It is an admitted fact that the books of accounts brought on record that the Corporate Debtor had business with ‘Safa Fruits’ and ‘SMGK Agro Products ‘ even before the financial year 2013-14. Post financial year 2017-2018 no new supplies were undertaken to the entities as they failed to clear the outstanding dues. Finally, in 2019-2020 the entities came forward to pay a part amount of the outstanding balance but the entities showcased their willingness in settling outstanding dues after several requests were made to pay the outstanding amount. From the year 2020-2021 recovery of debt became difficult due to Covid 19.

v. The respondents had made several attempts to recover moneys due from SMGK Agro Products but in spite of repeated reminders there was no response from SMGK Agro Products. Finally in the financial year 2019-2020 SMGK Agro Products agreed to clear dues partly pursuant to repeated reminders.

# 4. Heard the Learned Counsel for the Applicant and Learned Counsel for the Respondents and carefully perused the records.

# 5. In the written submission filed by the Applicant vide Diary No.1396 dated 10.03.2023, it was stated that based on the ledger Accounts and transactions with the two entities mentioned above, the Applicant is of the opinion that these transactions were liable to be treated as fraudulent transactions U/s.66 of the IBC, 2016. It was further stated as under:-

• “6. In the Statement of Objections filed before this Hon’ble Tribunal, the Respondents have for the first time since the commencement of the CIR Process given some information and documents which are summarised as follows:

• i. That the Corporate Debtor was in the business of manufacturing and supplying ‘Fruit Pulp’. In the event the Sales as made by the CD to the Buyer got spoilt, there was no possibility of recovery of such monies. Further, Advance Payments and Excess Payments were refunded and reconciled from time to time{Paragraph 4 of the Counter}

• ii. In the case of M/s. SMGK Agro Products, the arrangement was that the said Entity would manufacture and supply some fruit pulp to the CD while the CD would also supply other Fruit Pulp to it, as a result of which there would be no actual payments between the two entities{Paragraphs 5 of the Counter}

• iii. Due to continued business relationship and perishable nature of products and the small field in which very few firms such as M/s. Rich Fruits, M/s. Safa Fruits and M/s. SMGK Agro Products operate, continued business relationship was more important and was stopped from 2017-18 due to mounting receivables and losses {Paragraphs 10 & 12 of the Counter}

• iv. At Paragraph 11 of the Counter, it has been stated that Partial Recoveries had indeed been made from M/s. Safa Fruits even during 2019 – 2020 to the tune of Rs. 17,46,383 &during 2020 – 2021 to the tune of Rs. 19,00,000 which would show that continued efforts were made to recover the monies to the extent possible from vendors and therefore there was no fraudulent trading on the part of the Respondents.

• v. It was due to Business Losses that the Corporate Debtor fell into Insolvency and bad business decisions cannot be termed as a Fraudulent Act on the part of the erstwhile promoters. Mere inability to recover outstanding dues from Creditors would not be a fraudulent act on the part of the Respondents and the affairs of the CD were not carried on with an intent to defraud the Creditors with any dishonest intention {Paragraph 15 and 16}

• 7. For the convenience of this Hon’ble Tribunal, a detailed chart showing a comparison of the Applicant’s allegations and the Respondents’ relevant extracts from the reply to the same in their Objections is produced for the sake of ready reference:

• 8. The Applicant/Liquidator most respectfully submits that none of the above facts, explanations or documents presented along with the Reply before this Hon’ble Tribunal were ever presented to the undersigned when the Applicant had sought explanations from the Respondents.”

 

# 6. The Respondent in their written submission have reiterated that the Liquidator himself admitted that he did not have sufficient documents to ascertain the true nature of transactions and there were no sufficient evidences for the same. On the other hand, the Corporate Debtor has furnished the documents to negate the allegations of the Liquidator. It was the duty of the Liquidator to seek clarifications for the entries which could have been explained by the respondents. The Respondent reiterated the submissions given earlier in the statement of objections and has contested the claim that no efforts were made to recover the dues.It was stated that an amount of Rs.17,46,383/- was recovered in the year 2019-20 and a sum of Rs.19,00,000/-was recovered in the year 2020-21 from M/s. Safa Fruits, and from M/s. SMGK Agro Products also repeated attempts were made to recover the dues. It has been contended that merely because the Corporate Debtor is not able to recover the entire amount, it could not be said it was a fraudulent transaction. Finally, the Respondent has stated that in order to attract Section 66 of the Code, the essential ingredients of dishonest intention to defraud the creditors must be existing, for which Respondents placed reliance an Order dated 11.02.2022 given by the co ordinate Bench of NCLT, Chennai in the case of Mr. Ashish Rathi Vs. Rajiv Rai &Ors. in MA/631/2018 in C.P/665/IB/CB/2017.

# 7. We have considered the submissions by both the parties carefully and have gone through the provisions of the Code, along with decisions mentioned above.

# 8. It is noted that in the written submissions filed by the Applicant itself it is clear that the Applicant has repeatedly stated that the explanation and reply to the various observations of the Applicant has been made for the first time after commencement of the CIRP before this Adjudicating Authority. In fact in para 8 of the written submissions filed on 10.03.2023 by the Applicant it has been stated as under:

• “…8. The Applicant/Liquidator most respectfully submits that none of the above facts, explanations or documents presented along with the reply before this Hon’ble Tribunal were ever presented to the undersigned when the Applicant had sought explanations from the Respondents.”

# 9. It is seen from the provision of the Section 66 of the Code, that the essential condition in accordance with U/s. 66(1) of the IBC, 2016 that the business of the Corporate Debtor should have been carried on with intent to defraud Creditors of the Corporate Debtor; and the Respondents responsible for such transactions should have been the parties ‘knowingly’ to the carrying on of the business in such a manner. In this case, the Applicant has not been able to make out such a case. In fact, in the written submissions, it was stated by the Applicant that he was of the ‘opinion’ that these transactions, were fraudulent in nature. If there was some inconsistency with regard to nature of the transactions, an audit should have been ordered by the RP/Liquidator but this was not done. For concluding that it was ‘knowingly’ done there has to be some independent evidence even if there was no such transaction audit carried out RP. The RP has got enough powers to collect such information and furnish a detailed analysis before this Adjudicating Authority showing that the provisions of section 66(1) were attracted.

# 10. In Section 66(2), the requirement is that the Director or Partner of the Corporate Debtor was liable, in case before the CIRP commencement date, he was aware of the fact that there was no reasonable prospect of avoiding commencement of CIRP, if such Director or partner did not exercise due diligence in minimizing the potential loss to the creditors of the Corporate Debtor. In this case no such finding and evidence has been furnished so as to arrive at the conclusions that the conditions mentioned in the Section 66(2) were satisfied. Accordingly, it is held that neither the conditions of Section 66(1) nor the conditions of Section 66(2) of IBC, 2016 has been satisfied in this case. The Respondent relied upon the decision of the Hon’ble NCLT, Chennai vide Order dated 11.02.2022, in the case of Mr.  Ashish Rathi Vs. Rajiv Rai (cited supra) in which reliance was also placed by the Tribunal on the decision of the Hon’ble Supreme Court in the matter of Anuj Jain IRP for Jaypee Infratech Limited Vs. Axis Bank Limited etc., in Civil Appeal No.8512 – 8527 of 2019.

# 11. Accordingly, the Applicant has failed to prove that the Respondent entered into transactions with dishonest intentions to defraud the Corporate Debtor and the Applicant in his Application/pleadings nowhere contended that the conditions of Section 66 (2) were applicable.

# 12. Therefore, in view of the above facts and circumstances, we are of considered opinion that the applicant has failed to furnish the requisite details or provide any material proof with regard to the contention raised in the application. Hence, the present application is liable to be dismissed. Accordingly IA No.269 of 2022 is dismissed.

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Sidharth Bharatbhushan Jain & Ors. Vs State Bank of India & Ors. - Thus for reasons aforesaid, the outstanding being of more than 2 years prior to CIRP commencement date, the relief under Section 43 of the Code would not be available. The respondent, however, shall be at liberty to take alternative action(s) as may be allowed under the Law (inclusive of Section 66 of the Code).

 NCLAT (2024.10.14) in Sidharth Bharatbhushan Jain & Ors. Vs State Bank of India & Ors. [COMPANY APPEAL (AT)(INS) NO.242 OF 2024] held that;

• Thus for reasons aforesaid, the outstanding being of more than 2 years prior to CIRP commencement date, the relief under Section 43 of the Code would not be available. The respondent, however, shall be at liberty to take alternative action(s) as may be allowed under the Law (inclusive of Section 66 of the Code).

Excerpts of the Order;

This appeal is against an impugned order dated 09.11.2023 whereby an application filed under Section 43 of the Code was allowed by the Ld. NCLT. The Learned counsel for the appellant submits the Corporate Debtor had supplied certain goods to M/s Pratap Associates, an HUF firm of Appellant No.3 herein and hence a related party. Such goods were supplied before 23.05.2018 and the amount outstanding against Pratap Associates as on 23.05.2018 was of Rs.7,78,31,555/-. M/s Pratap Associates (HUF) could not pay this outstanding to Corporate Debtor. . 

# 2. On 8th September, 2021, M/s Sysco Industries Ltd, the Corporate Debtor, went into CIRP and thus look back period under Section 43 of Code commenced w.e.f. 8th September, 2019. . 

# 3. Admittedly the application under Section 43 of the Code was filed per minutes of 4th COC Meeting dated 14.12.2021 wherein Agenda Item No.7 read as under:- 

• Agenda 7: To file an application under Section 43 and Section 65 separately. 

• RP informed the COC Members that presently there is procedure of filing the application under Section 43 and Section 65 separately. Also increasing the lookup period is required as the company was not operating since 2079 i.e., more than 2 years before the CIRP commencement date. After a detailed discussion, it was decided and COC approved to file the application under section 43 and section 66 of IBC Finally, it was decided for adding prayer in the application for extension in look-up period of 5 years than only 2 years. COC also agreed the fees for the advocate. 

# 4. Following prayers were made in application filed under Section 43 of the Code: 

• a) That this Hon’ble Adjudicating Authority may be pleased to allow enhancement of period specified in Section 46 for a period of 5 years since financials data is only made available until financial year ending March, 2019, in the interest of justice; b) That this Hon’ble Adjudicating Authority may be pleased to pass appropriate orders or directions under Section 43 of the code against the respondents to contribute an amount of Rs.7,78,31,555/- being outstanding towards related party, in the interest of justice. 

# 5. Now, section 43 of the Code read as under:- 

• (4) A preference shall be deemed to be given at a relevant time} if- (a) it is given to a related party (other than by reason only of being an employee)} during the period of two years preceding the insolvency commencement date; or (b) a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date. 

# 6. The Ld. NCLT on this application under Section 43 of the Code had passed the following impugned order:- 

• 17. The said section refers to property which has very wide meaning and in our view includes goods. The respondent has admitted that goods were supplied by the CD and the outstanding of Rs. 7.78 crores are not denied. The Respondents have not denied that M/ s Pratap Associates is his HUF which is related party. 

• 18. It is common practice that before commencement of insolvency, the assets of the corporate debtor are stripped many a times by the management. The suspended management conceals the data from the RP during the CIRP process. In the present matter too S. 19 (2) application was filed by the RP. 

• 19. The present case falls squarely within the ambit of S. 43 of the Code so far as transactions with Pratap Associates is 4 concerned. As such we have no hesitation to hold that transactions are hit by provisions of S. 43 of the Code. 

• 20. In terms of the above observations prayers (a) and (b) are hereby allowed. R-1 to R-3 are directed to deposit the said amount of Rs. 7.78 Crores within a period of 15 days from the date of the order with the Corporate Debtor who in turn should distribute the same to the erstwhile members of COC immediately in their respective share. 

• 21. As regards the transactions with the 3 debtors, the same are transactions in the ordinary course of business of the ·Corporate Debtor and as the debtors were not made a party before us and without hearing them no orders can be passed and for the reasons stated above we hold that S. 43 is not attracted upon the respondents in the matter. Accordingly prayer (c) is denied. 

# 7. It is the submission of the learned counsel for the appellant such prayers ought not to have been allowed as there cannot be an extension of look back period beyond two years as is envisaged in sub-section (4) of Section 43 of the Code. Heard. 

# 8. In Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd Vs Axis Bank Ltd and Others, (2020) 8 Supreme Court Cases 491, the Hon’ble Supreme Court held as follows:- 

• 21.2 However, merely giving of the preference and putting the beneficiary in a better position is not enough. For a preference to become an offending one for the purpose of Section 43 of the Code, another essential and rather prime requirement is to be satisfied that such event, of giving preference, ought to have happened within and during the specified time, referred to as “relevant time”. The relevant time is reckoned, as per sub-section (4) of Section 43 of the Code, in two ways: (a) if the preference is given to a related party (other than an employee), the relevant time is a period of two years preceding the insolvency commencement date; and (b) if the preference is given to a person other than a related party, the relevant time is a period of one year preceding such commencement date. In other words, for a transaction to fall within the mischief sought to be remedied by Sections 43 and 44 of the Code, it ought to be a preferential one answering to the requirements of sub- 5 section (2) of Section 43; and the preference ought to have been given at a relevant time, as specified in sub-section (4) of Section 43. 

• 26. Even when all the requirements of sub-section (2) of Section 43 of the Code are satisfied, in order to fall within the mischief sought to be remedied by Section 43, the questioned preference ought to have been given at a relevant time. In other words, for a preference to become an avoidable one, it ought to have been given within the period specified in sub-section (4) of Section 43. The extent of ‘relevant time’ is different with reference to the relationship of the beneficiary with the corporate debtor inasmuch as, for the persons falling within the expression ‘related party’ within the meaning of Section 5 (24) of the Code, such period is of two years before the insolvency commencement date whereas it is one year in relation to the person other than a related party. The conceptions of, and rationale behind, such provisions could be noticed in the excerpts from the interim report of Law Reforms Committee, as referred on behalf of the appellants. We may usefully extract the same as under: - 

# 9. Thus for reasons aforesaid, the outstanding being of more than 2 years prior to CIRP commencement date, the relief under Section 43 of the Code would not be available. The respondent, however, shall be at liberty to take alternative action(s) as may be allowed under the Law (inclusive of Section 66 of the Code). 

# 10. In the circumstances we set aside the impugned order passed by Ld. NCLT, with liberty aforesaid. 

# 11. The appeal is disposed of in terms of above. Pending applications, if any, are also closed

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