NCLT Kolkata-11 (2024.05.22) in IDBI Bank Limited Vs. Manor Floatel Limited [I.A. (I.B.C)/ 873(KB) 2018 In C.P. (IB)/592(KB)2017] held that;
In case even if the difference in trade payable accepted, the difference has resulted in reduction of liability of CD. Therefore, the difference cannot be attributed to any loss to the Corporate Debtor and cannot be brought under purview of avoidance transactions and accordingly the amount claimed on account of difference in trade payables will have to be rejected.
Trade receivables as per audited financial statements maintained in tally will have to be relied. Even assuming that trade receivable provided by management has to be accepted, even then trade receivables shown by management is more than trade receivables shown in audited financials and consequently no damage has been done to the assets of the Corporate Debtor’s receivable account.
The RP did not take any steps to substantiate the reason for such difference and consequently even this claim will have to be rejected.
Therefore, the application of mind by the resolution professional is a sine qua non, for maintaining a PUFE application. Such application of mind ought to be evident from the manner in which the application is preferred and the pleadings contained therein.
Therefore, where an application has been filed before this Adjudicating Authority by simply relying upon the findings in the auditor’s report shall not be entertained.
In this regard, the NCLT, Ahmadabad Bench in Vijay P Lulla RP v. Technovaa Plastic Indstries Pvt Ltd in IA 618 of 2019 in CP (IB) 189/9/NCLT/AHM/2018 dismissed the application by observing that the RP had failed to perform his duties as mandated under the I&B Code as he had failed to form an “opinion” as mandated by law.
The payments made in cash to the tune of Rs. 145.18 Lakh as mentioned in the table annexed at pages 55 and 56 to the application, has been included as preferential transaction in the absence of details relating to parties and the purpose for which it was paid.
Merely based on assumptions and presumptions a transaction cannot be dealt as a preferential transaction in the absence of any adverse findings in the Audit report, GST returns or IT returns filed with the statutory authorities.
Excerpts of the Order;
# 1. The Court congregated through hybrid mode.
# 2. This is an application preferred by Mr. Anil Agarwal, Resolution professional of the Corporate Debtor Manor Floatel Ltd (hereinafter referred as “Applicant/RP”) against Mamba Pal and Shubha Pal the erstwhile directors of Corporate Debtor (hereinafter referred s “Respondent/Management) under Section 43, 45 and 66 of the Insolvency and Bankruptcy Code, 2016, for brevity “I&B Code” seeking following relief:
i. As this adjudicating Authority may be pleased to take notes on the report of forensic auditor placed before us by the RP in the instant case.
ii. Necessary adjudication be made by this Adjudicating Authority in the facts and circumstances of this case and necessary directions be passed in terms of Section 43, 45 and 66 of the Code.
iii. Such order or other orders as this adjudicating authority may deem fit and proper in accordance with the Code of Civil Procedure and the Code of Criminal Procedure.
Factual Matrix:
# 3. The financial creditor initiated CIRP against the corporate Debtor (CD) Manor Floatel Ltd under Section 7 of I&B Code and this Adjudicating Authority admitted the petition filed vide order dated 10.1.2018.
# 4. After the commencement of CIRP and during the process of examination of books of accounts and other relevant documents, the resolution professional formed an opinion on possibility of existence of avoidance transactions and accordingly appointed a forensic auditor with the approval of CoC.
# 5. The forensic auditor submitted his report with several observations involving avoidance transactions in terms of Section 43, 45, 50 and 66 of I&B Code.
# 6. On examination of the forensic audit report, the Resolution Professional has filed this application seeking reliefs mentioned above.
Learned counsel for the Applicant:
# 7. The learned counsel for the applicant submits that Regulation 35A of CIRP came in to force on 03.07.2018 in terms of which the RP will have to form an opinion within 75 days of the insolvency commencement date on CD being subjected to any transaction covered under Section 43, 45, 50 or 66. Once he forms an opinion, he should determine the same on or before the 115th day of insolvency commencement date.
# 8. He submits that he has fulfilled this requirement of the regulation and filed this application on 10.09.2019, He further submits that, in any event the said regulation is directory and not mandatory and this is a settled position. He took us through the various aspects covered in the Forensic Audit report by relying on various tables mentioned therein. The tables have been extracted from the forensic audit report and reproduced for the sake of convenience. . . . . . . .
# 9. He submits that table I refers to Trade payable. He contends that trade payable as per the audited financials is more than the trade payable by the management. He submits that reasons for such differences were not explained and these are perceived to be potentially suspect transactions
# 10. He further submits that table II refers to trade receivable and there are differences between the audited financial statements and trade receivables as per the list provided by the Management. In the absence of reasons for such difference, he contends that the difference is perceived potentially suspect transactions.
# 11. Referring to the table III, he submits that there is difference of Rs.664.85 Lac between revenue booked as per financials and the list provided by the management. Revenue as per the list provided by the management is Rs.1986.65 Lac as against Rs. 1327.77 Lac as per tally software (audited financials) Learned counsel submits that the difference is due to suspected short booking in the books of accounts.
# 12. Referring to the table IV, he submits that there are cash transactions during 2016-17 and 2017-18 to various creditors for which party wise details or nature of expenditure were not provided. In view of inadequate explanation these are perceived to be preferential transfer of funds.
# 13. Referring to table V, cash receipts from creditors by crediting trade payable, for which party wise details and reasons for such credits were not provided and therefore these receipts are perceived as potential adjustments or accommodating entries
Learned Counsel for the Respondent:
# 14. The learned counsel for the respondent submits that there was no provision in the resolution plan to continue with any avoidance application. He relied on the judgment of the Hon’ble Apex Court in the case of Tata Steel BSL Ltd. v. Venus Recruiter (P) Ltd., reported in 2023 SCC OnLine Del 155: (2023) 172 CLA 239 and held that in a case where resolution plan does not make any provision for avoidance application, then the application for avoidance transactions before the plan is approved is not maintainable.
# 15. Learned counsel further submits that even the successful resolution applicant has issued a written communication on 09.01.2019 (Copy of the said written communication is annexed at Pages 18-22 to the reply affidavit) that he has no interest to pursue avoidance applications
# 16. However, the said letter was suppressed by Ex RP before this tribunal. Therefore, this application is not maintainable on this ground alone. He also further submits that in any event the application is meritless and is a mere copy and paste of forensic audit report without any application of mind.
# 17. The Learned counsel further submits that there is no primary document disclosed to evidence any wrongful dealing by respondents. Forensic auditor and Ex RP has alleged that there are certain mismatches in the figures maintained in the tally software viz a viz list provided by the management.
# 18. The RP failed to understand that the list provided by the management are based on whatever they could collect as a suspended board whereas tally records have been audited and audited financials have been filed along with other GST and IT returns with the relevant statutory authorities.
# 19. It is not the case of the applicant that based on any discrepancies/mismatches listed in the application, statutory authorities have issued any order or notice to the Corporate Debtor. He further submits that even statutory Auditors of the Corporate Debtor has not issued qualified report when they signed the financials of the Corporate Debtor.
# 20. After the commencement of CIRP, suspended board had very less or no access to records and therefore whatever documents they had in relation to the records of the company have been provided without any cross verification with audited financials maintained in tally software.
# 21. Further the forensic audit report is with several caveats such as “much time and effort on the data collected could not be spent, thus detailed findings could not be reached”. Further “the report stated that which has been considered to be in the nature of non-finding.”
# 22. Even in the body of the report words used are “potentially based on alleged list provided by the management” without providing any opportunity whatsoever to corroborate with the tally.
# 23. In any case tally records have been duly audited by statutory auditor and therefore that stands final.
# 24. He submits that merely based on assumptions, presumptions and surmises the avoidance application are not maintainable.
Analysis and findings:
# 25. We find that there was no provision in the resolution plan to continue with any avoidance application. We also note that even the successful resolution professional has issued a written communication on 09.01.2019 that he has no interest to pursue avoidance applications. We are in agreement that on this ground alone, this application is not maintainable as per the case law relied by the Respondents. However, we still wanted to see whether the applicants have case on merits
# 26. We find difference in trade payables. Trade payables as per audited financial statements is substantially higher as compared to trade payables as per list forwarded by the management.
# 27. It is not the case of the applicant that trade payables are lesser because the sundry creditors have been paid outside the books of accounts or those creditors are given credit note in favour of CD.
# 28. In any case, the RP admits that the differences are perceived as potential suspect transaction without any valid evidence whatsoever. The evidence the RP could have produced is credit notes issued by the creditor or how such differences have been dealt in GST and IT returns filed by the CD during the relevant period.
# 29. In case even if the difference in trade payable accepted, the difference has resulted in reduction of liability of CD. Therefore, the difference cannot be attributed to any loss to the Corporate Debtor and cannot be brought under purview of avoidance transactions and accordingly the amount claimed on account of difference in trade payables will have to be rejected.
# 30. With reference to difference in trade receivables, we again find that the trade receivables shown as per the data provided by the management is actually more than the trade receivables shown in the audited financials. First of all, there is no basis to state that trade receivable provided by the management is correct when it is not even audited.
# 31. Trade receivables as per audited financial statements maintained in tally will have to be relied. Even assuming that trade receivable provided by management has to be accepted, even then trade receivables shown by management is more than trade receivables shown in audited financials and consequently no damage has been done to the assets of the Corporate Debtor’s receivable account. While financial accounts say lesser number as receivable, the data provided by the management show more amount as receivable.
# 32. Therefore, we are of the view that all such differences are merely based on the unverified data provided by the management when compared with the verified audited data as per the tally software.
# 33. The RP did not take any steps to substantiate the reason for such difference and consequently even this claim will have to be rejected.
# 34. The claim in difference between difference in sales/revenue between list provided by the management and revenue captured as per tally to the tune of Rs. 664.85 has not been substantiated at all. If invoice wise list provided by the management shows higher number than what has been shown in the books of accounts, then RP should have provided reconciliation of what invoices have not been shown in books of accounts, and he should have taken steps to verify with the parties to whom goods claimed to have been sold and get confirmation of receivables from them. At the least, he should have provided details of supply made with supporting documents such as Lorry / Rail receipts, E way bills etc in respect of Invoices which have not been booked in the tally software (audited financials)
# 35. Therefore, barely relying on unverified list provided by the management and comparing it with audited financials and alleging differences in revenue is not maintainable and accordingly the claim of 664.85 lac does not merit to be considered as avoidance transaction.
# 36. As per section 25 of the I&B Code read with regulation 35A of the CIRP Regulations, 2016, the resolution professional is mandated to form an opinion as to whether a transaction would fall within the purview of any of the provisions which enable avoidance of such transactions. Therefore, the application of mind by the resolution professional is a sine qua non, for maintaining a PUFE application. Such application of mind ought to be evident from the manner in which the application is preferred and the pleadings contained therein. Therefore, where an application has been filed before this Adjudicating Authority by simply relying upon the findings in the auditor’s report shall not be entertained. In this regard, the NCLT, Ahmadabad Bench in Vijay P Lulla RP v. Technovaa Plastic Indstries Pvt Ltd in IA 618 of 2019 in CP (IB) 189/9/NCLT/AHM/2018 dismissed the application by observing that the RP had failed to perform his duties as mandated under the I&B Code as he had failed to form an “opinion” as mandated by law.
Payments made in cash:
# 37. The payments made in cash to the tune of Rs. 145.18 Lakh as mentioned in the table annexed at pages 55 and 56 to the application, has been included as preferential transaction in the absence of details relating to parties and the purpose for which it was paid.
# 38. Merely based on assumptions and presumptions a transaction cannot be dealt as a preferential transaction in the absence of any adverse findings in the Audit report, GST returns or IT returns filed with the statutory authorities.
# 39. Therefore, we find that no case has been made out on and accordingly we dismiss this application in total not only on the point of maintainability as mentioned in para 25 of the order but on merits as well.
# 40. The certified copy of this order, if applied for with the Registry of this Adjudicating Authority, be supplied to the parties, subject to compliance with all requisite formalities.
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