2019 (3) TMI 1791 - Tri - Insolvency and Bankruptcy

Genuineness of Corporate Debtor - need to conduct Fornsic Audit in relation to the transactions took place between the creditors including respondent No. 2 and the corporate debtor - scope of Related Party - section 5(24), (24A) of the I and B Code, 2016. Whether Forensic Audit needs to be conducted in relation to the transactions took place between the creditors including respondent No. 2 and the corporate debtor, to ascertain the genuineness or otherwise? - HELD THAT - The balance-sheets of the corporate debtor clearly record the debt due and as such there can be no doubt of the genuineness of the transactions. The cash flow statements for the years 2013 and 2014 placed at pages 288 and 289 of the typed set filed with the counter by respondent No. 2 indicate under heading non-current liability , long-term borrowings and unsecured loan from directors is ₹ 388,514,392 and ₹ 385,514,392 respectively. In other words, long-term borrowings does not include the amount of ₹ 2,49,28,86,436 as claimed by Mrs. Indira Anand vide loan agreement dated April 1, 2012 the loan agreement dated April 1, 2012 shows that monies advanced from time to time was agreed to be repaid by the corporate debtor on demand as unsecured loan till March 31, 2016 which obviously is a non-current liability falling within the ambit of long-term borrowings . Therefore, the contention of the second respondent is not substantiated with the relevant documents of the corporate debtor - there requires a Forensic Audit to be conducted by the first respondent/resolution professional in order to examine the fraudulent, and avoidance transactions with regard to the claims of the creditors of the corporate debtor including the second respondent - the issue is decided in favour of the applicant and against the respondents. Whether respondent No. 2 is falling within the ambit of the related party as defined under section 5(24), (24A) of the I and B Code, 2016? - HELD THAT - The purport and object of section 5(24), (24A) read with proviso to sub- section (2) of section 21 of the I and B Code, 2016 is that a party which has vested interest/relation with the corporate debtor should not become the part of the CoC for the reasons that the decisions of the CoC must remain independent, as CoC is the pivot of the insolvency and resolution process. The decision of the CoC has far reaching consequences, which will have effect on the corporate debtor for its survival or liquidation and realization of the debt of the creditors. Therefore, the institution of CoC needs to be completely independent and free from any kind of influence based on vested interest either of the promoters or their closed relatives who may have stakes being creditors with respect to the corporate debtor. The provisions of section 5(24), (24A) of the I and B Code, 2016 appear to be incorporated to fulfil the said purport and object. The provisions of section 5(24), (24A) of the I and B Code, 2016 cannot said to be exhaustive but are inclusive - the second respondent is held to be related party to the corporate debtor, which shall have no right of representation, participation or voting in the meeting of the committee of creditors of the corporate debtor. It is made clear that the claim of the second respondent shall remain subject to the outcome of the Forensic Audit directed to be conducted. Consequently, respondent No. 1/resolution professional is directed to delete the name of respondent No. 2 from the list of the CoC with immediate effect and get the Forensic Audit conducted for the purpose - application disposed off.

Summary

Issues Involved:
1. Whether a "Forensic Audit" needs to be conducted in relation to the transactions between the creditors, including respondent No. 2, and the corporate debtor.
2. Whether respondent No. 2 falls within the ambit of the "related party" as defined under section 5(24), (24A) of the Insolvency and Bankruptcy Code, 2016.

Detailed Analysis:

First Issue:

15. The Tribunal examined the balance-sheets of the corporate debtor, which recorded the debt due, indicating no doubt about the genuineness of the transactions. However, the cash flow statements for 2013 and 2014 under "non-current liability" and "long-term borrowings" did not include the amount claimed by Mrs. Indira Anand. The loan agreement dated April 1, 2012, indicated that monies advanced were to be repaid by the corporate debtor as an unsecured loan till March 31, 2016. This was categorized as a "non-current liability" under "long-term borrowings," but the second respondent's contention lacked substantiation with relevant documents.

It was noted that Mrs. Indira Anand requested the corporate debtor to debit her account for a sum of ?200 crores and credit it to M/s. Anandcine Services. This letter was not a valid document legally as it was neither an assignment deed nor an agreement. Further, loan agreements between the second respondent and the corporate debtor dated April 1, 2015, and September 4, 2017, were not substantiated with the corporate debtor's books of account. Therefore, a "Forensic Audit" was deemed necessary to examine fraudulent and avoidance transactions regarding the creditors' claims, including the second respondent. The Tribunal decided this issue in favor of the applicant.

Second Issue:

16. The Tribunal found that the managing director of the corporate debtor, Mr. K. Bapaiah, was related to the shareholders and directors of the second respondent, Mrs. A. Padma Manohar and Mr. A. Anand Prasad. This relationship indicated a direct concern with the corporate debtor, affecting the decisions of the CoC, as the second respondent held a majority voting right. This relationship could adversely affect the rights of minority financial creditors.

17. The Tribunal emphasized that section 5(24), (24A) of the I and B Code, 2016, aims to ensure that parties with vested interests do not influence the CoC's decisions. The CoC's decisions have significant consequences for the corporate debtor's survival or liquidation and the realization of creditors' debts. Therefore, the CoC must remain independent and free from any influence based on vested interests. The provisions of section 5(24), (24A) are inclusive and must be interpreted purposively to achieve the intended objective. Consequently, the second respondent was held to be a "related party" to the corporate debtor, with no right of representation, participation, or voting in the CoC meetings.

18. The Tribunal decided the second issue in favor of the applicant, directing the resolution professional to delete the second respondent's name from the CoC list and conduct a "Forensic Audit" as directed. The application was disposed of accordingly.

Conclusion:

19. The Tribunal pronounced the order in open court with no order as to costs.