2020 (6) TMI 767 - Tri - Insolvency and Bankruptcy

Seeking directions to Respondents to make contributions to the assets of the Corporate Debtor - Section 66(1) Section 66 (2) of Insolvency Bankruptcy Code 2016 - misutilisation of LC facilities - Fraudulent transactions or not - Writing off trade receivables to the tune of ₹ 96.97 crores as bad debts by Corporate Debtor - dispute raised by the parties regarding quality of the material supplied - Applicability of provisions of Section 66 (1) of IBC to the transactions referred to by the Liquidator - Misutilisation of LC facilities - HELD THAT - The Respondents misused the LC facilities without actual purchase of goods and it was done with a view to defraud the creditors and they are liable to make good to the assets of Corporate Debtor under Section 66 (1) of IBC. The Liquidator estimated the liability being 1% of each LC which comes to ₹ 35 lakhs on the goods worth ₹ 35 crores involved in the above transactions. Fraudulent transactions or not - HELD THAT - Taking into account the volume of transactions involved, which is around ₹ 550 crores, the goods worth ₹ 35 crores were only returned. It is a specific case of Respondents 1-3 that the goods were returned after inspection due to quality and also due to fluctuations in the price. Neither the Liquidator nor the Forensic Auditor alleged that these are fraudulent transactions. Then mere return of goods on the very same day cannot be held to be fraudulent transactions intended to defraud the creditor. The important factor to be taken note of that these are not related party transactions. Thus, when there is no material to conclude that these are fraudulent transactions, then the request of the Liquidator to direct the Respondents to make contributions to the assets of the Corporate Debtor to the extent of ₹ 35 lakhs cannot be granted. Writing off trade receivables to the tune of ₹ 96.97 crores as bad debts by Corporate Debtor - HELD THAT - There was dispute raised by the parties regarding quality of the material supplied. The total amount involved in these transactions is around ₹ 57,79,35,214. It is very clear that disputes are not with related parties. These are the transactions entered with third parties and not with related parties. Thus, debts were written off on the ground that parties raised disputes with regard to quality. As far as these transactions are concerned, it cannot be said that they are fraudulent trading or wrongful trading - The contention of Liquidator, the Respondents who were in the management ought to have taken appropriate steps against those parties who raised disputes and who have not responded. The case of Liquidator, the Respondents, as ordinary prudent persons ought to have initiated legal action against those debtors. The Respondents failed to exercise due diligence and caused loss to Corporate Debtor Company and hence they are liable to compensate to the assets of the Corporate Debtor. There is nothing wrong in writing off those debts which are barred by limitation. Regarding claims where disputes are involved even though such debts were written off, it is open to the Corporate Debtor to proceed. Likewise the amount due from the parties who have not responded, even against them also the new management who acquired Corporate Debtor Company can proceed, if so advised. The fact remains that there is no fraud alleged. Secondly, the parties against whom the debts were written off are not related parties. It is within the commercial wisdom of the Company that the debts were written off. No fraud is alleged and established. There is no point in directing the Respondents to make good to the assets of the Company due to failure of the Company to take appropriate action against concerned parties for recovery of debts. It is made clear that the new management is at liberty to initiate action against the defaulters according to law - Application disposed off.

Summary

Issues Involved:
1. Application under Section 66(1) and Section 66(2) of the Insolvency and Bankruptcy Code (IBC), 2016.
2. Alleged fraudulent transactions and wrongful trading.
3. Writing off bad debts.
4. Liquidator's contention for contribution to the assets of the Corporate Debtor.
5. Respondent's defense against allegations of fraudulent transactions and bad debt write-offs.

Issue-wise Detailed Analysis:

1. Application under Section 66(1) and Section 66(2) of IBC, 2016:
The Liquidator filed an interlocutory application under Section 66(1) and Section 66(2) of IBC, 2016, seeking directions for the Respondents to contribute to the assets of the Corporate Debtor, M/s Southern Online Bio Technologies Limited. The application was based on findings from a forensic audit conducted by Raju & Prasad, Chartered Accountants, which identified certain irregularities under Section 66 of IBC.

2. Alleged Fraudulent Transactions and Wrongful Trading:
The forensic audit report highlighted two main issues:
- Writing off debts amounting to ?96.97 Crores during the financial year 2017-18 without proper measures to recover them, falling under Section 66(2) of IBC.
- Issuance of Letters of Credit (LCs) for purchases that were returned on the same day, indicating misuse of LC facilities, falling under Section 66(1) of IBC.

3. Writing off Bad Debts:
The Liquidator contended that the Corporate Debtor wrote off trade receivables amounting to ?96.97 Crores as bad debts without taking adequate steps for recovery. The Respondents argued that writing off bad debts is permissible under Section 36 of the Income Tax Act, 1961, and does not amount to relinquishment of rights over the debtor. They further contended that the write-offs were a commercial decision to support accounting accuracy and create tax savings.

4. Liquidator's Contention for Contribution to the Assets of the Corporate Debtor:
The Liquidator sought directions for the Respondents to contribute ?35 Lakhs to the assets of the Corporate Debtor, representing costs incurred to avail LC facilities and other incidental charges. The Liquidator also sought measures to recover amounts from parties mentioned in the forensic audit report.

5. Respondent's Defense Against Allegations of Fraudulent Transactions and Bad Debt Write-offs:
The Respondents refuted the allegations, arguing that:
- The transactions were commercial decisions made without malafide intent.
- The write-offs were not related party transactions and were made due to quality issues or price fluctuations.
- No fraud was established, and the write-offs were within the commercial wisdom of the Company.

Tribunal's Observations and Judgment:
- The Tribunal noted that the transactions questioned involved goods worth ?35 Crores returned on the same day, but no fraud was alleged or established. The transactions were not related party transactions, and the Respondents' actions were commercially justifiable.
- Regarding the write-off of trade receivables, the Tribunal observed that certain debts were barred by limitation, and writing them off was appropriate. For disputed debts and debts with no communication from parties, it was within the commercial wisdom of the Company to write them off. The Tribunal emphasized that writing off debts does not preclude the Corporate Debtor from pursuing recovery.
- The Tribunal concluded that no fraud was alleged or established, and the transactions were not related party transactions. Therefore, the Liquidator's request for contributions to the assets of the Corporate Debtor could not be granted.

Conclusion:
The application was disposed of with the observation that the new management could initiate action against defaulters if so advised, but no directions were given for the Respondents to make contributions to the assets of the Corporate Debtor.