2021 (11) TMI 1034 - Tri - Insolvency and Bankruptcy

Seeking removal of Respondent Nos. 3 to 7 from the CoC - there is neither any default nor any debt is owed - reconstitution of cancel entire voting rights of Respondent Nos. 3 to 7 and undertake appropriate changes to the present voting rights of the rest of the CoC members in view of the said fraud perpetrated by the Respondents - HELD THAT - It is very clear to the Bench that R1 and R7 in the above-mentioned transactions have defrauded the Corporate Debtor Company and such an act is squarely covered under Section 66 (1) and 66 (2) of the Code - R1 and R2 who are the suspended directors in their defense have mentioned that the forensic report is incomplete and that the auditors have not conducted detailed review of the operations of the Corporate Debtor company. The Bench notes that the Respondent Number 1 and 2 who are the suspended directors have raised baseless technical objection regarding choice of sampling method and sampling technique. It is clear to the Bench that they have no defense regarding their conduct in the whole matter wherein they had fraudulently taken out money from the Corporate Debtor s Bank account and had paid back same amount to the related parties of the alleged homebuyer. The Bench therefore notes that R7 has not provided any proper explanation regarding its collusion and being a party to the fraudulent transactions. Removal of R3 to R7 from CoC and also as financial Creditor/ Home- Buyer, as there is no debt own to them by the Corporate Debtor company and purported infusion of funds by each of these Respondent were returned back to them through their related parties (relatives) on the same day or the next day by Respondent Number 1 and 2 who are suspended directors of the Corporate Debtor company - these transactions of purported creditors are vitiated by fraud, therefore all these transactions are declared as null and void. Petition disposed off.

Summary

Issues Involved:
1. Fraudulent transactions and intent to defraud creditors.
2. Validity and reliability of the forensic audit report.
3. Removal of certain respondents from the Committee of Creditors (CoC).
4. Reconstitution of the CoC and cancellation of voting rights.

Detailed Analysis:

1. Fraudulent transactions and intent to defraud creditors:
The application was filed under Section 66 read with Section 60(5) of the Insolvency & Bankruptcy Code, 2016, alleging that the suspended directors (Respondent Nos. 1 and 2) and certain home-buyers (Respondent Nos. 3 to 7) engaged in fraudulent transactions to defraud creditors. The forensic audit conducted by Mazars Business Advisors Pvt. Ltd. revealed that Respondent Nos. 1 and 2 withdrew funds from the Corporate Debtor's account and transferred them to the related parties of Respondent Nos. 3 to 7, effectively returning the funds within 24 hours. This created a false impression that Respondent Nos. 3 to 7 were financial creditors, which misled the Resolution Professional (RP) and other stakeholders.

2. Validity and reliability of the forensic audit report:
Respondent Nos. 1, 2, and 7 challenged the forensic audit report's validity, arguing that it was incomplete and did not consider audited financial statements and other relevant documents. They claimed that the transactions were in the ordinary course of business and lacked fraudulent intent. However, the Tribunal found these objections baseless, noting that the forensic audit provided sufficient evidence of fraudulent transactions.

3. Removal of certain respondents from the Committee of Creditors (CoC):
The Tribunal found that Respondent Nos. 3 to 7 were fraudulently included in the CoC as financial creditors due to the circuitous transactions orchestrated by Respondent Nos. 1 and 2. The Tribunal observed that the funds purportedly invested by these home-buyers were returned to their related parties through personal accounts of the suspended directors, thereby nullifying any genuine financial debt. Consequently, the Tribunal directed the removal of Respondent Nos. 3 to 7 from the CoC.

4. Reconstitution of the CoC and cancellation of voting rights:
The Tribunal ordered the RP to reconstitute the CoC by canceling the voting rights of Respondent Nos. 3 to 7. The transactions were declared null and void due to their fraudulent nature. This decision aimed to protect the interests of genuine creditors and ensure the integrity of the insolvency resolution process.

Conclusion:
The Tribunal concluded that Respondent Nos. 1 and 2, in collusion with Respondent Nos. 3 to 7, engaged in fraudulent transactions to mislead the insolvency process. The forensic audit report, despite objections, was deemed reliable and provided sufficient evidence of fraud. The Tribunal directed the removal of the fraudulent home-buyers from the CoC and ordered the RP to reconstitute the CoC, ensuring that only genuine creditors participate in the insolvency resolution process.