2021 (10) TMI 1310 - Tri - Insolvency and Bankruptcy

Fraudulent Trading or Wrongful trading - whether any fraud is committed with the creditors only which has caused any loss to the creditors and the creditors of the Corporate Debtor ought to have suffered the financial loss arising out of the alleged Fraudulent Trading or Wrongful Trading? - HELD THAT - The provision of Section 66 deals with fraudulent trading or wrongful trading, therefore, intent to defraud the creditors is essential as it is imperative to prove that the business is conducted or a transaction has been made in a fraudulent manner in order to intentionally defraud the creditors of the Corporate Debtor - The Respondent No.1 has also not been able to satisfy the bench with respect to the various cash withdrawal made through the Account of the Janta Co-operative Bank Ltd, who is also Respondent No. 4 in the present application and has been proceeded ex parte. These facts support that there was an intention to defraud the creditors by keeping these assets of the Corporate Debtor beyond the reach of the Creditors or any such person who is entitled to make a claim against the Corporate Debtor - thus, these transactions are covered under the provisions of the 66 of the Code - application allowed. Appropriate order under Section 44 46 of the Code - reversal of property gone into preferential transaction and undervalued transaction and vest into the assets of the Corporate Debtor M.K. Overseas Pvt. Ltd. - HELD THAT - It has been observed that the Sale of the Mumbai Plant could not be realized and hence stands cancelled as the buyer paid ₹ 62.25 lakh and YES bank kept such amount under lien till the balance amount of ₹ 10.37 crore is received and due to initiation of the CIRP the buyer failed to pay the consideration in full. Hence, the amount was forfeited. It has been observed that the sales of the items of the inventory were made at a price lower than the purchase price paid, consequently such transactions have led to a loss of 4.57 crore and the Respondents have defended some but not been able to provide a satisfactory reason for doing the same - the Corporate Debtor entered into an undervalued transaction at a book loss of ₹ 2.32 crore with respect to the sale of the Daryaganj property vide various sale deeds from February 2018 to May 2019,which is till 4 months prior to the insolvency commencement date of the Corporate Debtor i.e. 19.09.2019 hence, it is within the look back period. Further it has been observed that the sale of the vehicle below the Book value to the extent of ₹ 1.90 Crore has been made from March 2019 to September 2019 which is prior to the insolvency Commencement date of the Corporate Debtor i.e. 19.09.2019 hence, it is within the look back period - the ex-management of the Corporate Debtor were well aware of the fact that an application has been filed and the same is pending for initiation of CIR process against the Corporate Debtor, therefore the ex-management continued with undervalued transaction with respect to sale of the vehicle as some of the vehicles have also been sold after the Application to initiate CIRP of the Corporate Debtor has been filed. It is directed to the Respondents who were directors/ shareholders of the Corporate Debtor and in control of the Corporate Debtor to retrieve the amounts set off against the benefitted creditors of the Corporate Debtor along with the liabilities assumed/accepted from Al dua processing Pvt. Ltd to the tune of ₹ 0.33 Crore during Financial Year 2017-18 and 2018-19 to the Resolution Professional within 3 weeks from the date of this order - application allowed.

Summary

Issues Involved:
1. Fraudulent and wrongful trading under Section 66 of the IBC.
2. Preferential and undervalued transactions under Sections 43 and 45 of the IBC.

Detailed Analysis:

Issue 1: Fraudulent and Wrongful Trading under Section 66 of the IBC

Background and Application:
The Resolution Professional filed an application under Section 66 of the IBC, seeking various directions against the ex-management of the Corporate Debtor, including the disclosure of inventories, recovery of misappropriated amounts, and addressing losses caused by fraudulent trading.

Findings:
1. Inventory Write-Offs: The Corporate Debtor wrote off inventories worth ?265.53 Crore without proper documentation, indicating malafide intentions.
2. Export Debtors Write-Offs: Export debtors' balances amounting to ?119.36 Crore were written off without supporting documents, suggesting fund diversion.
3. Sale of Inventories at Loss: Inventories were sold at a net loss of ?47.21 Crore, with inadequate records, indicating deliberate financial distortion.
4. Missing Vehicles: 22 vehicles listed in the balance sheet were unaccounted for, implying misappropriation.
5. Sale of Daryaganj Property: The property was sold at a book loss of ?2.32 Crore, with proceeds diverted to various bank accounts, violating the sanction letter from YES Bank.

Respondents' Defense:
1. Accounts and NPA Declaration: The accounts were running smoothly until mid-2018, and the NPA declaration was due to temporary difficulties.
2. Ordinary Course of Business: Transactions were made in the ordinary course of business without intent to defraud creditors.
3. Frozen Meat Sales: Inventories were sold at lower prices due to bad quality and export constraints.
4. Lack of Access to Documents: Respondents claimed they had no access to documents to support their defense.

Tribunal's Observations:
The tribunal found that the respondents failed to provide satisfactory documentary evidence to support their claims. The transactions were deemed fraudulent, intending to defraud creditors.

Judgment:
The tribunal held the suspended directors liable for the fraudulent transactions and directed them to compensate and refund the misappropriated amounts. The Auditor was also fined ?1,00,000 for signing the balance sheet without sufficient documentary support.

Issue 2: Preferential and Undervalued Transactions under Sections 43 and 45 of the IBC

Background and Application:
The Resolution Professional filed an application under Sections 43 and 45 of the IBC, seeking to reverse preferential and undervalued transactions and vest the assets back into the Corporate Debtor.

Findings:
1. Preferential Transactions: The Corporate Debtor adjusted creditors' balances against debtors' balances worth ?8.00 Crore without proper banking channels, giving undue preference to certain creditors.
2. Sale of Subsidiary: The Corporate Debtor sold its subsidiary, accepting liabilities worth ?19.68 Crore without proper disclosure and approval.
3. Undervalued Transactions: The Corporate Debtor sold its Mumbai plant and Daryaganj property at significantly undervalued prices, causing substantial losses.
4. Circular Trading: The Corporate Debtor engaged in circular trading of stock, incurring losses of ?4.57 Crore.

Respondents' Defense:
1. Ordinary Course of Business: Transactions were made in the ordinary course of business, and the business was affected by external factors like government notifications.
2. Lack of Evidence: The respondents claimed that the Resolution Professional failed to provide material evidence to demonstrate undervalued transactions.
3. Consent of Creditors: The respondents argued that creditors' consent was obtained for certain transactions.

Tribunal's Observations:
The tribunal found that the respondents failed to provide satisfactory evidence to support their claims. The transactions were deemed preferential and undervalued, conducted with the knowledge of impending insolvency.

Judgment:
The tribunal directed the respondents to retrieve and compensate the amounts involved in preferential and undervalued transactions. The possession of the Mumbai plant was to be handed over to the Resolution Professional, and the sale proceeds of the Daryaganj property and vehicles were to be reimbursed.

Conclusion:
The tribunal allowed both applications, holding the ex-management liable for fraudulent, preferential, and undervalued transactions, and directed appropriate compensations and reimbursements to be made to the Resolution Professional.