2021 (12) TMI 1375 - Tri - Insolvency and Bankruptcy

Preferential Transactions - Undervalued Transactions - Fraudulent Trading - Loan repaid to the director during the FY 2017-18, is in preference to trade payables statutory dues and salary to staff, during that year - amount paid to Mrs. Revathi Radhakrishnan, wife of suspended managing director, on 01st July 2018 as loan to be repaid to the Corporate Debtor with interest and cost thereof - settlement of interest and cost of the balance outstanding with respect to the SMS Server Maintenance charges of Rs. 90,00,000/-, which is still pending to be received from this subsidiary company, subject to the Application filed with NCLT, Kochi Bench regarding the recoverability of Outstanding Debtors of the Corporate Debtor - restoration of position as it existed before such transaction as if the transaction had not been entered into and protecting the interests of persons who are victims of such transactions. HELD THAT - The transactions in question were preferential, undervalued and fraudulent within the meaning of Sections 43, 45 and 66 of the Code as suspicious and vulnerable, firstly, Rs. 42,50,397 repaid to the director during the F.Y. 2017-18, is in preference to trade payables. Secondly, Rs. 6,28,000 paid to Mrs. Revathy Radhakrishnan Director of the Corporate Debtor. Thirdly, an amount of Rs. 90,00,000 is receivable from Sabkaa Payments Limited. Looking at the broad features of Section 43 of the Code, it is noticed that as per Sub-Section (1) thereof, when the liquidator or the resolution professional, as the case may be, is of the opinion that the Corporate Debtor has, at a relevant time, given a preference in such transactions and in such manner as specified in Sub-Section (2), to any person/persons as referred to in sub-Section (4), he is required to apply to the adjudicating authority for avoidance of preferential transactions and for one or more of the orders referred to in Section 44. If twin conditions specified in Section 43(2) are satisfied, the transaction would be deemed to be of preference - The relevant time is reckoned, as per Section 43(4) of the Code. in two ways (a) if the preferences given to a related party (other than an employee), the relevant time is a period of two years preceding the insolvency commencement date; and (b) if the preference is given to a person other than a related party, the relevant time is a period of one year preceding such commencement date. In other words, for a transaction to fall within the mischief sought to be remedied by Sections 43 and 44 of the Code, it ought to be a preferential one answering to the requirements of Section 43(2)(d) and the preference ought to have been given at a relevant time, as specified in Section 43(4). It appears from the records that on account of complexity in the transaction of the Corporate Debtor, Liquidator has appointed Mr. Vibin Vincent, Chartered Accountant in accordance with Regulation 7 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016 to conduct Transaction and Forensic Audit to identify the preferential, undervalued, fraudulent and extortionate transactions - This Tribunal is of the opinion that the concept of avoidance is essentially premised on fairness and equity, when a company is on the brink of insolvency, paying off one creditor may be detrimental to the interests of the other creditors as it would result in a diminution of total assets available for distribution to other creditors. After conducting a Transaction Audit and Forensic Audit by Mr. Vibin Vincent, Chartered Accountant, he has reported that based on his analysis of Audited Financial Statements, various bank statements, and other explanations he has found preferential transaction of an amount of Rs. 1,38,78,397/- during the relevant period - this amount should be returned to the Liquidator for distributing among the stakeholders. We direct Mr. Reji Sivankutty and Mrs. Revathy Radhakrishnan to return this amount to the Liquidator within two weeks from the date of receipt of this order. With regard to the payment made by the Sabkaa Payments Limited (subsidiary Company), since they have not been made party to the proceedings, this Tribunal cannot direct them to return the money. Since, the Liquidator has already filed a dissolution application, he shall take immediate steps to recover the amount from the suspended Managing Director/Director and a report submitted before this Tribunal as to how he has distributed the amount to the stakeholders, immediately after two weeks. Application disposed off.

Summary

Issues Involved:

1. Preferential Transactions
2. Undervalued Transactions
3. Fraudulent Trading

Issue-wise Detailed Analysis:

Preferential Transactions:

The Liquidator filed IA(IBC)/51/KOB/2021 under Sections 35(1)(n), 43, 44, 45, 46, 48, 49, 60(5) & 66 of the Insolvency and Bankruptcy Code, 2016, seeking reliefs related to preferential transactions. It was found that Rs. 42,50,397 was repaid to the director during FY 2017-18, in preference to trade payables, statutory dues, and salaries. Additionally, Rs. 6,28,000 was paid to Mrs. Revathi Radhakrishnan, wife of the suspended managing director, as a loan, when no such loan was recorded in the audited financials. Moreover, Rs. 90,00,000 was outstanding from Sabkaa Payments Limited for SMS server maintenance charges. The Tribunal noted that these transactions were preferential within the meaning of Sections 43 and 44 of the Code, as they occurred within the relevant time frame and benefited related parties over other creditors. Therefore, the Tribunal directed the return of Rs. 42,50,397 and Rs. 6,28,000 to the Liquidator for distribution among stakeholders.

Undervalued Transactions:

The Liquidator identified undervalued transactions where assets with a written-down value of Rs. 48,55,750 were either missing or sold without proper documentation. A car was sold for Rs. 24,00,000, but other assets worth Rs. 33,12,921 were unaccounted for. The Tribunal noted that these transactions were undervalued and lacked proper records, making them suspicious and detrimental to the interests of creditors. The report by the Transaction Auditor confirmed these findings, indicating that the assets were lost, written off, or sold without adequate documentation.

Fraudulent Trading:

The Liquidator also highlighted fraudulent trading activities, including the incorporation of Sabkaa Payments Limited and the investment of Rs. 13,34,818 in its share capital without proper disclosure in the financial statements of the Corporate Debtor. The Tribunal found that these activities were intended to defraud creditors, as the investments and related party transactions were not disclosed as required by accounting standards. The report by the Transaction Auditor corroborated these findings, showing that Rs. 1,09,550 was spent on preliminary and legal expenses for Sabkaa Payments Limited, which was not reflected in the Corporate Debtor's financial statements.

Findings:

The Tribunal concluded that the transactions in question were preferential, undervalued, and fraudulent. The Liquidator was directed to recover Rs. 42,50,397 from the suspended managing director and Rs. 6,28,000 from Mrs. Revathi Radhakrishnan. However, since Sabkaa Payments Limited was not made a party to the proceedings, no orders could be passed against them. The Liquidator was instructed to take immediate steps to recover the amounts and submit a report on the distribution of the recovered funds among stakeholders.

Conclusion:

The Tribunal disposed of IA(IBC)/51/KOB/2021 with directions to the Liquidator to recover specific amounts from the suspended managing director and Mrs. Revathi Radhakrishnan and report the distribution of these funds among stakeholders. The application was disposed of on December 21, 2021.