2022 (9) TMI 1544 - Tri - Insolvency and Bankruptcy

Preferential, fraudulent, and undervalued transactions under sections 43,45 and 66 of Insolvency and Bankruptcy Code 2016. Preferential Transactions - HELD THAT - The 4th respondent is not related party to the corporate debtor; this transaction had taken place in the financial year 2015-2016. The CIRP commenced against the corporate debtor on 26.04.2018. As per section 43(4)(b) any transaction made within a year prior to the date of commencement of insolvency termed as preferential transaction. In this case the disputed transaction happened in the financial year 2014-2015 three years prior to the date of commencement of insolvency date. Here the look back period exceeded one year as mentioned in section 43(4)(b) of IBC 2016, hence the transaction referred here is not a preferential transaction. Fraudulent Transactions - HELD THAT - The Section 66 (1) of Insolvency Bankruptcy Code, 2016 should read along with Section 35 (1) (n) of IBC, 2016. If the contention of the respondent is accepted then there will not be any avenue available to the Liquidator who found the fraudulent transactions of the corporate debtor during liquidation process, to proceed against them, this will not the intention of the statue, hence it is held that this petition filed by the liquidator alleging certain fraudulent transactions against the corporate debtor is maintainable. Purchase of Rice husk from Related parties at a reasonably High Price - HELD THAT - There is no material to show that the suspended directors of the corporate debtor reasonably knew that the commencement of insolvency proceeding against the corporate debtor was inevitable and the suspended directors failed to take due diligence to minimise the potential loss to the creditors. The purchase was made in the year 2015, the look back period exceeded three years from the date of commencement of CIRP. The Vendors who supplied rice husk are not arrayed as respondents. In the scenario it is answered that the fraudulent transaction alleged against the corporate debtor is not proved. Interest free Advance to Ashirwad Trading Company, Kamal Associates and Parsa Kente Collieries Limited - HELD THAT - As per section 66(1) of IBC 2016 if the Adjudicating Authority arrived to the conclusion that the transactions were carried out in fraudulent manner, it can order against persons who were knowingly parties to the such fraudulent business transactions to make such contribution to the corporate debtor. The applicant stated that the supra mentioned amounts are remains as an outstanding amount payable to the corporate debtor. The respondent 1 2 failed to take any steps to recover the same but the applicant has not whispered what steps he has taken to recover the amount. In this scenario the afore mentioned three companies are necessary parties to this application. In the absence, said companies no fruitful order can be passed. Further fails to recover the outstanding amounts will not amounts to fraud, at most it can be termed as negligence act. In these circumstances it is concluded that on the applicant side failed to establish these transactions are fraudulent transactions as alleged. Fraudulent write off of Debtor from the Books of the Corporate Debtor - HELD THAT - There is major difference exist between a loan is waived off and write off. If the loan is waived off thereafter no action can be taken to recover the said loans but if the loan is write off, the loan can be recovered through legal process. In short, write off will not extinguish the rights of the lender to recover the amount, it is only for audit purposes write of is made - the write off of debt will not amounts to fraudulent Transactions. Advance Payment Made to Fatehpur East Coal Pvt. Ltd. A potentially Related Party and Later on adjustment of the said payment by way of purchase of shares - HELD THAT - There is a difference between wrongful trading and fraudulent trading, the element of negligence exists in wrongful trading but element of deceit will not there. On the applicant side not explained how the above transaction is termed as fraudulent transaction. In the circumstances it is concluded that since the incident taken much before the commencement of corporate insolvency resolution process date and in the absence of elements of deceit, the applicant failed to prove this transaction is a fraudulent transaction. Excess Payment made to various suppliers but Receipt of payment, Goods or services not booked - HELD THAT - In the case of fraudulent transactions, the person or persons who were benefited because of the fraudulent acts of the suspended directors of corporate debtor also to be added as party to arrive just and correct conclusion and also if the guilt is proved to get back the benefit acquired by them. In this case five vendors of Rice husk are not arrayed as parties to this application, this amounts to non-joinder of necessary parties - the transactions under the caption of fraudulent transactions are not proved. Undervalued Transactions - HELD THAT - As per section 46(1)(ii) of IBC 2016, the transactions made with related party within period of two years preceding the insolvency commencement date is the under-value transaction. In this case look back period exceeded two years from the date of commencement of CIRP against the corporate debtor hence, the transactions referred in the application does not fall under value transactions. Thus, the transactions styled as preferential, fraudulent, and undervalued in the petition are not proved hence the petition is liable to be dismissed. Application dismissed.

Summary

Issues Involved:
1. Preferential Transactions
2. Fraudulent Transactions
3. Undervalued Transactions

Issue-wise Detailed Analysis:

1. Preferential Transactions:
The application contends that the erstwhile directors of the corporate debtor engaged in preferential transactions by paying old debts to the 4th respondent preferentially. The disputed transaction occurred in the financial year 2014-2015, three years before the commencement of insolvency on 26.04.2018. As per Section 43(4)(b) of IBC 2016, preferential transactions are those made within one year prior to the insolvency commencement date. Since the transaction happened outside this look-back period, it is not considered a preferential transaction.

2. Fraudulent Transactions:
The applicant alleged several fraudulent transactions under Section 66 of IBC 2016. The respondents argued that the liquidator is not authorized to file such an application, but the tribunal interpreted Section 66 to allow the liquidator to file during the liquidation process.

- Purchase of Rice Husk at High Prices: The applicant claimed that the corporate debtor purchased rice husk from related parties at inflated prices. The tribunal found no evidence to support the claim that the purchases were not in the ordinary course of business or that the directors acted with fraudulent intent. The vendors were not made parties to the application, leading to the conclusion that the fraudulent transaction was not proved.

- Interest-free Advances: The applicant alleged interest-free advances to certain companies. The tribunal noted that these transactions were not related party transactions and occurred before the look-back period. The companies involved were not made parties to the application, and there was no evidence of fraudulent intent by the directors. Thus, the transactions were not proved as fraudulent.

- Write-off of Debts: The applicant argued that the directors fraudulently wrote off debts owed by Om Astha Construction Private Limited. The tribunal clarified that writing off debts does not extinguish the creditor's right to recover them. The write-off was an internal accounting procedure and did not amount to fraudulent transactions.

- Advance Payment to Fatehpur East Coal Pvt. Ltd.: The applicant claimed that payments made to this potentially related party were later adjusted by purchasing shares, which were then written off. The tribunal found that the write-off was due to the cancellation of coal allotment orders by the Supreme Court, an unforeseen event. There was no evidence of fraudulent intent, and the transaction was not proved as fraudulent.

- Excess Payments to Suppliers: The applicant alleged excess payments to various suppliers without receiving goods or services. The tribunal noted that the suppliers were not made parties to the application, and there was no evidence of fraudulent intent. The transactions were not proved as fraudulent.

3. Undervalued Transactions:
The applicant claimed that two cars were sold at undervalued prices to the 5th respondent. The tribunal found that the transactions occurred more than two years before the commencement of insolvency, exceeding the look-back period defined in Section 46(1)(ii) of IBC 2016. Additionally, the cars were sold at or above the valuation price provided by a competent valuer. Therefore, the transactions were not considered undervalued.

Conclusion:
The tribunal concluded that the transactions alleged as preferential, fraudulent, and undervalued were not proved. Consequently, the application was dismissed. The registry was directed to send email copies of the order to all parties and their counsel, and certified copies were to be issued upon compliance with requisite formalities.