2019 (7) TMI 1144 - Tri - Insolvency and Bankruptcy

Initiation of Corporate Insolvency Resolution Process - insolvency or liquidation of the Corporate Debtor - HELD THAT - There are serious allegations made by the Resolution Professional in the instant CA and supporting evidence for the same was shown to us during the multiple hearings in the case. In their reply, Respondent 1, 2 and 3 have countered these allegations and filed documents in support of their stand. Respondent 4, being the Operational Creditor on whose application the CIRP was initiated, has also filed reply countering the allegations made by the RP in the instant application. It is also seen that there have been two unsavory incidents at the premises of the CD namely fire at the factory premises on 12.02.2018 and subsequent attack on the security guard at the office of the CD on 15.03.2018. Voluminous documents and vouchers have been filed by the parties in support of their contentions. The proceedings before this Tribunal are summary in nature and it is not possible for us to conduct an in-depth investigation and examine the veracity of these documents and averments. Without an in-depth investigation, it is not possible to arrive at a correct appraisal of the State of Affairs of the Corporate Debtor and to adjudicate upon the allegations made by the RP. The affairs of the Corporate Debtor ought to be investigated. Accordingly, the Central Government is directed to order an investigation into the affairs of the Corporate Debtor under Section 210(2) of the Companies Act, 2013 - application disposed off.

Summary

Issues Involved:
1. Fraudulent initiation of Corporate Insolvency Resolution Process (CIRP)
2. Falsification and destruction of corporate records
3. Fraudulent financial practices and transactions
4. Non-disclosure of information by suspended directors
5. Allegations of malicious intent and harassment by the Resolution Professional (RP)
6. Counterclaims and defenses by the respondents
7. Request for investigation into the affairs of the Corporate Debtor

Detailed Analysis:

1. Fraudulent initiation of Corporate Insolvency Resolution Process (CIRP):
The RP alleged that the CIRP of the Corporate Debtor was initiated fraudulently and with malicious intent, not for the resolution of insolvency but for other purposes. The RP pointed out that the Operational Creditor filed the CIRP application when DRT proceedings were at a final stage and did not file its claim with the RP until the last date. The RP claimed that the Operational Creditor, along with the Suspended Directors, is liable under Section 65 of the Insolvency and Bankruptcy Code (IBC) for dishonest initiation of CIRP.

2. Falsification and destruction of corporate records:
The RP identified multiple instances of falsification and destruction of books and records by the Corporate Debtor's erstwhile management. The RP discovered non-existent debtors and fake invoices, and noted that a significant portion of the records was destroyed in a fire at the Corporate Debtor's office, which the RP suspected was orchestrated by the suspended directors to evade investigation.

3. Fraudulent financial practices and transactions:
The RP highlighted several fraudulent financial practices, including the creation of fake suppliers and operational creditors, inflated stock statements to obtain credit from banks, unauthorized rice trading, and failure to maintain proper books of account. The RP also referred to ongoing sales tax and income tax proceedings against the Corporate Debtor, which further evidenced fraudulent activities.

4. Non-disclosure of information by suspended directors:
The RP accused the suspended directors of intentionally withholding information required by the RP regarding the state of affairs of the Corporate Debtor. The RP cited repeated instances where communications seeking crucial information were met with evasive responses or no response at all, thus violating Section 70 of the IBC.

5. Allegations of malicious intent and harassment by the Resolution Professional (RP):
Respondents 1, 2, and 3 alleged that the RP's application was based on conjectures and aimed at harassing them. They denied all allegations of fraudulent activities and claimed that the RP might have been involved in the fire incident at the Corporate Debtor’s office. They also highlighted that the affidavit filed by the RP was not notarized, questioning the maintainability of the application.

6. Counterclaims and defenses by the respondents:
The respondents argued that the proceedings had been settled with the Excise Department and that the CIT (Appeals) orders had been set aside by the ITAT, which the RP had suppressed. They asserted that the allegations of unauthorized rice trading were unfounded as the Memorandum of Association permitted such trading. They also denied allegations of asset stripping and stated that they had taken steps to protect the Corporate Debtor's assets until the RP took over.

7. Request for investigation into the affairs of the Corporate Debtor:
Given the serious allegations and the voluminous documents presented, the Tribunal found it challenging to conduct an in-depth investigation within its summary proceedings. Therefore, the Tribunal ordered an investigation into the affairs of the Corporate Debtor under Section 210(2) of the Companies Act, 2013, directing the Central Government to carry out this investigation.

Conclusion:
The Tribunal acknowledged the complexity and seriousness of the allegations made by the RP and the counterclaims by the respondents. It ordered an investigation into the affairs of the Corporate Debtor by the Central Government and allowed the respondents to file grievances against the RP with the Insolvency and Bankruptcy Board of India (IBBI). The application was disposed of with directions for the investigation and consideration of claims during the liquidation process.