2021 (1) TMI 141 - Tri - Insolvency and Bankruptcy

Preferential Transactions - direction to related parties to pay sums in respect of benefits received - Transactions Defrauding Creditors or not - fraudulent and/or wrongful trading has been done or not - contributions to the assets of the Corporate Debtor - HELD THAT - Section 43 of the I B Code deals with 'Preferential transactions and relevant time'. To be made clear a transaction will not come as a preferential transaction, if such transaction was made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee. The applicant has given details of summary of transactions in tabular form in the application. One transaction under challenge is under section 43 of the I B Code on the ground that it is a preferential transaction in respect of ₹ 10 lacs. According to the Liquidator an amount of ₹ 10 lacs was taken from Smt. Yerra Padmaja during the financial year 2016-17 and the same was repaid. The contention of the Liquidator is that this is an unsecured loan, which was given preference over secured loans. Therefore, this transaction is in the nature of preferential transaction and this transaction is to be declared as preferential transaction. The respondents have given details regarding this transaction. The case of the respondents is that this money was borrowed from Smt. Yerra Padmaja in order to meet urgent needs of the company, viz. to pay the fee to the Arbitrators on 22.07.2016 and for other urgent payments. This amount was credited into Corporation Bank account on the very same day. The respondents have given details in their reply at pages 22 to 24. The details furnished by the respondents were already stated in the Counter, which are discussed supra. Therefore, there is no need to reiterate the explanation given by the respondents. The amount was borrowed in connection with payment to the Arbitrators, who are dealing with an issue in the matter of Vishwa-BVSR JV Vs. Ministry of External Affairs, wherein the claim involved was ₹ 258.23 crores in three projects/packages. Ledger copies of three Arbitrators were also enclosed as ANNEXURE-2 COLLY. The said amount was repaid to Smt. Yerra Padmaja on 06.08.2016. Therefore, this cannot be treated as a preferential transaction. The next contention of the Liquidator is that the respondents while in the management of the corporate debtor had written off an amount of ₹ 3.78 crores pertaining to Security Deposits, such as, Security Deposit (Works), VAT Deposit against assessment, Electricity Deposit, Excise Duty Deposit and other deposits. The case of the Liquidator is that this writing off is a pre-meditated move to keep the assets of the corporate debtor beyond the reach of any persons, who is entitled to make a claim against it. Hence the transaction is intended to defraud the creditors, which is to be annulled under section 49 of the I B Code - As far as these transactions are concerned the respondents have given a detailed reply commencing from pages 24 to 54 of their counter. The respondents narrated the circumstances under which Security Deposits and other deposits were written off. It is not necessary to reproduce the detailed explanation given by the respondents with regard to writing off the Security Deposits and other deposits. The deposits traced back to the year 2005. These were the deposits made in 2005 in some cases. We are very much convinced with regard to the detailed explanation given by the respondents as to why Security Deposits relating to various projects were written off from time to time. The contention of the Liquidator is that these amounts were written off with a view to defraud the creditors. We are unable to agree with the opinion taken by the Liquidators that these are the transactions intended to defraud the creditors. The company was expected to write off these deposits in the circumstances stated by the respondents. We do not find any fraud involved in writing off the deposits in relation to various projects from time to time. The respondents have given detailed explanation with regard to Security Deposit in respect of various projects. The explanation given by the respondents that projects were complete, therefore, the Security Deposits were invariably to be written off. The respondents also gave detailed explanation as to why the corporate debtor has written off the VAT Deposits and further reasons are given for writing off Electricity Deposits, Road Restoration Deposits and Rent Deposits. We do not find any ground to consider these transactions involving writing off the deposits as fraudulent transactions intended to defeat the interest of the creditors. The last contention of the learned counsel for the Liquidator is that there was writing off an amount of ₹ 10 lacs on the ground that there were cash thefts at three sites - HELD THAT - The employee involved in not handing over the money was the Project Manager. However, the Project Manager offered to adjust the amount against his salary, but no amount was due to him towards salary. Therefore, this amount was written off. Similarly, as regards the amount of ₹ 78,039/- concerning Agar Electrical site the respondents stated that the amount was stolen and an FIR was lodged. Copy of the FIR is also not available; the same copy is available in the records of the corporate debtor. The applicant can obtain a copy of the FIR from the records of the corporate debtor. This is the explanation given by the respondents. We are unable to agree with the view taken by the Liquidator that this is a fraudulent transaction liable to be annulled under section 66 of the I B Code. So considering the detailed explanation the application deserves no consideration and it is liable to be dismissed. Application dismissed.

Summary

Issues Involved:
1. Preferential Transactions under Section 43 of IBC, 2016.
2. Transactions Defrauding Creditors under Section 49 of IBC, 2016.
3. Fraudulent and Wrongful Trading under Section 66 of IBC, 2016.
4. Appropriate Orders under Sections 44, 48, 67, and 69 of IBC, 2016.

Detailed Analysis:

Preferential Transactions under Section 43 of IBC, 2016:
The Liquidator sought to declare certain transactions as preferential under Section 43 of IBC. Specifically, a transaction involving a ?10 lakh unsecured loan taken from Smt. Yerra Padmaja was highlighted. The Liquidator argued that this loan was repaid preferentially over secured loans, thus constituting a preferential transaction. However, the respondents explained that the loan was taken to meet urgent needs, such as paying arbitrators, and was repaid in the normal course of business. The Tribunal found the explanation convincing and ruled that the transaction did not fall under Section 43 of IBC.

Transactions Defrauding Creditors under Section 49 of IBC, 2016:
The Liquidator alleged that the respondents wrote off ?3.78 crores in Security Deposits and ?0.86 crores in retention money to defraud creditors. The respondents provided detailed explanations, stating that these write-offs were due to the completion of projects or the impossibility of recovery. The Tribunal was convinced by the respondents' explanations and found no fraudulent intent in these transactions.

Fraudulent and Wrongful Trading under Section 66 of IBC, 2016:
The Liquidator challenged transactions involving ?0.35 crores and ?0.10 crores as fraudulent. The ?0.35 crores were adjusted against interest expenses, and the respondents admitted an error in the entry, which was meant to be a discount. The ?0.10 crores were written off due to alleged cash thefts at project sites. The respondents provided detailed explanations, including the abandonment of sites by contractors and the loss of money by staff. The Tribunal found the explanations satisfactory and ruled that these were not fraudulent transactions under Section 66 of IBC.

Appropriate Orders under Sections 44, 48, 67, and 69 of IBC, 2016:
The Liquidator sought various orders under these sections to recover sums from the respondents. However, given the Tribunal's findings that the transactions in question were not preferential, fraudulent, or intended to defraud creditors, no orders were passed under these sections.

Conclusion:
The Tribunal dismissed the application, finding that the transactions in question were conducted in the ordinary course of business and did not meet the criteria for preferential, fraudulent, or defrauding transactions under the Insolvency and Bankruptcy Code, 2016.