2021 (11) TMI 604 - Tri - Insolvency and Bankruptcy

Avoidable transactions made by Respondent Nos. 1-3 - fraudulent and wrongful transaction within the meaning of section 66 of the Code - intent to defraud the creditors or not - HELD THAT - The business of the Corporate Debtor has not been carried out to defraud the creditors. The Corporate Debtor has exercised proper control in the affairs of the Corporate Debtor - It is denied that the Respondents have not cooperated with the RP or have refused to provide any information or document. It is wrong to submit that the books of accounts of the Corporate Debtor have not been maintained as per the law. Merely because the Respondents are Managing Directors and Chairman and CFO of the Corporate Debtor, they are not liable to contribute the astronomical sums as prayed for in the said application. It is incumbent upon the RP to form an opinion as to whether the Corporate Debtor has been subjected to preferential, undervalued or as has been alleged in the present case - fraudulent transaction on or before the seventy-fifth day from the date of commencement of CIRP - In the present case, CIRP had commenced on 07.02.2020, therefore, as per the said regulation, an opinion should have been formed on of before 22.04.2020; determination should have been made on or before 01.06.2020 and the application under the relevant section applicable should have been filed on or before 21.06.2020. The two independent auditors appointed by the financial creditors prior to initiation of CIRP, when the Trust Retention Account was operational, have cleared the transactions in question without any demur. Further, it is not the Resolution Professional's case that any benefit in the form of any additional facilities from the financial creditor has been obtained by the corporate debtor or its key managerial personnel. Therefore, the allegation that the transactions were intended to defraud the creditors, does not hold water. Consequently, the allegations under section 66 cannot be sustained. We are not inclined towards granting the prayers made in the present application - application dismissed.

Issues Involved:
1. Alleged avoidable transactions under sections 43, 45, 50, and 66 of the Insolvency and Bankruptcy Code.
2. Adjustment entries in trade receivables.
3. Non-existent sundry debtors.
4. Inflation of fixed assets.
5. Transactions with SKP Overseas Pte Ltd.
6. Transactions with MSTC Limited.
7. Inventory write-off.
8. Reduction in unsecured debt.
9. Non-cooperation from Respondents.

Detailed Analysis:

1. Alleged Avoidable Transactions:
The Resolution Professional (RP) alleged that Rohit Ferro Tech Limited, the Corporate Debtor, was subjected to avoidable transactions intended to defraud creditors. These transactions were identified based on a forensic audit conducted by Ernst & Young LLP, covering the period from 01.04.2015 to 31.03.2020. The RP formed an opinion on 08.07.2020 and made a determination on 17.08.2020 regarding these transactions.

2. Adjustment Entries in Trade Receivables:
The RP claimed that adjustment entries in the Corporate Debtor's receivables misrepresented financial statements, particularly noting discrepancies in the year-on-year closing balances for FY 2017-2018 and 2018-2019. The Respondents countered that there were no discrepancies and that the RP's allegations were based on surmises without documentary evidence.

3. Non-existent Sundry Debt:
The RP alleged that a significant portion of the Corporate Debtor's trade receivables were non-existent or irrecoverable, with debts amounting to ?191 crore owed by non-existent entities. The Respondents argued that the debts were mutual and continuous transactions, and the RP's conclusions were based on returned demand notices rather than concrete evidence.

4. Inflation of Fixed Assets:
The RP claimed that the Haldia Plant's assets were grossly inflated in the financial statements despite the plant being non-operational and subject to theft. The Respondents acknowledged thefts but argued that proper disclosures were made in the financial statements and insurance claims were filed. They denied any deliberate misrepresentation.

5. Transactions with SKP Overseas Pte Ltd:
The RP alleged that investments and advances to SKP Overseas Pte Ltd., a subsidiary, were used to make questionable investments in Indonesian companies, leading to a write-off of ?93 crore. The Respondents explained that the investments were lost due to adverse court rulings in Indonesia and were written off in compliance with accounting standards.

6. Transactions with MSTC Limited:
The RP highlighted a significant shortfall in chrome ore stock, alleging unauthorized lifting of material. The Respondents attributed the shortfall to cyclones and unauthorized lifting reported during the RP's control period. They denied responsibility for the shortfall and disputed the claim amount admitted by the RP.

7. Inventory Write-off:
The RP noted that raw material inventory worth ?199.34 crore was written off over three financial years. The Respondents argued that the write-off was justified due to the plant's closure and no specific prayers were made regarding this issue.

8. Reduction in Unsecured Debt:
The RP observed reductions in unsecured debt in the financial statements, implying potential irregularities. The Respondents clarified that the reductions were due to reclassification of borrowings and mutual settlements with creditors.

9. Non-cooperation from Respondents:
The RP alleged non-cooperation from the Respondents, hindering access to necessary information. The Respondents denied these allegations, asserting that they had severed ties with the Corporate Debtor post-CIRP initiation and had cooperated as required.

Judgment:
The Tribunal found that the RP did not comply with the timelines prescribed under Regulation 35A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The Tribunal also noted that the RP failed to provide adequate evidence to substantiate the allegations of fraudulent transactions. The explanations provided by the Respondents were deemed satisfactory. Consequently, the Tribunal dismissed the application, emphasizing the lack of cooperation from the Respondents but not finding sufficient grounds to grant the RP's prayers.

Conclusion:
The Tribunal dismissed the application, finding the RP's allegations unsubstantiated and the Respondents' explanations satisfactory. The Tribunal also highlighted procedural lapses by the RP in adhering to regulatory timelines.

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