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2022 (10) TMI 207 - AT - Insolvency and BankruptcyFraudulent trading or wrongful trading - Direction to Appellants to jointly and severally pay to the Corporate Debtor certain amounts on account of having indulged in fraudulent and under-valued transactions - Applicability of time limitation - Section 66 of the IBC - HELD THAT - The Adjudicating Authority in the present case took a view that the time-line mentioned in Regulation 35-A of CIRP Regulations is directory in nature because no consequential effect is mentioned therein for non-compliance of time limit and has relied on Madras High Court Judgement in Shahji Purushutom Vs. UOI 2020 (4) TMI 418 - MADRAS HIGH COURT . Adjudicating Authority has therefore held that the Appellants themselves took time to provide accounts and gained time on the pretext of OTS proposal which led to the delay and hence the Appellants should not be allowed to take advantage of their own wrong-doing. The delay has therefore been condoned by the Adjudicating Authority on the ground that the delay is properly and satisfactorily explained by the Resolution Professional even though there is no formal application for delay condonation. There are no reason to interfere with the delay condonation allowed by the Adjudicating Authority in filing of the application beyond 135 days by the Resolution Professional. We hold that Regulation 35-A is directory and in the present case the application filed by the Resolution Professional cannot be rejected only on the ground of delay in filing beyond 135 days of ICD in view of explanation offered before the Adjudicating Authority justifying the delay. Whether the Appellants had indulged in fraudulent trade transactions and certain avoidance transactions and in the light of the findings thereon whether the Adjudicating Authority had committed any error while passing the impugned order dated 26.04.2022? - HELD THAT - The defence taken by the Appellants cannot detract from the plain truth that the Appellants had wrongfully diverted funds which in turn had aggravated the financial liability of the Corporate Debtor and thus an unethical act to defraud creditor tantamounting to fraudulent trade practice - the TAR raised suspicion about the write-offs on the ground that the damaged stock was not shown separately in stock register and that the write-off started all of a sudden coinciding with the beginning of CIRP. Moreover it has been noted that the carry over the damaged stocks/inventory have not been done across the years which was warranted by the accounting standards. Hence the write-off was held to be unusual in nature. The Adjudicating Authority had sufficient and valid reasons to hold that these undervalued transactions were done with the intent to siphon off the amounts on the false pretext of advance. Thus CIRP Regulations 35-A is not mandatory and the requirement for approaching the Adjudicating Authority for appropriate relief on or before 135th day of the ICD is only directory. Keeping in view the facts of this case it is held that there were sufficient and genuine reasons for the application under Section 66 to be considered by the Adjudicating Authority even though it was filed beyond 135th day of ICD - the Resolution Professional having appraised the TAR through his detailed and specific pleadings before the Adjudicating Authority has made out a proper case substantiating that the appellants have carried out certain fraudulent and under-valued transactions for fraudulent purposes and to defraud the creditors of the corporate debtor. In such circumstances the IBC empowers the Adjudicating Authority to take decisions to maximise the assets of the Corporate debtor and in the present case the Adjudicating Authority having been satisfied that the assets of the Corporate Debtor have been subjected to undervalued transactions/fraudulent transactions/ transactions to defraud the creditors it has rightly issued directions for recovery of amounts from the Appellants jointly and severally for the benefit of the corporate debtor. Appeal dismissed.
Issues Involved:
1. Whether the application filed by the Resolution Professional under Section 66 of the IBC before the Adjudicating Authority was barred by limitation. 2. Whether the Appellants had indulged in fraudulent trade transactions and certain avoidance transactions, and whether the Adjudicating Authority committed any error while passing the impugned order dated 26.04.2022. Issue-Wise Detailed Analysis: Issue 1: Limitation of Application under Section 66 of IBC Analysis: The key point of contention is whether the application filed by the Resolution Professional under Section 66 of the IBC was time-barred as per Regulation 35-A of the CIRP Regulations. Regulation 35-A prescribes timelines for the Resolution Professional to form an opinion, make a determination, and apply to the Adjudicating Authority regarding transactions covered under Sections 43, 45, 50, or 66 of the IBC. The Tribunal noted that the timeline prescribed in Regulation 35-A is directory and not mandatory. This interpretation aligns with the principles laid down by the Hon'ble Supreme Court in various judgments, including "State of Uttar Pradesh Vs. Manbodhan Lal Shrivastava" and "Lalaram Vs. Jaipur Development Authority," which emphasize that the intent of the legislature and the consequences of non-compliance should guide the interpretation of statutory provisions. The Tribunal observed that the delay in filing the Section 66 application was due to several factors, including the stalling of CIRP proceedings due to a One Time Settlement (OTS) proposal and non-cooperation by the Appellants in timely submission of accounts. The Adjudicating Authority had condoned the delay, considering these reasons and the impact of the Covid pandemic. The Tribunal found no reason to interfere with this decision, holding that the application cannot be rejected solely on the ground of delay. Issue 2: Fraudulent and Avoidance Transactions Analysis: The Tribunal examined whether the Appellants indulged in fraudulent and under-valued transactions. 1. Diversion of Funds: - The Corporate Debtor had invested Rs. 13.45 crores in its sister concern, MDTPCL. The Appellants argued that this was a commercial decision taken with good intentions and with the knowledge of Financial Creditors. However, the Transaction Auditor (TA) and the Adjudicating Authority found this to be a wrongful diversion of borrowed funds, leading to increased financial liability and constituting a fraudulent trade practice. 2. Unusual Write-off of Inventory: - The TA raised concerns about the write-off of 2352 quintals of paddy attributed to the storm 'FANI'. The Appellants claimed the write-off was legitimate due to stock damage and insurance claims. However, the TA and the Adjudicating Authority found the timing of the write-off suspicious, coinciding with the initiation of CIRP, and noted the absence of proper records for damaged stock, concluding it was a fraudulent act. 3. Under-valuation of Income: - The TA reported a significant drop in the Corporate Debtor's gross profit ratio, which the Appellants attributed to increased costs. The Adjudicating Authority found this explanation unreasonable, supporting the TA's findings of under-valuation. 4. Advances to Certain Persons: - The Appellants contended that advances were made in the ordinary course of business. However, the TA found these advances suspicious due to the lack of business turnover and failure to provide detailed particulars of the entities involved. The Adjudicating Authority agreed with the TA's assessment that these were undervalued transactions intended to siphon off funds. Conclusion: The Tribunal upheld the Adjudicating Authority's findings that the Appellants had engaged in fraudulent and under-valued transactions, justifying the directions for recovery of amounts from the Appellants jointly and severally. Separate Judgment: The Tribunal also addressed a related appeal concerning the rejection of the Resolution Plan under Section 29-A(g) of the IBC. The Adjudicating Authority had found the Resolution Applicant, along with two other directors, ineligible to submit a Resolution Plan due to their involvement in fraudulent transactions. The Tribunal upheld this decision, affirming the liquidation order for the Corporate Debtor. Final Decision: Both appeals were dismissed, affirming the Adjudicating Authority's orders in IA Nos. 276/2020 and 337/2020, with no costs awarded.
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