2022 (11) TMI 164 - AT - Insolvency and Bankruptcy

Fraudulent transactions - Direction to Respondents (including the present Appellant) to contribute jointly and severally to the assets of the Corporate Debtor which was under Corporate Insolvency Resolution Process (CIRP) - directing criminal prosecution of the Respondents (including the present Appellant) under Section 69 of IBC - HELD THAT - On going through the TAR, it is more than amply clear that Transaction Auditor has admitted inability to comment on the transactions falling under Sections 43, 45 and 50 of IBC. Even in respect of fraudulent transactions under Section 66 of IBC, the Transaction Auditor has admitted that they are not in a position to give a conclusive opinion and that this matter requires further investigation. Transaction Auditor has admitted inability to comment on the transactions falling under Sections 43, 45 and 50 of IBC and in respect of fraudulent transactions under Section 66 of IBC also did not give a conclusive opinion and opined need of further investigation. This aspect was also emphatically asserted by the Learned counsel for the Appellant while making his pleadings - the Adjudicating Authority has also taken due cognisance of the observations made in the TAR that in respect of the alleged fraudulent transactions under Section 66 of IBC, no conclusive opinion could be given by them and that the matter required further investigation. There is clear convergence of opinion between the Transaction Auditor and the Adjudicating Authority that further investigation was warranted in the matter. The real nature of transactions in question requires deeper examination and the matter be put to rest only after the true character of the transactions is unravelled. The need for unearthing the true nature and character of these transactions has acquired special relevance in the present matter since the Adjudicating Authority has ordered initiation of criminal prosecution of the Appellant under Section 69 of IBC besides directing recovery of Rs. 2687.27 lakhs jointly and severally including from the present Appellant while fore-closing his right to reply, which prima-facie militates against the principles of natural justice. Matter remanded back to the Adjudicating Authority for taking appropriate steps to conduct a detailed and in-depth investigation of the transactions in dispute to arrive at a conclusive opinion whether they fall within the bracket of Section 66 of the IBC without getting influenced by any comments made in this judgment and decide on merits in accordance with law - the right of the Appellant to furnish his reply/clarifications on the transactions in question in the interest of justice is restored - appeal disposed off.

Summary

Issues Involved:
1. Admissibility of the application under Sections 66, 68, 69, 70 of IBC.
2. Legitimacy of transactions flagged in the Transaction Audit Report (TAR).
3. Justification for criminal prosecution under Section 69 of IBC.
4. Adjudicating Authority's foreclosure of the right to reply.
5. Necessity for further investigation into the transactions.

Detailed Analysis:

1. Admissibility of the application under Sections 66, 68, 69, 70 of IBC:
The appeal arises from an order admitting an application under Sections 66, 68, 69, 70 of IBC, directing the respondents to contribute to the assets of the Corporate Debtor and initiating criminal prosecution under Section 69 of IBC. The Adjudicating Authority had ordered the initiation of CIRP proceedings and appointed an Interim Resolution Professional (IRP) who, after auditing the Corporate Debtor's transactions, filed an application to declare certain transactions as sham and fraudulent.

2. Legitimacy of transactions flagged in the Transaction Audit Report (TAR):
The TAR identified various transactions as potentially fraudulent, including Rs. 1527.82 lakhs transferred to related parties, Rs. 982.12 lakhs withdrawn by erstwhile directors, and Rs. 1.25 crores transaction with the Appellant. The Appellant contended that the transactions were legitimate, supported by contractual agreements for advisory services, and evidenced by banking transactions. However, the TAR noted the absence of supporting documents, making it difficult to ascertain the nature and purpose of these transactions.

3. Justification for criminal prosecution under Section 69 of IBC:
The Adjudicating Authority directed criminal prosecution under Section 69 of IBC based on the TAR's findings. The TAR, however, admitted its inability to conclusively comment on the transactions due to limited information. The Adjudicating Authority acknowledged the need for further investigation but proceeded with the order for recovery and prosecution.

4. Adjudicating Authority's foreclosure of the right to reply:
The Appellant's right to reply was foreclosed by the Adjudicating Authority due to delays attributed to COVID-19 complications. The Appellant argued that the delay was due to the Director's illness and office closures. The Tribunal recognized the exceptional circumstances of the pandemic and suggested that the foreclosure could have been avoided to ensure a fair examination of the transactions.

5. Necessity for further investigation into the transactions:
Both the TAR and the Adjudicating Authority recognized the need for further investigation to conclusively determine the nature of the transactions. The Tribunal highlighted that no steps were taken by the Resolution Professional to conduct further investigations post-TAR. The Tribunal emphasized the importance of deeper examination to ascertain the true nature of the transactions, especially given the serious implications of criminal prosecution and recovery orders.

Conclusion:
The Tribunal set aside the impugned order and remanded the matter back to the Adjudicating Authority for a detailed investigation into the transactions. The right of the Appellant to furnish a reply was restored, and no further steps for criminal prosecution or recovery were to be taken until the investigation was completed. The appeal was disposed of with no order as to costs.