2024 (10) TMI 155 - Tri - IBC

Fraudulent transactions - section 66 of the Insolvency and Bankruptcy Code, 2016 - Conversion of Share Application Money to Unsecured Loan - Conspicuous Investments into Related Parties - investment into related parties - Unaccounted rental income. HELD THAT - Perusal of the provision of section 66 of IBC requires a Resolution Professional to establish that 'business' of a Corporate Debtor has been carried on with intent to defraud creditors or for any fraudulent purpose. Thus, this Adjudicating Authority is bound to examine and satisfy itself whether the impugned business/transactions attribute malice and thus constitute fraud. Perusal of the judgement in the case Union of India v. Chaturbhai M. Patel Co. 1975 (12) TMI 176 - SUPREME COURT would make it abundantly clear that for a fraud like any other charge whether made in civil or criminal proceedings, must be established beyond reasonable doubt. In the present case, the Applicant for all the four impugned transactions has primarily relied on the Transaction Audit alone which is also clearly disputed by the respondents. It is also noteworthy to highlight that Section 66 of the Code vide explanation contained therein has set up a rebuttable presumption in favour of the erstwhile directors of the Corporate Debtor. This presumption can only be rebutted by providing adequate, material proofs and pleadings so as to establish fraudulent intent and knowledge of the fraudulent intent at the very inception of the transaction and not later. Conversion of share application money - HELD THAT - It is the admitted position that the money paid as share application money was held by the Corporate Debtor and that no shares were issued for the same. Further, the infusion of capital was subsequently converted into debt and the same would not constitute as fraudulent transaction. Investment into related parties - HELD THAT - The respondents have furnished accounts and explained the investments. It is also noteworthy to highlight that even in the report of the Transaction Auditor, it was suggested that in order to infer and ascertain the whole picture, a consolidated transaction audit of the group companies was necessary. The investments made thereof are not made in any manner prejudicial to the interest of the Corporate Debtor, its creditors or its stake holders. That all the investments were made in accordance with the provision of 186 of the Companies Act, 2013 at arm's length. Thus, the investments cannot be concluded as fraudulent trading under section 66 of the Code. Unjustified Cash Withdrawal on Account of Salaries - HELD THAT - After 2016, no payment in the name of salary to employees were made by the Corporate Debtor. Assuming that the payments made in the name of salaries were made proximate to the commencement of Corporate Insolvency Resolution process and, there may be a possible suspicion, however, in the present case, there is no disbursement after the year 2016. Hence, this Adjudicating Authority cannot conclude that these salaries were disbursed for defrauding the creditors of the Corporate Debtor. Unaccounted Rental Income - HELD THAT - The applicant has failed to establish with material and reason as to how and why these agreements were entered into are for the purpose of defrauding the creditors of the Corporate Debtor. The applicant has only suspicion on the genuineness of the transactions and has not sought for any application to setaside the agreements as no material is available to establish the same. Thus, it is concluded that the Applicant has failed to establish a case for intervention under section 66 of the Code. Thus, upon detailed consideration of all the materials placed on record, this Adjudicating Authority holds that the Application has been filed on mere suspicion and the Resolution Professional has not established a case of fraudulent trading under section 66 of the Code - application allowed.

Issues Involved:
1. Conversion of Share Application Money to Unsecured Loan
2. Conspicuous Investments into Related Parties
3. Unaccounted Rental Income
4. Unjustified Cash Withdrawal on Account of Salaries

Detailed Analysis:

1. Conversion of Share Application Money to Unsecured Loan:
The Tribunal examined the conversion of share application money amounting to Rs. 16,72,11,639/- into unsecured loans by the Corporate Debtor. The Applicant contended that this conversion was fraudulent and aimed at defrauding creditors. The Tribunal noted that the share application money from Respondent Nos. 5 and 6 was retained for a long period and later converted into unsecured loans through book entries. The Tribunal found that the agreements related to these transactions were not registered and lacked proper stamp duty, raising suspicions. However, the Tribunal concluded that the infusion of capital subsequently converted into debt did not constitute a fraudulent transaction.

2. Conspicuous Investments into Related Parties:
The Tribunal scrutinized investments totaling Rs. 12,22,36,108/- made by the Corporate Debtor into related parties. The Applicant argued that these investments were fraudulent and lacked proper substantiation. The Tribunal noted that the investments were made in accordance with the provisions of Section 186 of the Companies Act, 2013, and were at arm's length. The Tribunal also highlighted that the Transaction Auditor suggested a consolidated audit of the group companies to infer the whole picture. Consequently, the Tribunal concluded that these investments did not qualify as fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code (IBC).

3. Unaccounted Rental Income:
The Tribunal reviewed the claim that the Corporate Debtor had received Rs. 31,20,000/- as rental income, which was not accounted for in the audited books of City Square. The Applicant questioned the authenticity of the financial statements prepared by Respondent No. 14, the statutory auditor. The Tribunal found no material evidence to establish that the rental agreements were executed to defraud creditors. The Tribunal concluded that the Applicant failed to establish a case for intervention under Section 66 of the IBC.

4. Unjustified Cash Withdrawal on Account of Salaries:
The Tribunal examined the sudden increase in salary payments amounting to Rs. 52,84,560/- in March 2016. The Applicant argued that these payments were a means to siphon off money from the Corporate Debtor's accounts. The Tribunal noted that no salary payments were made after 2016, and there was no disbursement proximate to the commencement of the Corporate Insolvency Resolution Process (CIRP). The Tribunal concluded that the salary payments could not be considered as fraudulent transactions aimed at defrauding creditors.

Conclusion:
The Tribunal concluded that the Applicant failed to establish a case of fraudulent trading under Section 66 of the IBC. The Tribunal emphasized that the burden of proof lies on the Resolution Professional to produce tangible material evidence to corroborate allegations of fraudulent intent. The Tribunal dismissed the application, stating that the claims were based on mere suspicion and the Transaction Audit Report lacked adequate information and material evidence to support the allegations.

Orders:
The Tribunal dismissed all 11 reliefs sought by the Resolution Professional, including the declaration of the transactions as fraudulent and the recovery of monies from the respondents. The Tribunal emphasized the need for concrete evidence and material proof to establish claims of fraudulent trading under Section 66 of the IBC.

Summary:
The Tribunal dismissed the application filed by the Resolution Professional, citing a lack of concrete evidence and material proof to establish claims of fraudulent trading under Section 66 of the IBC. The Tribunal emphasized the need for tangible material evidence to corroborate allegations of fraudulent intent and concluded that the claims were based on mere suspicion.

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