2021 (9) TMI 787 - Tri - Insolvency and Bankruptcy

Direction to respondents to make contributions to the assets of the Corporate Debtor - ex-management of the Corporate Debtor and related parties carried on the affairs of the Corporate Debtor in a fraudulent manner with intent to defraud its creditors - related parties are the beneficiaries of such fraudulent transactions or not - section 66 of the Insolvency and Bankruptcy Code, 2016 - HELD THAT - After rejection of the Resolution Professional's first application under section 66 of the Code, the Resolution Professional collected and produced on record some additional evidence in the form of Forensic Audit Report dated 24.12.2018 prepared by M/s. Haribhakti Co. It was found from the loan amount, the Corporate Debtor had created Fixed Deposits and sought loan to its subsidiary companies pledging those Fixed Deposits. It was done in the year 2016, viz. almost five years after the Consortium of Lenders granted and disbursed the Corporate Debtor some amounts of loan. The Resolution Professional has averred that under section 25(1) of the I B Code the Corporate Debtor has issued notice dated 19.02.2014 for withdrawal of an amount of ₹ 1452 crores in order to invest the said amount in plant and machinery, for carrying some civil work, to invest some amount in fixed assets for laying transmission lines, etc. In view of this it was for the Resolution Professional to put on record the material indicating that though the Corporate Debtor has shown the above expenses, in fact, those amounts were not spent at all for the purpose for which it is shown to have been spent - It is not in dispute that the Liquidator (then Resolution Professional) has sold the Corporate Debtor as a going concern. It means that the Corporate Debtor was a going concern throughout the CIRP period and hence it has to be held that the entire loan amount has not been misused as alleged by the RP. Second transaction called in question by the Resolution Professional is that the Corporate Debtor gave advance to M/s. Sokeo Power Pvt. Ltd. in 2014. It was independent transaction carried out by the Corporate Debtor and the creditors having no relations thereto except the allegation that the Corporate Debtor ought not to have advanced such amount and the amount was given in advance to defraud them - there are no reason to record any finding other than the finding of fact recorded by this Adjudicating Authority while rejecting the earlier application filed by the RP. There is one more aspect which needs our serious consideration. It is not in dispute that now some members of the Consortium of Lenders have filed an F.I.R. against the respondents and officers of the Axis Bank alleging that the disputed transactions are fraudulent in nature. Central Bureau of Investigation (CBI) has registered a crime and has started investigation into the matter. Now at this stage, can this Adjudicating Authority, in its limited jurisdiction, record finding that the transaction in dispute is per se fraudulent in nature. In our considered opinion it would be against the cannons of justice. Let the prime investigating agency investigate into the allegations. Let the competent court, during the trial, record findings of fact. The RP/Liquidator could not establish that the transactions in dispute are fraudulent in nature. This finding is recorded for want of sufficient material before us and hence the respondents cannot be called upon to contribute to the assets of the Corporate Debtor as per section 66 of the I B Code, 2016 - Application dismissed.

Issues Involved:
1. Allegations of fraudulent transactions by the ex-management of the Corporate Debtor.
2. Examination of whether the transactions were fraudulent and intended to defraud creditors.
3. Adequacy of evidence provided by the Resolution Professional.
4. Analysis of Forensic Audit Report.
5. Applicability of Section 66 of the Insolvency and Bankruptcy Code, 2016.
6. Definition and interpretation of 'fraud' under the Indian Contract Act, 1872.
7. Impact of ongoing criminal investigation by the Central Bureau of Investigation (CBI).

Issue-wise Detailed Analysis:

1. Allegations of Fraudulent Transactions by Ex-Management:
The Resolution Professional (RP) alleged that the ex-management of the Corporate Debtor and related parties conducted business in a fraudulent manner with the intent to defraud creditors. Specifically, the RP pointed to two transactions involving the creation of Fixed Deposits using loan amounts and advancing funds to M/s. Sokeo Power Pvt. Ltd.

2. Examination of Whether Transactions Were Fraudulent:
The Tribunal examined whether the transactions could be classified as fraudulent with intent to defraud creditors. The RP argued that the ex-management's actions constituted fraudulent transactions under Section 66 of the Insolvency and Bankruptcy Code, 2016. However, the Tribunal noted that the transactions in question, such as creating Fixed Deposits and advancing funds, were conducted with the knowledge of the Consortium of Lenders and the Axis Bank, which allowed the management to use the loan amounts.

3. Adequacy of Evidence Provided by the Resolution Professional:
The Tribunal emphasized the need for "clinching and conclusive evidence" to establish fraudulent intent. The RP's initial application was rejected due to insufficient evidence. In the second application, the RP presented additional evidence, including a Forensic Audit Report. However, the Tribunal found the report inconclusive and insufficient to overturn the previous decision.

4. Analysis of Forensic Audit Report:
The Forensic Audit Report prepared by M/s. Haribhakti & Co. was scrutinized. The report contained disclaimers indicating that it was based on limited data and sample verification, making it inconclusive. The Tribunal concluded that the report did not provide sufficient material to establish the transactions as fraudulent.

5. Applicability of Section 66 of the Insolvency and Bankruptcy Code, 2016:
Section 66 requires proof that the business was carried out with intent to defraud creditors. The Tribunal noted that the RP failed to demonstrate that the ex-management acted with such intent. The Tribunal also highlighted that the Corporate Debtor was sold as a going concern, indicating that the loan amounts were not entirely misused.

6. Definition and Interpretation of 'Fraud' under the Indian Contract Act, 1872:
The Tribunal referred to Section 17 of the Indian Contract Act, 1872, to define 'fraud.' It emphasized that fraud involves intentional deception or concealment of material facts. The Tribunal found that the transactions in question did not meet this definition, as they were conducted with the knowledge and consent of the lenders and the bank.

7. Impact of Ongoing Criminal Investigation by the Central Bureau of Investigation (CBI):
The Tribunal acknowledged that some members of the Consortium of Lenders had filed an FIR against the respondents, leading to a CBI investigation. The Tribunal decided not to make a definitive ruling on the fraudulent nature of the transactions, leaving it to the investigating agency and competent court to determine the facts.

Conclusion:
The Tribunal concluded that the RP/Liquidator could not establish that the transactions were fraudulent due to insufficient material evidence. Consequently, the respondents were not required to contribute to the assets of the Corporate Debtor under Section 66 of the Insolvency and Bankruptcy Code, 2016. The application was rejected.

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