2022 (8) TMI 231 - AT - Insolvency and Bankruptcy

Preferential Transactions or not - documents being Transaction Audit Report and Forensic Audit Report were not provided to the Appellants - whether the impugned transactions fall within the ambit of Sections 43 45 or 66 of the Code? - NCLT admitted the claim - HELD THAT - For comprehensive and fair scrutiny of books of accounts by an expert person the Respondent in exercise of powers under Regulation 7 of IBBI (Liquidation Process) Regulations 2016 appointed professional Chartered Accountant/Auditor to conduct a detailed and thorough transaction audit of the Corporate Debtor - The objectives of the audit is to identify preferential transactions undervalued transactions transactions defrauding creditors identify extortionate credit transactions and fraudulent trading or wrongful trading. The auditor has given the report on all the above observations. However the Adjudicating Authority confined to only preferential transactions of an amount of Rs.1, 38, 78, 397/-. The Auditor also gave his observations and conclusions on avoidance of undervalue transactions defrauding creditors and fraudulent trading or wrongful trading. At the end of the report it is seen that the Auditor addressed letters to Shri Reji Sivankutty Shri Tinu Jose (Suspended Director) and Giriraj Associates previous Auditor requesting them to provide books of accounts for carrying out the audit. In the report at page 156 under the caption limitation of scope it is mentioned that the Corporate Debtor had discontinued their operations from August 2018. Presently they neither have a registered office nor employees from who we could extract documents and information for the purpose of our audit - in the present case though the Respondent/Liquidator mentioned various provision of the I B Code however a specific relief sought praying the Adjudicating Authority to hold that the loan of Rs.42, 50, 397/- repaid to the Director during the Financial Year 2017-18 is in preference to trade payables statutory dues and salary to staff during that year. Further it is prayed that to hold that Rs.6, 28, 000/- paid to Mrs. Revathy Radhakrishnan w/o Suspended Managing Director on 01.07.2018 as loan to be repaid to the Corporate Debtor with interest and cost thereof. This Tribunal is of the view that the Respondent/Liquidator made the application before the Adjudicating Authority after having sufficient evidence/material to establish the case of the Appellants beyond reasonable doubt. The basis for the application before the Adjudicating Authority is the report of the auditor and the observations and conclusions arrived at by the auditor. Therefore the ratio arrived at by the Adjudicating Authority is free from any legal infirmity hence no interference is called for - this Tribunal comes to an irresistible conclusion that the Appeal sans merit - Appeal dismissed.

Summary

Issues Involved:

1. Preferential transactions.
2. Composite application under multiple provisions.
3. Natural justice and evidence submission.
4. Applicability of Section 66 by the Liquidator.
5. Compliance and cooperation by the Appellants.

Issue-wise Detailed Analysis:

1. Preferential Transactions:
The Liquidator filed an application under Sections 35(1)(n), 43, 44, 45, 46, 48, 49, 60(5), and 66 of the I&B Code, 2016, seeking to declare certain transactions as preferential. The transactions in question were a loan repayment of Rs.42,50,397/- to the Director and Rs.6,28,000/- to the wife of the Director. The Adjudicating Authority found these transactions to be preferential under Section 43 of the Code. The Liquidator's audit report identified these transactions as preferential, given their timing and the preferential treatment of the Director over other creditors.

2. Composite Application Under Multiple Provisions:
The Appellants argued that the filing of a composite application under multiple provisions violated the Supreme Court's dicta in Anuj Jain IRP for Jaypee Infratech Limited Vs. Axis Bank & Ors., which mandates separate applications for different types of transactions. However, the Tribunal noted that the Adjudicating Authority's decision was based solely on the preferential nature of the transactions, thereby not violating the Supreme Court's guidelines.

3. Natural Justice and Evidence Submission:
The Appellants contended that the Liquidator did not provide them with the Transaction Audit Report and Forensic Audit Report, violating natural justice principles. The Tribunal observed that the Liquidator had addressed letters to the Appellants seeking explanations and documents, but the Appellants did not respond or provide the required information. The Tribunal found that the Appellants had ample opportunity to present their case but failed to do so.

4. Applicability of Section 66 by the Liquidator:
The Appellants argued that only a Resolution Professional, not a Liquidator, could invoke Section 66 of the Code. The Tribunal clarified that Section 66, which deals with fraudulent trading, is not limited to Resolution Professionals and can be invoked during the liquidation process as well. However, the Adjudicating Authority's decision focused on preferential transactions, not on fraudulent trading under Section 66.

5. Compliance and Cooperation by the Appellants:
The Liquidator had requested the Appellants to provide books of accounts and other necessary documents for the liquidation process, but the Appellants did not comply. The Tribunal noted the lack of cooperation from the Appellants, which hindered the audit process. The Adjudicating Authority had previously directed the Appellants to provide the required documents, but they failed to do so.

Conclusion:
The Tribunal upheld the Adjudicating Authority's decision, finding no legal infirmity in declaring the transactions as preferential. The appeal was dismissed, and the Appellants were directed to return the amounts to the Liquidator for distribution among the stakeholders. The Tribunal emphasized the importance of compliance and cooperation in the liquidation process and upheld the principles of natural justice.