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2023 (2) TMI 670 - AT - Insolvency and BankruptcyPreferential and fraudulent transaction - Seeking avoidance of certain preferential and fraudulent transactions carried out by the suspended directors of the Corporate Debtor - Sections 43 and 66 of the IBC - Whether the application filed by the Resolution Professional with regard to transactions under Sections 43 and 66 is rendered non-maintainable on grounds of non-compliance to Regulation 35-A if it is not filed on or before 135th day of ICD and if formation of opinion and making a determination on such transactions does not take place on or before the 75th day and 115th day of ICD respectively and whether these periods stipulated by the said Regulation is mandatory or directory? - HELD THAT - It is commonsensical axiom that the time taken by a Resolution Professional to determine an avoidance transaction is dependent on a multitude of factors, including availability of information, co-operation from the erstwhile directors of the Corporate Debtor, cooperation from parties to the avoidance transactions, analysis by the transaction auditor, etc. Such factors often being outside the control of the Resolution Professional, there is therefore a distinct possibility of delay in making a determination, beyond the timelines specified in the CIRP Regulations. While admitting some delay in determination of opinion by the Resolution Professional in the present case, it was submitted that this was on account of delay in submission of report by the TA and for this delay the fault was attributable to the suspended management as documents were not provided by them to the TA despite repeated reminders - there are no hesitation in pointing out that the suspended management of the Corporate Debtor by not parting with information on time and refusing to comment on the final TAR has also been a critical and contributory factor in causing delay in the determination of the opinion and to that extent cannot be absolved of blameworthy conduct. 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. Moreover, since Regulation 35-A must be read along with the statutory construct of IBC which by itself does not prescribe any time period for determination of opinion. Hence merely on account of delay in determination of opinion cannot by itself become a ground for non-maintainability of the petition - Keeping in view the facts of this case, it is held that there were sufficient and genuine reasons for the delay justifying consideration of the application under Sections 43 and 66 by the Adjudicating Authority even though it was filed beyond 135th day of ICD. Whether the transactions conducted by the Respondents which find mention in the application of the Resolution Professional were not in the ordinary course of business and thus fell in the category of preferential transactions and fraudulent trading in terms of Sections 43 and 66 of the IBC - HELD THAT - The Adjudicating Authority without much analysis has simply noted that the Respondent has opined that the Resolution Professional has misrepresented the stock statement and that even the creditor Bank has relied on the genuineness of these transactions based on CA certificate which had verified the stock and book debts. However, it is held that the Adjudicating Authority has not taken the full picture into account since the Bank inspection note of 18.09.2017 placed at page 230 of APB clearly records that the Respondent No.1 had admitted that negligible sales was being reflected in the Corporate Debtors account since the sales proceeds were being parked in the account of a separate firm. Prima-facie, we are of the view that there is sufficient and adequate reason to subscribe to the contention of the Appellant that the Respondents had wrongfully diverted funds of the Corporate Debtor which in turn had aggravated the financial health of the Corporate Debtor and tantamount to fraudulent trade practice. The Resolution Professional after having appraised the TAR, did effectively make out a detailed and specific case substantiating how the Respondents carried out certain transactions which squarely answer the description of preferential and fraudulent transaction under Sections 43 and 66 of IBC. However, the Adjudicating Authority has erroneously disregarded the same without placing on record cogent and sufficient reasons. The Adjudicating Authority has erroneously dismissed the application filed by the Resolution Professional under Sections 43 and 66 of the IBC - Being satisfied that the Appellant has successfully established that the Respondents had indulged in transactions which squarely attract Sections 43 and 66 of the IBC, the Respondents are directed to pay back the sums received by them from the Corporate Debtor - appeal allowed.
Issues Involved:
1. Non-compliance with Regulation 35-A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. 2. Determination of preferential and fraudulent transactions under Sections 43 and 66 of the Insolvency and Bankruptcy Code, 2016 (IBC). Issue-Wise Detailed Analysis: 1. Non-compliance with Regulation 35-A of the IBBI Regulations: The primary issue was whether the application filed by the Resolution Professional (RP) regarding transactions under Sections 43 and 66 was non-maintainable due to non-compliance with Regulation 35-A timelines. Regulation 35-A mandates that the RP must form an opinion on suspicious transactions by the 75th day and make a determination by the 115th day of the Insolvency Commencement Date (ICD). The application should be filed by the 135th day of ICD. The RP formed an opinion on 23.11.2019 and appointed a Transaction Auditor (TA). The TA's draft report was sent to the suspended management on 11.09.2020, and the final report was sent on 29.09.2020. Despite delays attributed to non-cooperation from the suspended management and the COVID-19 pandemic, the application was filed on 26.07.2021, beyond the stipulated 135 days. The Tribunal held that Regulation 35-A's timelines are directory, not mandatory. Citing the judgment in Aditya Kumar Tibrewal v. Om Prakash Pandey, it was noted that the primary objective of the Code is to maximize the assets of the Corporate Debtor. Therefore, actions taken by the RP beyond the prescribed period cannot be deemed void solely due to the delay. The Tribunal concluded that the RP had sufficient reasons for the delay, including non-cooperation from the suspended management and the pandemic's impact. 2. Determination of Preferential and Fraudulent Transactions: The second issue was whether the transactions conducted by the suspended management were preferential and fraudulent under Sections 43 and 66 of the IBC. Section 43 - Preferential Transactions: - Transaction 1: Rs.1,50,000 transferred to Vinod Agarwal for repaying his father's mortgage loan. The Tribunal found that this transaction was not in the ordinary course of business and was within the look-back period. - Transaction 2: Rs.3,00,000 transferred to Meena Agarwal for medical needs. The Tribunal noted that the medical expenses occurred a year after the transfer, indicating it was not an emergent need and not in the ordinary course of business. - Transaction 3: Rs.65,000 transferred to Abhishek Aggarwal for business tour expenses. The Tribunal found no documents substantiating the expenditure, and the Corporate Debtor was in financial stress, making the transaction unjustifiable. - Transaction 4: Rs.1,11,60,000 transferred to Jaipal Consultancy Pvt. Ltd. The Tribunal noted that the company was incorporated for siphoning funds, and the transactions lacked regular business records, making them suspicious. Section 66 - Fraudulent Transactions: - The Tribunal found that the suspended directors had engaged in fraudulent sale of stocks with fictitious debtors. The stock statements showed significant discrepancies, with stock worth Rs.6 crore sold in two months without corresponding entries in the Corporate Debtor's accounts. The Tribunal concluded that this amounted to fraudulent trading. The Tribunal criticized the Adjudicating Authority for not adequately analyzing the transactions and for replicating the Respondents' submissions verbatim. It also noted that the Adjudicating Authority failed to apply the principles laid down by the Supreme Court in Anuj Jain v. Axis Bank Limited regarding preferential transactions and ordinary course of business. Conclusion: The Tribunal set aside the impugned order, holding that the RP had established that the transactions were preferential and fraudulent under Sections 43 and 66 of the IBC. The Respondents were directed to repay the sums received and reverse the siphoned amounts. All adverse observations against the RP were expunged, and the appeal was allowed.
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