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TMI Blog2021 (3) TMI 552X X X X Extracts X X X X X X X X Extracts X X X X ..... arties becomes essential which the applicant has failed to do and in the absence of these parties we are unable to consider the said allegations and the attendant reliefs sought for. However, the transactions alleged in relation to these reliefs are of very serious nature as brought forth in the Forensic Audit Report, the audit of which had been commissioned only after the approval from the members of the CoC. When the Forensic Audit Report commissioned by the CoC itself returns with serious findings against the respondents, being the promoters, the same is required to be not ignored and is required to be taken in all seriousness. It is evident that based on an application filed under section 10 of the IBC, 2016 on March 4, 2019 by the corporate debtor through its promoters/directors who are the respondents herein, CIRP had been initiated by this Tribunal in relation to the corporate debtor vide its order dated April 15, 2019. By now its trite that whether it be under sections 7, 9 or section 10 of the IBC, 2016 the petitioner(s) under the concerned sections of the IBC, 2016 are required to approach this Tribunal with a bona fide and honest intent seeking for the resolution o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by learned counsel for the applicant on September 10, 2020 it was represented that this application is required to be treated only as an application under section 66 of the IBC, 2016, even though the provisions as stated above in paragraph 1 supra have been reflected in the title portion of the application. In relation to the same, learned counsel for the applicant points out that both the pleadings as well as reliefs, which have been sought for, points out to the invocation of section 66 of the IBC, 2016 and not the other provisions, viz., section 43 or 45 of the IBC, 2016 and in the circumstances this Tribunal is required to treat this application only as an application filed under section 66 of the IBC, 2016, on a standalone basis. 4. For this purpose, reference is made to the relief portion of the application and for sake of convenience the same is extracted hereunder : (a) Order for the recovery of funds received by the related party M/s. Trinity Enterprises and M/s. Sivasakthi International to the extent of ₹ 920.31 lakhs and direct the respondents/directors of the corporate debtor under section 66(2) to contribute the above funds to the assets of the corporate d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e recovered from the promoter- directors for causing wrongful loss to the corporate debtor-page No. 35. (d) Payments made to customers and written-off for a sum of ₹ 50.28 lakhs, is to be recovered from the promoter-directors for causing wrongful loss to the corporate debtor-page No. 36. (e) Loans given to parties and written off for ₹ 43.49 lakhs, is to be recovered from the promoter-directors for causing wrongful loss to the corporate debtor-page No. 36. 6. In relation to each of the transactions as referred to in paragraph 8(a) to (e), learned counsel for the applicant relies upon the Forensic Audit Report as annexed in Volume II document No. 8 from page Nos. 54 to 386. For the purpose of establishing that the corporate debtor had diverted a sum of ₹ 541.58 lakhs to a related party, viz., Trinity Papers India P. Ltd., the attention of this Tribunal is drawn to the financial statements as enclosed for the period 2016-17, 2017-18 and 2018-19 filed as annexure along with the typed set volume II to the application. 7. Further reliance is also placed, as stated above, on the Forensic Audit Report of the corporate debtor done by the Forensic Auditor at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the financial years 2016-17 ; 2017-18 and 2018-19 and it is again concluded in relation to the said M/s. Siva- sakthi International that there has been a clear case of diversion of funds and preferential transaction as per section 43 of the IBC, 2016. 10. Coming to the allegations as made in page No. 5 clause (b) relating to paragraph 8 of the application that former directors of the corporate debtor did not hand over the cash balance of ₹ 12.31 lakhs to the IRP when the CIRP commenced, attention of this Tribunal in support of the said allegation is drawn to page Nos. 31 and 39 of Volume I of the application by learned counsel for the RP and in this regard it is seen that the applicant seeks to rely upon the balance-sheet drawn by the corporate debtor as of March 31, 2019 as well as notes to the balance-sheet as of March 31, 2019. From the balance-sheet as of March 31, 2019 it is pointed out by learned counsel for the applicant that for the year ended March 31, 2019 the cash and cash equivalent available in the hands of the company/corporate debtor was to the extent of ₹ 23,12,085 and upon further reference to the notes to the balance-sheet, it is pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to his knowledge. 13. In relation to clause d of paragraph 8 as given in page No. 5 of the application concerning payments made to the customers and written off in a sum of ₹ 50.28 lakhs it is contended that the same is recoverable from the promoter-directors for causing wrongful loss to the corporate debtor. Learned counsel for the applicant for this purpose relies upon page No. 185, volume II, being the ledger account of VKS Agencies (India) P. Ltd., as maintained in the books of the corporate debtor read with the documents annexed at page No. 386 being the communication dated November 16, 2019 sent by M/s. VKS Agencies (India) P. Ltd., to one M/s. K. S. P. V. and Co., as a reply to the correspondence dated November 14, 2019 sent by the said M/s. K. S. P. V. and Co. 14. Learned counsel for the applicant places reliance to sustain the allegations made in the application upon the report of the Forensic Auditor and in this connection page No. 92 of the Forensic Auditor's report is pointed out. It is further submitted that a sum of ₹ 30.78 lakhs was written off on April 1, 2018 while correspondingly the payment is stated to have been made subsequently on Ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the corporate debtor is suffering huge loss and since the respondents are responsible for the write off, they are liable to contribute the said sum into the account of the corporate debtor. 18. In relation to clause e of paragraph 8 as given in page No. 5 of the application concerning loans given to the following parties, namely : Customer Amount (in lakhs) Hand loan-Lumba, Chennai 15.00 V. Kuppuswamy-loan 12.00 Loan-Subbulakshmi (K. N.) 6.00 Loan-Lakshmi Narasimman-Cni 4.00 Loan-Raj Kumar-Vadavalli, Cbe (Pionee) 3.49 Loan-Omni Paper Converters P. Ltd. 3.00 Total 43.49 and that the above loans have been subsequently written off. 19. It is the submission of learned counsel for the applicant in this connection that the corporate debtor had no objects for providing loans to the third parties. However, despite the same, loans have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11,08,36,078.00 3,63,13,889 21. As may be seen from the table, as above position of stock on various dates in paragraph 20, whereby there is a precipitous decline in the amount of stock to ₹ 3,63,13,889.91 while the value of the same as per the balance-sheet as on March 31, 2019 is ₹ 4,11,12,248 which is stated in the report of the statutory auditors of the company dated December 23, 2019. 22. Paragraph 2 of page No. 20 of the statutory auditors' report in respect of inventories under the heading annexure A to independent auditors' report is reproduced below : 2. In respect of its inventories : The inventories have been physically verified by the management at reasonable intervals during the year. In our opinion, the frequency of such verification is reasonable no material discrepancies were noticed at the time of verification. 23. It is hereby noted that the statutory auditors have given qualified opinion, wherein in the heading itself it has been stated that there is material uncertainty relating to going concern, the reporting paragraph begins as follows : the borrowings from banks and financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents and to be contributed to the assets of the corporate debtor under section 66(2) of the IBC, 2016. 28. The respondent has filed its preliminary counter and it was submitted by learned counsel for the respondent that the application as filed by the applicant is liable to be dismissed on the preliminary count itself on the issue of maintainability, in view of the decision rendered by the hon'ble Supreme Court in the matter of Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd. (in Civil Appeal Nos. 8512-8527 of 2019) [2020] 221 Comp Cas 625 (SC), as the applicant has filed composite application under sections 43, 45 and 66 of the IBC, 2016. 29. Further, adverting to the contentions raised by learned counsel for the applicant, in so far as diversions of funds to the tune of ₹ 920.31 lakhs to M/s. Trininty Enterprises and M/s. Sivasakthi International is concerned, it was submitted by learned counsel for the respondent that the applicant has not mentioned the exact dates and nature of the alleged transactions, but has only stated that the corporate debtor had diverted the funds to the related party. Further, it was submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in the present case no write off took place as alleged in the Forensic Audit Report and as such the question of fraudulent trading and wrongful trading does not arise. It was also submitted by learned counsel for the respondent that they are the successful resolution applicant and also an MSME and as such the resolution plan submitted by them is duly approved by the committee of creditors and pending adjudication before this Tribunal, which itself shows the bona fide intention of the respondent to safeguard the interest of all the stakeholders concerned. 33. Heard the submissions made by learned counsel for both the parties and perused the records including the pleading placed on record. As already alluded supra, the applicant even though has filed the present application under sections 42, 45 and 66 of IBC, 2016 has restricted its relief only to section 66(2) of the IBC, 2016, save in relation to relief as sought for in sub- paragraph (c) of the relief portion in the application and as extracted in paragraph 4(c) of the instant order. In this context it is relevant to extract section 66 of the IBC, 2016, which is as follows : 66. Fraudulent trading or wrongful trading. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to deceive the creditors. 35. On analysing section 66(2) of the IBC, 2016 it is to be seen that it deals with wrongful trading and for a transaction to qualify under section 66(2) the following conditions must be satisfied : (a) Liability can be fixed upon only 'director' or 'partner' ; (b) They knew, or ought to have concluded that there was no rea sonable prospect of avoiding insolvency proceedings ; (c) They did not take due diligence with a view to minimising the potential loss to the company's creditors ; 36. Thus, there seems to be a stark contrast in relation to section 66(1) and (2) of the IBC, 2016. It is needless to say that even the scope of sub-sections (1) and (2) of section 66 of the IBC, 2016 are different. While the former, i. e., section 66(1) places emphasis on the aspect of the intention of persons against whom allegations are made, be it is promoters/directors or third parties privy to such act, section 66(2) places emphasis more to say on the attitude of the directors in the conduct of the business prior to the insolvency commencement date, whether knowingly or they ought to have known that the business is heading toward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In our view, in the scheme of the Code, the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions. As noticed, the question of intent is not involved in section 43 and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time. However, whether a transaction is undervalued requires a different enquiry as per sections 45 and 46 of the Code and significantly, such application can also be made by the creditor under section 47 of the Code. The consequences of undervaluation are contained in sections 48 and 49. Per section 49, if the undervalued transaction is referable to sub-section (2) of section 45, the Adjudicating Authority may look at the intent to examine if such under valuation was to defraud the creditors. On the other hand, the provisions of section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons responsible therefor. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re in relation to the resolution plan submitted by them, this Tribunal is not in a position to appreciate the conduct of the CoC despite recommending for the instant application to be preferred before this Tribunal and at the same time also approving the resolution plan submitted by the respondents. Even though the CoC, in relation to commercial decisions, have absolute say, when fraudulent accounting manipulation or legal infringement is noticed of any law by the promoters or third parties connected with the corporate debtor thereby impairing the interest of the corporate debtor and resulting in insolvency, such accounting manipulation or legal infringement is required to be taken note of seriously, particularly by the CoC members, who have advanced substantial loans to the corporate debtor of public money ; in this case by State Bank of India and City Union Bank and to whom the directors or promoters who ran the business are accountable and to be held accountable when they start doing business not with their own capital but with finance from outside. Thus, when the Forensic Audit Report commissioned by the CoC itself returns with serious findings against the respondents, being th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43. From the facts of the case, it is evident that based on an application filed under section 10 of the IBC, 2016 on March 4, 2019 by the corporate debtor through its promoters/directors who are the respondents herein, CIRP had been initiated by this Tribunal in relation to the corporate debtor vide its order dated April 15, 2019. By now its trite that whether it be under sections 7, 9 or section 10 of the IBC, 2016 the petitioner(s) under the concerned sections of the IBC, 2016 are required to approach this Tribunal with a bona fide and honest intent seeking for the resolution of the insolvency of the corporate debtor and the petition should not have been filed with a fraudulent or malicious intent, lest the person approaching this Tribunal should become liable to prosecution under section 65 of the IBC, 2016. While the yardstick in relation to the intention on the part of the petitioner approaching this Tribunal seeking for initiation of the CIRP in relation to the corporate debtor under any of the sections, namely be it 7, 9 or 10, is of equal importance, however, when a corporate debtor approaches this Tribunal under section 10 of the IBC, 2016 seeking for the initiation of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olution, can be inquired into by the Adjudicating Authority under section 66. Section 69 makes an officer of the corporate debtor and the corporate debtor liable for punishment, for carrying on transactions with a view to defraud creditors. Therefore, the National Company Law Tribunal is vested with the power to inquire into (i) fraudulent initiation of proceedings as well as (ii) fraudulent transactions. It is significant to note that section 65(1) deals with a situation where CIRP is initiated fraudulently 'for any purpose other than for the resolution of insolvency or liquidation'. Therefore, if, as contended by the Government of Karnataka, the CIRP had been initiated by one and the same person taking different avatars, not for the genuine purpose of resolution of insolvency or liquidation, but for the collateral purpose of cornering the mine and the mining lease, the same would fall squarely within the mischief addressed by section 65(1). Therefore, it is clear that the National Company Law Tribunal has jurisdiction to enquire into allegations of fraud. As a corollary, the National Company Law Appellate Tribunal will also have jurisdiction. Hence, fraudulent initiati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,147 the application has failed to quantify as to how the figure of ₹ 2,70,46,147 has been arrived at. Referring to the Forensic Audit Report as filed along with the application at page No. 87 of Volume II of the typed set also does not throw much light as to how the figure of ₹ 2,70,46,147 has been computed by the Forensic Auditor. Further in the audited financial statements filed for the year ended 2018-19 by the respondents, the following figures are reflected, in relation to closing stock as on March 31, 2019, namely : Audited financial as annexed with typed set 68,56,421.00 10,00,000.00 1,91,89,726.00 1,40,60,101.00 4,11,12,248.00 51. Whether the figures as reflected above for the financial year ended March 31, 2019 have been considered by the applicant and if the same has not been considered the reasons thereof have also not been given in the application. In the light of the above, even though, the applicant has been able to demonstrate by way of a comparative chart, the alleged inconsistency in rela ..... X X X X Extracts X X X X X X X X Extracts X X X X
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