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TMI Blog2022 (10) TMI 207X X X X Extracts X X X X X X X X Extracts X X X X ..... t) by the Appellants arise out of order dated 26.04.2022 (hereinafter referred to as 'Impugned Order') passed by the Adjudicating Authority (National Company Law Tribunal, Cuttack Bench) in I.A. No. 276/CTB/2020 arising out of TP No. 36/CTB/2019 connected with CP(IB) No. 1292/KB/2019. By the impugned order, the Adjudicating Authority on an application filed by Resolution Professional (present Respondent No.1) under Section 66 of the IBC directed the present Appellants to jointly and severally pay to the Corporate Debtor certain amounts on account of having indulged in fraudulent and under-valued transactions. Aggrieved by this, the present appeal has been preferred. 2. Put briefly, the factual matrix of the present case, necessary for deciding the appeal are as follows: Maa Durga Rice Products Pvt. Ltd./Corporate Debtor having come under Corporate Insolvency Resolution Process ('CIRP' in short), the Interim Resolution Professional ('IRP' in short) was appointed on 04.09.2019 and later confirmed as Resolution Professional on 07.11.2019. As part of CIRP proceedings, the Resolution Professional with the approval of Committee of Creditors ('CoC' in short) appointed a Transaction A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso discharged the Resolution Professional on finding his conduct inconsistent and disturbing since he had moved two applications, one, for approval of the Resolution Plan and, the other, against the Resolution Applicant and two other suspended Directors of the Corporate Debtor under Section 66 of the IBC for indulging in fraudulent transactions at the same time. 3. Aggrieved by this order of the Adjudicating Authority in IA No 276/2020, the Appellants have come up in appeal. 4. The Learned Counsel for the Appellant submitted that the Adjudicating Authority had failed to consider that the application filed on 09.11.2020 by the Resolution Professional under Section 66 of IBC was not within the time limit prescribed under Regulation 35-A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulation, 2016 ('CIRP Regulations' in short) and hence, not maintainable and thus liable to be rejected. It has been submitted that CIRP Regulation 35-A prescribes clear timelines. It requires the Resolution Professional to form an opinion as to whether the Corporate Debtor has been subjected to any transaction under Section 43, 45, 50 or 66 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als of paddy amounting to 87% of stock holding on 03.05.2019 were damaged due to arrival of storm of 'FANI'. Further it has been submitted insurance was not only claimed but claim relief also received for the damage suffered which have been adjusted against CIRP costs. The damage caused to stocks being legitimate, it was thus necessary to write off the damaged stocks. 7. As regards the advances made by the Corporate Debtor to certain persons, it has been submitted that this was done during the course of ordinary business without any malafide intention to harm the creditors. Being genuine business transactions and advances made towards purchase of paddy, such transactions have been wrongly classified as transactions defrauding creditors by the Resolution Professional. 8. Pointing out anomaly in the TAR, it has been submitted that the damaged stock of paddy has been incorrectly included in calculating the Milling Output. Since the said damaged stock was never utilized for milling purposes, it was incorrect on the part of TA to record this in 'estimation of loss' and in identifying the transaction as avoidable. 9. On the issue of undervaluation of the income of the Corporate Debtor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in another company, diversion of part loan amount received from the Financial Creditors to any other Company and that too for a purpose which was not approved by the Creditor amounted to wrongful diversion of funds to defraud creditors and fraudulent trade practice. It was also pointed out that the Appellants had indulged in the fraudulent act of unusual write off of inventory particularly the write-off of 2352 quintals of paddy on a single day by attributing it to the storm 'FANI', though this storm had landed 70 kms. away from the godown location. It was also stated that the Resolution Professional had arrived at these conclusions of fraudulent and under-valued transactions after study and appreciation of the TAR and that the Adjudicating Authority had also affirmed these findings. 13. We have heard the submission and rival contentions of Learned Counsel for both the parties and perused the records carefully. 14. The main points which need to be addressed for determination are:- (i) Whether the application filed by the Resolution Professional under Section 66 of the IBC before the Adjudicating Authority was barred by limitation; and (ii) Whether the Appellants had indulge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35-A Preferential and other transactions - (1) On or before the seventy-fifth day of the insolvency commencement date, the resolution professional shall form an opinion whether the corporate debtor has been subjected to any transaction covered under section 43,50 or 66. (2) Where the resolution professional is of the opinion that the corporate debtor has been subjected to any transactions covered under sections 43,45, 50 or 66, he shall make a determination on or before the one hundred and fifteenth day of the insolvency commencement date, (3) Where the resolution professional make a determination under sub-regulation (2), he shall apply to the Adjudicating Authority for appropriate relief on or before the one hundred and thirty-fifth day of the insolvency commencement date, whichever is earlier. 16. A reading of Regulation 35-A cited above shows that the Resolution Professional "shall make a determination" on whether the Corporate Debtor had been subjected to any transaction covered under Section 43, 45, 50 and 66 of the IBC on or before 115th day of ICD during and "shall apply to the Adjudicating Authority" on or before 135th day of ICD for appropriate relief. The Learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vs. Jaipur Development Authority" as below: "106. As noticed hereinabove, it is affirmatively acknowledged as well that where provisions of a statute relate to the performance of a public duty and where the invalidation of acts done in neglect of these have the potential of resulting in serious general inconvenience or injustice to persons who have no control over those entrusted with duty and at the same time would not promote the main object of the legislature, such prescriptions are generally understood as mere instructions of the guidance of those on which the duty is imposed and are regarded as directory. It has been the practice to hold such provisions to be directory only, neglect of those, though punishable, should not, however, affect the validity of the acts done. At the same time where however, a power or authority is conferred with a direction that certain regulation or formality shall be complied with, it would neither be unjust nor incorrect to exact a rigorous observance of it as essential to the acquisition of the right of authority." Thereafter drawing further support from the judgment of the Hon'ble Supreme Court in (2017) 16 SCC 143 in "Surendra Trading Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Professional not to proceed further in the transaction audit as they were going to file withdrawal application having entered into OTS. On 17.12.2019, a letter was also issued by them to hold back the said audit work. The Resolution Professional was permitted to recommence transaction audit on 18.02.2020. It is also noted that the Appellants/Suspended Board of Directors of Corporate Debtor had taken time to provide reconciled account. There was lack of cooperation by the Suspended Directors as documents and registers were not handed over on time. The tallied accounts were submitted on 03.12.2019 which was the 90th day of CIRP and hence constituted another factor for delay. There has been delay on the part of the Corporate Debtor to also furnish requisite documents/registers to the TA to complete his appraisal as may be seen from pages 328-345 of Appeal paperbook. The Adjudicating Authority has also noted that another reason attributed for delay has been the Covid pandemic. The Adjudicating Authority in the present case also took a view that the time-line mentioned in Regulation 35-A of CIRP Regulations is directory in nature because no consequential effect is mentioned therein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Debtor with huge interest loss. 20. Given the above facts, on balance of consideration, we are inclined to agree with the Adjudicating Authority that the defence taken by the Appellants cannot detract from the plain truth that the Appellants had wrongfully diverted funds which in turn had aggravated the financial liability of the Corporate Debtor and thus an unethical act to defraud creditor tantamounting to fraudulent trade practice. 21. The other fraudulent transaction, which the Resolution Professional had pointed based on the TAR was the unusual write-off of inventory of Rs. 3,65,90,960/- by the Appellants. The TA also raised question marks on the write-off of 2352 quintals of paddy on a single day due to the storm 'FANI' since the cyclone had made its fall at Puri which was 70 kms. away from the rice mill. Moreover, the godown was a fully covered one and there being prior prediction of the arrival of the cyclone, doubts have been raised on the version of cyclone related stock damages. In their defence, the Appellants have submitted that only damaged stock were written off and that the stocks as per the books and the physical position stood reconciled. The stock write-off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not a correct accounting principle. It is found that the TA in its report has found that the Corporate Debtor during the period 2009-2013 clocked a gross profit ratio of around 20% which fell precipitously to a negative figure except for financial year 2017-2018. The Adjudicating Authority has not accepted the contention of the Corporate Debtor that decrease in profit margin was due to changes in the fixed cost like increased cost of paddy, increased tariffs etc. The sudden fall in the gross profit from around 20% to a negative figure has been found to be unreasonable. 24. On the issue of undervalued transactions, it has been admitted by the Appellants that advances were made to nine parties including one related party amounting to Rs 1,68,29,280/-. It has, however, been contended by them that these transactions were made during the course of ordinary business and included advances made towards purchase of paddy. The TAR, however, finds that these advances were made at a time when the Corporate Debtor was completely eroded with hardly any turnover/business and hence these transactions cannot be perceived to have been made in the usual course of business. Moreover, keeping in m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 1292/KB/2019. By the said order, the Adjudicating Authority on an application filed by Resolution Professional under Section 30(6) of the IBC rejected the Resolution Plan of the Resolution Applicant in view of the bar provided under Section 29-A(g) of the IBC and, inter-alia, ordered liquidation of the Corporate Debtor, which has been challenged. 27. The factual matrix of IA No. 850/2022 is the same as in IA No. 869/2022 which has been outlined at Para 2 above. Recapitulating the salient points therefrom in the context of this appeal, the Resolution Applicant submitted a Resolution Plan under Section 240-A of the IBC along with eligibility affidavit affidavit under section 29-A of IBC. The said Resolution Plan was placed before the Adjudicating Authority by the Resolution Professional under Section 30(6) of the IBC. However, the Adjudicating Authority having come to the conclusion in IA No. 276/2020 that this Resolution Applicant along with two other directors of the Corporate Debtor had indulged in fraudulent and undervalued transactions, it held that the Resolution Applicant is not eligible to submit resolution plan in view of the bar placed by Section 29-A (g) of IBC and fur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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