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TMI Blog2023 (2) TMI 670X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lacing 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. - Company Appeal ( AT ) ( Insolvency ) No. 483 of 2022 - - - Dated:- 16-2-2023 - [ Justice Ashok Bhushan ] Chairperson And [ Barun Mitra ] Member ( Technical ) For the Appellant : Mr. Aishvary Vikram , Advocate For the Respondents : Mr. Abhinav Shrivastava and Ms. Ritu Reniwal , Advocates JUDGMENT [ Per : Barun Mitra , Member ( Technical ) ] The present appeal filed under Section 61 of Insolvency and Bankruptcy Code 2016 ( IBC in short) by the Appellant arises out of the Order dated 02.03.2022 (hereinafter referred to as Impugned Order ) passed by the Adjudicating Authority (National Company Law Tribunal, Cuttack Bench) in T.P. No.198/CTB/2019 arising out of CP(IB) No.4686/CTB/2019. By the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) for approval of the Resolution Plan. This application was followed later by another application filed under Sections 43 and 66 of the IBC vide I.A. No.66/CTB/2021 on 26.07.2021. The Adjudicating Authority dismissed the application filed by the Resolution Professional under Sections 43 and 66 of the IBC Code. Aggrieved by the Impugned Order, this appeal has been preferred by the Resolution Professional /Appellant. 3. The Learned Counsel of the Appellant making his submission stated that the Appellant on having been appointed as the Resolution Professional, found after perusal of the Balance sheet of the Corporate Debtor, that no funds were available with the Corporate Debtor though the Balance Sheet of the Corporate Debtor had recorded a profit of Rs.10,57,504/- in FY 2016-17. It was contended that serious endeavours were made by the Resolution Professional for obtaining documents from the ex-management but on having failed to obtain them, went ahead and filed a Section 19 application of non-cooperation against the suspended management. On analysis of the available records, having come to the opinion that some suspicious transactions had been undertaken by the suspended man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consultancy Pvt. Ltd. R-4 Dec17 Feb18 Vinod Agarwal Meena Agarwal are the Directors 1,11,60,000 Shree Om Ricetech Private Limited R-6 Vinod Agrawal s father is the Director of the present company 10,00,000 Total 1,26,75,000 5. Elucidating on the suspicious transactions, it was stated that a sum of Rs.1,50,000/- was transferred by the Corporate Debtor to Shri Vinod Aggarwal/R No. 1 for repayment of mortgage loan which was taken by his father from Union Bank of India. As this transfer was for meeting personal needs, it was contended that the Adjudicating Authority has wrongly held that this payment was made in the ordinary course of business Moreover, Rs.3 lakh was transferred by the Corporate Debtor to Meena Agarwal/Respondent No. 2 for her emergent medical needs on 17.01.2018 while the treatment happened a year later. Submitting that these expenses cannot be viewed as expenditure to meet emergent medical needs it was contended that the Adjudicating Authority had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agement in some other account of the suspended directors. Alternatively the stock statement was inflated to mislead the lenders to obtain their sanction. Challenging the impugned order, it is submitted that the Adjudicating Authority had overlooked this fraudulent manipulation of the stock statement by relying on selective reading of a bank inspection report. 7. The Learned Counsel for the Respondent refuting the above submissions raised the issue of the maintainability of the application on the ground that the Resolution Professional had failed to adhere to the timelines prescribed by the Regulation 35-A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ( Regulation in short). As per this Regulation, the Resolution Professional is required to form his opinion on or before the 75th day of the Insolvency Commencement Date ( ICD in short) which was not done. It was added that the Regulations further lay down the requirement to make a determination by the Resolution Professional that the Corporate Debtor had been subjected to transactions covered by Sections 43 and 66 on or before 115th day of ICD which was also not done. Thus, the Resolution Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od Agarwal, Respondent No.1 was for repayment of mortgage loan taken by his father from Union Bank of India for which guarantee had been given by Respondent No.1 and therefore was a transaction in the ordinary course of business. It was also added that Respondent No.1 had given an unsecured loan of Rs.50 lakhs to the Corporate Debtor. Secondly, the payment of Rs.3 lakhs made to Meena Agarwal was made by the Corporate Debtor as interest in consideration of unsecured loan granted by Respondent No.2 to meet emergency medical need for which medical reports had also been submitted. It was therefore not preferential in nature. As regards, the payment of Rs.65,000/- to Respondent No.3 it was submitted that this was reimbursement of expense incurred on hotel bookings and travellings which were carried out in the usual course of business promotion. It was mentioned that the Adjudicating Authority had also noted that the Appellant had not pressed for any decision on the transactions with respect to Respondents No.4 and 5 before the Adjudicating Authority. It was further denied that there was any manipulation in the stock statement. The stock price which was over-inflated on 27.03.2017 due to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation (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. 14. For a better appreciation of the issue under consideration, we need to notice the important CIRP milestones involved and their time-lines in the backdrop of the present case. It is noticed that CIRP commenced on 03.10.2019. The CIRP termination date after extension of 90 days was 29.06.2020. The application under Section 43 and 66 was filed by the Resolution Professional on 26.07.2021 which as per Regulations should have been filed on or before 14.02.2020 being the 135th day counted from 03.10.2019. As against the due date of filing application under Section 43 and 66 falling on 14.02.2020, the application was actually filed on 26.07.2021 which is after 17 months from due date. There is also a gap of nearly 8 months between filing the application of approval of Resolution Plan and filing of application under Sections 43 and 66. There is also a clear delay beyond 135 days from the ICD in filing the Section 43 and 66 application which is un-disputed. 15. We now come down to have a look at the timelines laid d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quotation from Crawford on Statutory Construction .art.261 at p. 516, is pertinent: The question as to whether a statute is mandatory or directory depends upon the intent of the legislature and not upon the language in which intent is clothed. The meaning and intention of the legislature must govern, and these are to be ascertained, not only from the phraseology of the provisions but also by considering its nature, its design, and the consequences which would follow from construing it the one way or the other Going further, this Tribunal in the same judgment also relied on the observations of the Hon ble Apex Court in (2016) 11 SCC 31 in Lalaram 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 instruc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this was a clear violation of Regulation 35-A. The Learned Counsel for the Appellant has also admitted the delay in filing of the application under Section 43 and 66 of IBC but justified the delay on the ground of non-cooperation by the suspended management of the Corporate Debtor in furnishing information and requisite documents. The Respondents have, however, contended that the Corporate Debtor having handed over the factory along with the documents to the Appellant on 15.10.2019, there was no further information in their possession. However, we do not find on record any proof or list of documents handed over by the suspended management to the Resolution Professional. Hence, by merely claiming that the factory premises was handed over we are not sufficiently convinced that all the requisite documents had been handed over. 18. Furthermore, from material on record, we find that inspite of sustained efforts, the Resolution Professional remained unsuccessful in obtaining documents from the ex-management. We also find that a spate of Emails were sent seeking information from the suspended management on 09.10.2019, 11.10.2019, 14.10.2019, 15.10.2019, 16.10.2019, 21.10.2019, 22.10.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ICD. This was rebutted by the Learned Counsel for the Appellant and submitted that the Resolution Professional had formed an opinion of suspicious transactions on 23.11.2019 which was much before the 75th day of CIRP as it was this opinion which had triggered the appointment of TA to conduct an investigation and audit of the Corporate Debtor to examine suspicious transactions. We are inclined to agree to this standpoint since holding any opinion carries with it an element of belief and in the present case the decision taken by the Resolution Professional to appoint the TA is a clear expression of the belief that some suspicious transactions had taken place. The TA has also acknowledged while submitting the TAR that the Resolution Professional while engaging the TA on 23.11.2019 had clearly laid down the scope and procedure to be followed for the audit as placed at page 133 of APB. This validates the contention of the Appellant that it had formed an opinion well in time on the need for audit and defined the contours of audit in respect of transactions attracting Sections 43 and 66 of IBC. 22. Coming to the determination aspect, it is commonsensical axiom that the time taken b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nion that 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 and for reasons discussed above we hold 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. Question No. (ii) 25. This now brings us to the second question as to whether in the present case the transactions conducted by the erstwhile management of the Corporate Debtor contain the ingredients as specified in Sections 43 and 66 of IBC or whether these transactions were conducted in the ordinary course of business. 26. At this stage it may be useful to reproduce the statutory provision contained i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clude a financial debt or operational debt substituted for existing financial debt or operational debt. (4) A preference shall be deemed to be given at a relevant time, if- (a) it is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or (b) a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date. Section 66 Fraudulent trading or wrongful trading- (1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit. (2) On an application made by a resolution professional during the corporate insolvency resolution pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions and ordinary course of business have been interpreted. Before going into analysis of the facts of the transactions in question, we may focus on the preposition of law as laid down in the Anup Jain (supra) judgment. The relevant extracts are as excerpted below: 21.1 .. If twin conditions specified in sub-section (2) of Section 43 are satisfied, the transaction would be deemed to be of preference. As per clause (a) of sub-section(2) of Section 43, the transaction, of transfer or property or an interest thereof of the corporate debtor, ought to be for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and as per clause (b) thereof, such transfer ought to be of the effect of putting such creditor or surety or guarantor in beneficial position than it would have been in the event of distribution of assets under Section 53. 21.2. However, merely giving of the preference and putting the beneficiary in a better position is not enough. For a preference to become an offending one for the purpose of Section 43 of the Code, another essential and rather pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mon flow of transactions in affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation. 30. Analysing the transactions in question, at the very outset we notice that CIRP had commenced on 03.10.2019 and therefore the relevant look back period would be two years for the related parties i.e. 03.10.2017 to 03.10.2019. We notice that a sum of Rs.1,50,000/- was transferred by the Corporate Debtor to Shri Vinod Agarwal /Respondent No. 1, who was an erstwhile Director of the Corporate Debtor for repayment of mortgage loan which was taken by his father from Union Bank of India. In this case, the transaction had happened on account of loan taken by the father of Respondent No.1 and therefore repayment should have been done from the personal account of Respondent No.1. Since no profit motive for the business of the Corporate Debtor can be found in this transaction nor was the transaction related to the normal flow of business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and purpose of Section 43 of IBC is to find out and nullify the preferential transactions undertaken by the parties at relevant time to withdraw money from a distressed corporate debtor when it is on the verge of commencement of CIRP. The analysis made of the above set of transactions seem to clearly have the effect of putting the erstwhile directors of the Corporate Debtor in a more beneficial position than it would have been placed in the event of distribution of asset of the Corporate Debtor under Section 53 of the Code and cannot be said to have been covered under the exception of ordinary course of business or financial affairs of the Corporate Debtor as carved out under Section 43(3) of the Code. 34. The fourth transaction found suspicious by the TA and the Resolution Professional relates to transfer of Rs. 1,11,60,000/- to Jaipal Consultancy Pvt. Ltd./Respondent No.4. It is pertinent to note that both Respondents No.1 and 2 were Directors in the said Jaipal Consultancy Private Limited. These transactions were made from December 2017 to February 2018 which squarely fall in the lookback period. It has been submitted by the Learned Counsel for the Appellant that this company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s clever manoeuvring of sales and purchase transactions amounted to be fictitious and fraudulent sale of stocks being booked by the suspended director and that the actual stocks were sold off and the amounts received from such transactions were siphoned off by the suspended management in some other account of the suspended directors. 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, we feel 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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