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TMI Blog2023 (3) TMI 74X X X X Extracts X X X X X X X X Extracts X X X X ..... mencement of Corporate Insolvency Resolution Process. However, a director can be deemed to have exercised due diligence, if such diligence was exercised as expected reasonably of a director carrying out a business in ordinary course of business. Thus, for establishing the fraudulent purpose, it must be shown that the Ex-Directors of the Corporate Debtor knew that the Company was insolvent but continued to run business with dishonest intentions. On a broader sense, concealment of true financial position of the Corporate Debtor can also be covered under such provisions. This Appellate Tribunal after going through the averments of both the parties and the record made available, comes to the conclusion that onus was on the Appellants and difficult to accept that details of large number of 4,000 customers were not available. Similarly, it also not convincing that no payment has been received from any of such customers. On face of it, the finding of the Adjudicating Authority seems to be correct and no error is found in the impugned order on this account. This Appellate Tribunal, is of the considered opinion that the Appellants, have not turned out to be clean in their explanati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the account of the Liquidator for distribution under Section 53 of the Insolvency and Bankruptcy Code, 2016. 5. The Adjudicating Authority being satisfied of all facts and provisions of law, agreed to the prayers sought by the Liquidator declaring the entries of Rs. 21.37 crores shown in the Audited Financial Statement for the year 2018 as fraudulent transactions and the Appellants herein were held liable to pay this amount to the Liquidator / Respondent herein for distribution under Section 53 of the I B Code, 2016. 6. Aggrieved by the impugned order dated 13.07.2021, the Appellants have filed the present appeal before this Appellate Tribunal . Appellants Submissions :- 7. Learned Counsel for the Appellants gave the background of the case and circumstances which led to the present appeal. Learned Counsel for the Appellants assailed the impugned order as well as conduct of the Respondent for initiating false IA(IBC) 27/KOB/2021 in IBA/133/2019 under Section 66 of the I B Code, 2016. Learned Counsel for the Appellants stated that the Respondent filed above Interlocutory Application almost after one year of the impugned order for liq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchases worth Rs. 353.09 crores, inventory aggregated to Rs. 47.16 crores and all these clearly demonstrate the Corporate Debtor s ability to pay as well as desire to develop the business. Learned Counsel for the Appellants stated that at no stage any bank declared accounts of the Corporate Debtor as NPA. 13. Learned Counsel for the Appellants took pains to explain that fixed assets did not show any major changes over years which indicates no disposal or alienation of the properties of the Corporate Debtor was made to defraud any Creditor . 14. Learned Counsel for the Appellants described major floods in August, 2018 which ruined the business of the Corporate Debtor . Learned Counsel for the Appellants further stated that the Respondent failed to bring out any specific allegation and the findings were without any concrete evidence including any Forensic Audit Report . Learned Counsel for the Appellants mentioned that mandatory ingredients of Section 66(1) of the I B Code, 2016 is that persons knowingly should carry on of the business in a manner with an intent to defraud the creditors or for a fraudulent purpose and as per section 66(2), it is must be shown that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the pictures depicting impact of the floods on the fixed assets which were not taken into account by the Adjudicating Authority . Learned Counsel for the Appellants submitted that the vehicles, were demo-vehicles and financed by M/s Sundaram Finance who had taken back due to non-payment by the Corporate Debtor . As regard inventory, Learned Counsel for the Appellants refuted the allegations which could not be substantiated by the Respondent and in any case their inventories dated back to 2013-14 and had no value. Learned Counsel for the Appellants also refuted the allegation regarding misuse of trade receivable of Rs. 6.91 crores. Learned Counsel for the Appellants stated that these receivables were to be directly connected by Tata Motors and the Corporate Debtor did not have any control. 18. Learned Counsel for the Appellants also strongly refuted the allegation regarding fraudulent dealing with M/s Sai Financial Services Ltd. and termed them as turnaround experts and mentioned that the payment was made towards legitimate expenses like travel, stay, consultancy fee etc. of Sai Financial Service Ltd. 19. Learned Counsel for the Appellants also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehicles were included whereas neither these vehicles were available for physical verifications nor any details available in the records to substantiate that these vehicles were sold and the amount received and in absence of the same these vehicles shown in the balance sheet have been proved to be in bogus/ fraudulent in nature. 26. Learned Counsel for the Respondent also elaborated fictitious nature of inventory shown at various branches of the Corporate Debtor sheet of 2017-18 and further stated that the Appellants could not furnish details regarding inventory including location, stock register and other details including physical verification. Learned Counsel for the Respondent also stated that the Appellants could not produce any record to prove that these were lost in the flood or any claim has been filed before the Civil Authorities monitoring the flood damage and claims. Learned Counsel for the Respondent further stated that during the physical visit to Kannadi Branch , he found out that this branch was not at all affected by any flood as confirmed by the Village Officer . Learned Counsel for the Respondent also stated that similarly inventory including vehicles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eflected as value of other current assets , out of which receivable from buyers constituted Rs. 1.53 crores and no detail could be furnished by the Appellants to establish this amount. 30. Learned Counsel for the Respondent submitted that he has given all the documentary evidence and details to the Adjudicating Authority , who after being satisfied regarding fraudulent nature of transactions in the Financial Statements, allowed the Application of Respondent under Section 66 and gave order for recovery from the Appellants . 31. Learned Counsel for the Respondent emphasised that Tata Motors had cancelled Appellant s dealership and therefore, the Appellants were aware that there were no chances for further business and despite knowing non-avoidance of Corporate Insolvency Resolution Process , failed to exercise diligence in minimising potential losses and even entered into fraudulent transactions as elaborated earlier to defraud the creditors. 32. Learned Counsel for the Respondent also denied statement of the Appellants regarding restructuring by South Indian Bank and stated this to be false. 33. Learned Counsel for the Respondent submitted that the non-disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if (a) before the insolvency commencement date, such director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and (b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor. Explanation. For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltimately it is the role of the Board of Directors to have control over the affairs of the Corporate Debtor through the Board Meetings and therefore are accountable for the conduct of business and cannot escape their liability in case, the Adjudicating Authority is satisfied regarding meeting ingredients of Section 66 of the I B Code, 2016. 46. This Appellate Tribunal also notes the fiduciary duties of the Directors of the Corporate Debtor to preserve the assets of the company. 47. It is a case of the Appellants that the entire business was affected by the floods in Kerala in August 2018 and the assets and the records of the Corporate Debtor were destroyed. Per-contra, the Respondent has brought out that the many branches of the Corporate Debtor were not affected by flood at all, as confirmed by the concerned Village Officer of the State. In the teeth of the same, it is therefore, difficult to believe the claims of the Appellants that Rs. 21.36 crores were lost on account of the flood alone. The Liquidator , the Respondent herein has taken pains in establishing various items shown in the Financial Statement of the Corporate Debtor for the Financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken back by Sundaram Finance who financed these demo-vehicles. Per-contra, the Respondent brought out that despite the Appellants being asked to submit details, no details were made available. This Appellate Tribunal also notes that the Adjudicating Authority has clearly recorded that the Appellants herein were unable to provide item wise details, location, assets register, invoices, etc. or offer the asset for physical verification. Similarly, the Adjudicating Authority also recorded regarding non-availability of any vehicle in the Company or evidence of sale as reflected in the books of accounts. In absence of these, the Adjudicating Authority held these entries in the books of accounts amounting to Rs. 5.33 crores which included Rs. 4.21 crores as buildings, Rs. 0.41 crores as plant and machinery and Rs. 0.47 crores as vehicles as fraudulent and fictitious. To this Appellate Tribunal , it looks strange that the Appellants could not furnish the details of the assets, locations and the copies of the assets register of fixed assets valuing to Rs. 5.33 crores which have been reflected in the consecutive Balance Sheets including 2018. Similarly, it is difficult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Respondent has given list of major advances (details at Para 28) which could not verified or found to be of related parties. It is a case of the Appellants that all agreements entered into with parties have also been lost in the floods and as such could not be furnished to the Liquidator . On the other hand, Liquidator has clearly established that contact details of Sai Finance Service Ltd., Abdul Azeez and CP Andrews were not found in the addresses provided. From the details of loans and advances given by the Respondent , prima-facie the Respondent has succeeded in establishing that most of such parties did not exist nor such party were found. Similarly, few parties were found to be related parties. All such evidence, prima-facie points out towards wrongful intent of the Corporate Debtor . Therefore, we do not find any error in the impugned order on this ground. 52. Another major item pointed out by the Liquidator pertains to trade debtor/receivables amounting to Rs. 6.91 crores from more than 4,000 customers. According to the Liquidator ,the Appellants could not give details about these trade receivables and also that no payment has been received fr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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