Tribunal Orders Forensic Audit for Fraudulent Transactions, Bars Related Party from Committee of Creditors

The Tribunal ordered a "Forensic Audit" to investigate potentially fraudulent transactions involving creditors, including the second respondent. It found that the second respondent fell within the definition of a "related party" under the Insolvency and Bankruptcy Code, prohibiting their representation, participation, or voting in the Committee of Creditors (CoC) meetings. The Tribunal directed the removal of the second respondent from the CoC list and instructed a "Forensic Audit" to be conducted. The case was concluded with no costs awarded.

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Issues Involved:
1. Whether a "Forensic Audit" needs to be conducted in relation to the transactions between the creditors, including respondent No. 2, and the corporate debtor.
2. Whether respondent No. 2 falls within the ambit of the "related party" as defined under section 5(24), (24A) of the Insolvency and Bankruptcy Code, 2016.

Detailed Analysis:

First Issue:

15. The Tribunal examined the balance-sheets of the corporate debtor, which recorded the debt due, indicating no doubt about the genuineness of the transactions. However, the cash flow statements for 2013 and 2014 under "non-current liability" and "long-term borrowings" did not include the amount claimed by Mrs. Indira Anand. The loan agreement dated April 1, 2012, indicated that monies advanced were to be repaid by the corporate debtor as an unsecured loan till March 31, 2016. This was categorized as a "non-current liability" under "long-term borrowings," but the second respondent's contention lacked substantiation with relevant documents.

It was noted that Mrs. Indira Anand requested the corporate debtor to debit her account for a sum of Rs. 200 crores and credit it to M/s. Anandcine Services. This letter was not a valid document legally as it was neither an assignment deed nor an agreement. Further, loan agreements between the second respondent and the corporate debtor dated April 1, 2015, and September 4, 2017, were not substantiated with the corporate debtor's books of account. Therefore, a "Forensic Audit" was deemed necessary to examine fraudulent and avoidance transactions regarding the creditors' claims, including the second respondent. The Tribunal decided this issue in favor of the applicant.

Second Issue:

16. The Tribunal found that the managing director of the corporate debtor, Mr. K. Bapaiah, was related to the shareholders and directors of the second respondent, Mrs. A. Padma Manohar and Mr. A. Anand Prasad. This relationship indicated a direct concern with the corporate debtor, affecting the decisions of the CoC, as the second respondent held a majority voting right. This relationship could adversely affect the rights of minority financial creditors.

17. The Tribunal emphasized that section 5(24), (24A) of the I and B Code, 2016, aims to ensure that parties with vested interests do not influence the CoC's decisions. The CoC's decisions have significant consequences for the corporate debtor's survival or liquidation and the realization of creditors' debts. Therefore, the CoC must remain independent and free from any influence based on vested interests. The provisions of section 5(24), (24A) are inclusive and must be interpreted purposively to achieve the intended objective. Consequently, the second respondent was held to be a "related party" to the corporate debtor, with no right of representation, participation, or voting in the CoC meetings.

18. The Tribunal decided the second issue in favor of the applicant, directing the resolution professional to delete the second respondent's name from the CoC list and conduct a "Forensic Audit" as directed. The application was disposed of accordingly.

Conclusion:

19. The Tribunal pronounced the order in open court with no order as to costs.

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