2019 (5) TMI 1416 - Tri - Insolvency and Bankruptcy

Preferential Transactions Uncovered in Tribunal Ruling: Compliance Order Issued

Ram Ratan Kanoongo Versus Sunil Kathuria

Ram Ratan Kanoongo Versus Sunil Kathuria - TMI Issues Involved:1. Commencement and failure of Corporate Insolvency Resolution Process (CIRP).2. Identification of fraudulent or preferential transactions.3. Non-cooperation of promoters/directors.4. Mismanagement and diversion of funds.5. Preferential repayment of loans.6. Loss due to fire and lack of insurance coverage.7. Inflated debtors and incorrect book debts.8. Fraudulent transactions with related parties.9. Misuse of bill discounting facility.10. Fictitious receivables and adjustment entries.Issue-wise Detailed Analysis:1. Commencement and Failure of CIRP:The Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor commenced on 22.08.2017, following a Section 7 application filed by a Financial Creditor. The Corporate Debtor could not be revived due to non-approval of the Resolution Plan by the Committee of Creditors (CoC), leading to a liquidation order on 19.07.2018 and the appointment of a Liquidator.2. Identification of Fraudulent or Preferential Transactions:During the CIRP, the Resolution Professional (RP) identified transactions appearing fraudulent or preferential. The application was filed to address these transactions, emphasizing the importance of recovering siphoned funds to complete liquidation proceedings. The Code allows handling such transactions even at the liquidation stage.3. Non-cooperation of Promoters/Directors:The Liquidator reported non-cooperation from promoters/directors, including the sale of the registered office without due process and the operation of the company from a different location. The IRP faced challenges in obtaining information and completing the information memorandum due to non-cooperation.4. Mismanagement and Diversion of Funds:The RP discovered that the company’s operations were managed by a related party, and cash flows were not routed through the Corporate Debtor’s bank accounts until a later date. Financial statements review revealed transactions indirectly benefiting promoters/directors, raising suspicion of potential fraud.5. Preferential Repayment of Loans:The Liquidator identified that Rs. 135 Lakhs was paid to Respondent No. 1 as a preferential loan repayment, and Rs. 132.51 Lakhs taken from various lenders was credited to Respondent No. 1’s account. The Liquidator sought recovery of these amounts as preferential transactions.6. Loss Due to Fire and Lack of Insurance Coverage:A fire incident in October 2015 resulted in substantial loss of goods hypothecated with State Bank of India (SBI). The insurance policy had expired and was not renewed, leading to a significant loss for the lenders. The Liquidator highlighted negligence and wilful conspiracy by the promoters/directors.7. Inflated Debtors and Incorrect Book Debts:The Liquidator noted discrepancies between receivables as per audited balance sheets and those submitted to SBI, indicating inflated debtors and incorrect book debts. The overall loss to lenders due to these discrepancies was approximately Rs. 1,344.32 Lakhs.8. Fraudulent Transactions with Related Parties:The Liquidator identified fraudulent transactions with related parties, including adjustment entries and loans received and repaid through journal vouchers. The total amount recoverable from Respondent No. 5 was Rs. 985.14 Lakhs, and from Respondent No. 6 was Rs. 459.26 Lakhs.9. Misuse of Bill Discounting Facility:Fictitious sales to Konark Synthetics Ltd. were used to obtain inflated bill discounting facilities from SBI. The total loss to lenders due to misuse of this facility was Rs. 3,103.30 Lakhs. The sales were returned, indicating a scheme to defraud the creditor.10. Fictitious Receivables and Adjustment Entries:The Liquidator identified fictitious receivables and adjustment entries, with a total transaction value of Rs. 9,450 Lakhs. Balance confirmation letters to customers revealed discrepancies, indicating possible diversion of collections. The transactions were executed without the knowledge and consent of financial creditors/lenders.Judgment:The Tribunal found that the respondents indulged in preferential, fraudulent, and undervalued transactions. An order under Section 19(3) of the I&B Code was passed, directing ex-promoters/directors to cooperate with the Liquidator. Transactions falling under Sections 45(2)(b) and 43(1)(a) of the I&B Code were identified, and respondents were ordered to return siphoned sums and benefits received. Failure to comply would result in penal actions under Sections 70-73 of the Code. MA 436 of 2018 was allowed.