2021 (4) TMI 10 - Tri - Insolvency and Bankruptcy

Fraudulent Plant & Machinery Sale Cancelled, Directors Liable for Compensation

TARUN BATRA (Resolution Professional of M/s Shree Vardhman Rice Mills Pvt. Ltd) Versus RAM BHAJ JAIN & ORS and M/s BHUPINDRA AGRO PVT. LTD. Versus M/s SHRI VARDHMAN RICE MILLS PVT. LTD.

The National Company Law Tribunal, New Delhi, declared a transaction of Plant and Machinery as fraudulent and canceled the sale of assets to a specific ... Undervalued Transactions - seeking declaration that the transaction of Plant and Machinery of the Corporate Debtor to Respondent No.3 as fraudulent - seeking necessary directions for cancellation of the transaction of sale of Plant and Machinery of Corporate Debtor - HELD THAT:- As per the Final Audit Report dated 15.05.2020 the book value of the Machinery is ₹ 1.56 Cr. However, on perusal of the documents placed on record by the Respondent no. 3 it has been observed that the Machinery has been purchased by the Respondent No. 3 vide bill no. 407 dated 03.05.2019 for an amount of ₹ 7,55,200/- and bill no. 408 dated 08.05.019 for an amount of ₹ 14,40,600/- (Inclusive of GST). The Final Audit Report states that during the period under audit there have been no transaction as laid down in Section 49 and with respect to Section 66 of the code, the observations made only rely on the fact that the Corporate Debtor has trans-ferred its fixed assets just before the initiation of CIRP by the way of books entries - However, on scrutinizing the details of all the documents placed on record, the Directors of the Corporate Debtor were well aware of the fact that an application has been filed on 25.01. 2019 and the same is pending for initiation CIR process against the Corporate Debtor, therefore the Directors of the Corporate Debtor deliberately entered into an undervalued transaction - These facts support that there was an intention to defraud the creditors by keeping these assets of the Corporate Debtor beyond the reach of the Creditors or any such person who is entitled to make a claim against the Corporate Debtor. These transactions are covered under the provisions of the Section 49 and 66 of the Code - the sale of plant and machinery of the Corporate Debtor to the Respondent no. 3 stands cancelled - these transactions are covered under the provisions of the Section 49 and 66 of the Code - application allowed. Issues Involved:- Declaration of transaction of Plant and Machinery as fraudulent- Cancellation of the transaction of sale of Plant and Machinery- Application of Sections 49 and 66 of the Insolvency and Bankruptcy Code- Examination of irregularities in conduct and management of business affairs- Determination of fraudulent activities by the Corporate Debtor- Analysis of the intention to defraud creditors- Consideration of related entities and corporate guarantees- Review of transactions and agreements between parties- Assessment of the sale of Plant and Machinery in the ordinary course of business- Interpretation of Sections 49 and 66 of the Code for fraudulent tradingComprehensive Analysis:The judgment by the National Company Law Tribunal, New Delhi, involved an application filed by the Resolution Professional seeking to declare a transaction of Plant and Machinery as fraudulent and to cancel the sale of such assets to a specific respondent. The case stemmed from irregularities highlighted in a transaction audit report, indicating potential preferential transactions and actions defrauding creditors under Sections 49 and 66 of the Insolvency and Bankruptcy Code.The facts revealed that the Corporate Debtor had transferred its fixed assets through book entries to the respondent, allegedly with the intent to defraud creditors and mislead potential resolution applicants. The Respondent was identified as a related entity of the Corporate Debtor's suspended directors, raising concerns about the legitimacy of the transaction and the involvement of corporate guarantees.The Tribunal carefully examined the provisions of Sections 49 and 66 of the Code to determine the deliberate nature of the under-valued transaction and the presence of fraudulent intent. It was crucial to establish that the Directors were aware of the pending application for insolvency proceedings, indicating a deliberate attempt to keep assets beyond creditors' reach.Ultimately, the Tribunal found the transactions in question fell within the purview of Sections 49 and 66, leading to the cancellation of the sale of Plant and Machinery. The Resolution Professional was directed to take possession of the assets to safeguard creditors' interests. Additionally, the suspended Directors were held liable for the fraudulent transactions and ordered to compensate the purchaser for the amount raised from the sale.In conclusion, the Tribunal's decision highlighted the importance of upholding the integrity of insolvency proceedings, deterring fraudulent activities, and ensuring fair treatment of creditors in such cases. The judgment serves as a significant precedent for addressing similar issues in insolvency matters, emphasizing accountability and transparency in business transactions.