2021 (8) TMI 653 - AT - Insolvency and Bankruptcy

Tribunal upholds Adjudicating Authority's directions on Companies Act, emphasizes need for further investigation.

The Tribunal dismissed the appeal, upholding the Adjudicating Authority's directions for further inquiries under Sections 206 and 207 of the Companies ... Validity of direction issued to the Registrar of Companies to inspect the books and conduct inquiries - Section 206 and Section 207 of the Companies Act, 2013 - Directions to furnish the report to the Appropriate Authority for necessary action - Section 208 of the Companies Act - HELD THAT:- Under Sub-section (4) of Section 206 of the Companies Act 2013, if the Registrar is satisfied based on information available or furnished to him or on a representation made to him by any person that the business of a company is being carried on for a fraudulent or unlawful purpose, the Registrar may, after informing the Company of the allegations against it by written Order, call on the Company to furnish in writing any information or explanation the matters as specified in the Order and carry out such enquiry as he deems fit after providing the Company with a reasonable opportunity of hearing - It is pertinent to mention that under proviso to Sub-section (4) of Section 206, Central Government is empowered to direct the Registrar or any inspector appointed by, for the purpose to carry out the enquiry under this sub-section. It is essential to mention that the proceeding under the Insolvency and Bankruptcy Code, 2016, is initiated by the Corporate Debtor/Corporate Applicant itself. Serious irregularities are reported in the Forensic Audit Report against the Corporate Debtor. However, the power of the NCLT to order an investigation under the Companies Act, 2013 can not be denied. But whether the Adjudicating Authority under the I& B Code is empowered to order inquiry and investigation about affairs of the Company or not is to be observed - Based on the Forensic Audit Report and Application filed by the RP, the Adjudicating Authority noticed that the Corporate Debtor had diverted a sum of ₹ 541.58 lakh to a related party viz., Trinity Papers India P. Limited., the attention is drawn to the Financial Statements as enclosed for the period 2016-17, 2017-18 and 2018-19. Under Section 210(1)(b) of the Act, the Central Government can investigate independently. As per Section 210(3), the Central Government has no option but to direct an investigation, appoint an Inspector, and obtain his report. The Inspectors are empowered to scrutinise the materials gathered from a Company and prepare the report. Section 210 of the Act specifies a procedure for an investigation by SFIO. As per Section 60(1) of the Code, 'National Company Law Tribunal' is an 'Adjudicating Authority' possessing concurrent jurisdiction under the Companies Act, 2013 and also under the I&B Code, 2016. The Tribunal/Adjudicating Authority on receipt of an Application/complaint of breach of the relevant provisions of the IBC, 2016 and the Companies Act and after satisfying itself that there are attendant circumstances pointing out fraudulent/wrongful trading has been committed then, it is well within jurisdiction to refer the matter to Central Government for an investigation by Inspectors to be appointed by the Central Government. In the instant case, the Applicants/RP filed an Application under Sections 43, 45 and 66 of the I&B Code 2016 but has restricted its relief only to Section 66(2). Therefore, considering the serious nature of the transaction as brought forth in the Forensic Audit Report, the investigation has been ordered to the concerned Registrar of Companies - In the instant case, it is evident that CIRP has been initiated by the Corporate Applicant/Corporate Debtor through its Promoters/Directors U/S 10 of the Code on 4th March 2019. When the Corporate Debtor applies for Initiation of Corporate Insolvency Resolution Process on its own, the Corporate Debtor is required to make it complete disclosure of its affairs as mandated under the provisions of the I&B Code 2016. The disclosures, in particular, Form 6 of the said Rules and the Annexures filed thereunder, are of significant importance in coming to a conclusion on the existence of insolvency of the Corporate Debtor and initiating the Corporate Insolvency Resolution Process. It is also evident that serious irregularities have been found in the forensic audit report - the Adjudicating Authority ordered that the companies' Registrar exercise its power as available to it under Sections 206 and 207 of the Companies Act 2013. It is also important to mention that under Section 206 of the Companies Act, the Registrar is empowered to act on any information he receives. Considering the circumstances of the case, we do not find any irregularity or illegality in passing the impugned Order. Appeal dismissed. Issues Involved:1. Jurisdiction of the Adjudicating Authority in directing inquiries under Sections 206 and 207 of the Companies Act, 2013.2. Validity of the Forensic Audit Report and its consideration by the Adjudicating Authority.3. Allegations of fraudulent transactions and diversion of funds by the Corporate Debtor.4. Requirement for the Respondents to contribute to the Corporate Debtor's assets under Section 66 of the IBC, 2016.5. Procedural fairness and opportunity to be heard for the Appellants.Detailed Analysis:1. Jurisdiction of the Adjudicating Authority:The Appellate Tribunal addressed the question raised by the Appellant regarding the jurisdiction of the Adjudicating Authority in passing the impugned order to inquire/investigate into the affairs of the Company by the Registrar of Companies under Sections 206 and 207 of the Companies Act, 2013. The Tribunal clarified that the Adjudicating Authority has the power to direct such inquiries based on the serious nature of the transactions reported in the Forensic Audit. However, it was noted that the NCLT cannot exercise powers under Sections 206 and 207 but can direct the Central Government for an investigation under Sections 210(2) and 213 of the Companies Act, 2013.2. Validity of the Forensic Audit Report:The Appellants contended that the Forensic Audit Report was flawed as it was based on unaudited financial statements for the Financial Year 2018-19, while the audited financial statements were prepared and signed during the CIRP period. The Tribunal acknowledged the discrepancies highlighted by the Appellants but emphasized that the Forensic Audit Report revealed significant irregularities and fraudulent transactions, which warranted further investigation.3. Allegations of Fraudulent Transactions:The Forensic Audit Report identified several discrepancies, including the diversion of funds to related parties, arbitrary write-offs of receivables, and non-handover of cash balances. The Tribunal detailed the findings of the Forensic Audit, such as the diversion of Rs. 541.58 lakh to Trinity Papers India Pvt. Ltd. and Rs. 378.73 lakh to Sivasakthi International. The report also highlighted the arbitrary write-off of Rs. 649.39 lakh from Sakal Papers Pvt. Ltd. and other transactions causing wrongful loss to the Corporate Debtor.4. Contribution to Corporate Debtor's Assets:The Adjudicating Authority directed the Respondents to contribute Rs. 12.31 lakh to the Corporate Debtor's assets under Section 66 of the IBC, 2016. The Appellants argued that they were not given an opportunity to explain the utilization of these amounts for operational purposes. The Tribunal upheld the Adjudicating Authority's direction, emphasizing the seriousness of the irregularities reported in the Forensic Audit.5. Procedural Fairness:The Appellants claimed that the Adjudicating Authority had not provided them with a reasonable opportunity to be heard before directing further inquiries and ordering the contribution of Rs. 12.31 lakh. The Tribunal found that the Appellants were given opportunities during the Forensic Audit and the proceedings before the Adjudicating Authority to explain the transactions. The Tribunal concluded that the principles of natural justice were not violated.Conclusion:The Tribunal dismissed the appeal, finding no merit in the Appellants' contentions. It upheld the Adjudicating Authority's directions for further inquiries under Sections 206 and 207 of the Companies Act, 2013, and the requirement for the Respondents to contribute to the Corporate Debtor's assets. The Tribunal emphasized the seriousness of the fraudulent transactions and the necessity for further investigation to protect the interests of the creditors and ensure compliance with the provisions of the IBC, 2016.