TaxTMI 
TaxTMI 
2021 (1) TMI 141
X X X X Extracts X X X X
X X X X Extracts X X X X
....ected in the Transaction Audit Report are Transactions Defrauding Creditors in terms of Section 49 of IBC, 2016; iv. To declare that the transactions as reflected in the Transaction Audit Report are Transactions wherein fraudulent and/or wrongful trading has been done, in terms of Section 66 of IBC. v. To pass appropriate orders in terms of Section 66 of IBC, specifically directing the Respondents to make such contributions to the assets of the Corporate Debtor as this Hon'ble Tribunal may deem fit; vi. To pass appropriate orders under Section 67 of IBC; vii. To pass appropriate orders under Section 44, 48, 49 & 73 of Insolvency & Bankruptcy Code against the Respondents; 2. The averments in the Application filed by the Applicant/Resolution Professional are briefly stated hereunder: i. It is averred Respondent Nos. 1 to 4 are the Directors (powers suspended) of the Corporate Debtor, who were managing and controlling the affairs of the Corporate Debtor at the relevant time during which the preferential and undervalued transactions were carried out by the Respondents 1 to 4 with an intention to defraud the creditors of the Corporate ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n Audit Report is as follows: S.No. Classification Section Nature of Transaction Reporting Section Particulars Amount (Rs. in crores) 1. 43 of IBC, 2016 Preferential Transactions F.2 Payment towards Unsecured Loan 0.10 2. 49 of IBC, 2016 Transaction Defrauding F.3 Write-off of Security Deposits 3.78 Creditors F.4 Write-off of: * Advance to Creditors * VAT recoverable (Asset) 3.75 F.5 Write-off of retention money 0.80 3. 66 of IBC, 2016 Fraudulent Transactions F.6 Party's receivable balance charged to P&L 0.35 F.7 Write-off of cash balance 0.10 Total Rs. 8.88 crores viii. It is averred the above Transaction Audit Report points out that the transactions have been carried out by the Respondents 1 to 4 in the Corporate Debtor Company during the relevant time, which are preferential and/or undervalued in nat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es had been written-off as on 31.03.2017. Since the final outcome of litigation is still pending in the court of law/Tribunal such write-offs should not have been made in the books of accounts. Hence, these transactions classified under Section 49 of IBC, 2016 - Transactions Defrauding Creditors. e) Party's receivable balance charged to Profit & Loss Account: It is averred outstanding receivable balance of Rs. 0.35 crores have been adjusted against interest expenses by debiting interest account and crediting the ledger of Agastya Tradelinks. It is averred that an amount of Rs. 4.99 crores was paid to Agastya Tradelinks on 27.05.2015 through letter of credit and Rs. 4.64 crores was received back on 30.05.2015 from Agastya Tradelinks. It is submitted that no purchases were made from Agastya Tradelinks even though payments were made against LC and thereafter the outstanding receivable balance of Rs. 0.35 crores from Agastya Tradelinks was charged to interest expense whereby no justification or supporting document has been provided by the management. Hence, the transaction has been classified under Section 66 as Fraudulent Trading/Wrongful Trading. f) Wri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s on account of receipt or after obtaining any further information against the Respondents which is prejudicial to the interest of the Corporate Debtor and its stakeholders/creditors. 3. The averments in the Counter filed by the Respondents 1 to 4 are described hereunder: a) It is averred Respondent Nos. 1 to 4 are Ex-directors of the Corporate Debtor/M/s. Vishwa Infrastructure and Services Private Limited since inception i.e. from 10.12.2004 and all were terminated from the management pursuant to the Liquidation Order dated 14.06.2019 passed by the Hon'ble Tribunal. b) It is averred all the allegations/submissions/averments made in the instant application filed under Sections 43, 44, 45, 48, 49, 66, 67 and 69 of the IBC, 2016 read with Section 25(2)(j) of IBC are denied in totality and is legally untenable as against the Respondents 1-4. c) Before giving para-wise replies to the allegations/submissions, the Respondents 1 to 4 made the following submissions on the averments made by the Applicant: 1. No case can be made out against the Respondents 1 to 4 in absence of any specific averments against the Respondents 1 to 4. No amount can be c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pplication does not fall within the ambit of section 49 of IBC. i. The Applicant in his application has wrongfully identified various transactions as transactions defrauding creditors, alleged to have been done by the Respondents 1 to 4. ii. The Applicant has failed to identify a person whose interest has been adversely affected in relation to its claim from the Corporate Debtor. In the absence of the same, the instant application is liable to be dismissed outrightly. 4. The transactions allegedly impugned in the present application does not fall within the ambit of section 43 of IBC. i. It is averred that in terms of Section 43 of IBC an opinion is a jurisdictional condition precedent to filing of an application under Section 43, and if there is no opinion formed and expressed, the application will be without jurisdiction and would be liable to be rejected outrightly without going into the merits of the case. In the instant case, no opinion of the Applicant is on record and the Applicant has failed to place on record any opinion for preferring an application under Section 43 of IBC. Thus, the instant application as preferred by the Applicant wit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d) Para-wise replies submitted by the Respondents 1 to 4 1. The contents of para 1-2 are denied except for what is a matter of record. 2. The contents of para 3 are denied in entirety. It is denied that all the Directors of the Corporate Debtor are jointly and severally liable. It is averred that it is a settled position of law that a firm or a company is a separate legal entity and accordingly, the principle of joint and several liability of the Directors of a company cannot be extended in any manner. It is held by the Hon'ble Supreme Court of India in the matter of Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co. vide Judgement dated on 25.04.2020. 3. The contents of para 4(i) to (vii) are denied except for what is a matter of record. 4. The contents of para 4(viii) (a) to (f) are denied in entirety. It is submitted that the Applicant in the instant case has alleged various transactions to be preferential transaction(s)/defrauding creditors/fraudulent and wrongful trading, which occurred prior to the commencement of IBC. It is submitted that the Applicant in no case can make any allegation qua any transaction which were entered to prior the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....its viz. Electricity and Rent Deposits. 46,65,728 Total 3,77,82,154 The detailed information elucidating the reasons of writing off of Security Deposits done by the Corporate Debtor are shown at page Nos. 24 to 54. iii. The contents of para 4(viii)(c) are denied in entirety. It is denied that advances to creditors amounting to Rs. 3.25 crores have been written off during F.Y. 2017-18. It is averred that the Corporate Debtor is an infrastructure Company dealing primarily with Sub-Contractors, suppliers for purchases, consultants for engineering designs, non-contracted labour etc. for execution of the contracted works. The contract value normally ranges between Rs. 10 crores to Rs. 100 crores. There are contracts valued between Rs. 180 crores and Rs. 230 crores also. Each contract is situated at different locations and the Corporate Debtor was dealing with about 1000 employees of both trained or untrained. It is averred most of the sub-contractors i.e. small or big operates through an advance payment and though the work contracted is executed some of them did not submit their bills for the advances availed resulting in the amoun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessments cannot be completed. Thus, the credit balances in the VAT recoverable head will continue to exist in the books. Hence, when there is absolutely no possibility of receiving these amounts, the same are written off. Project-wise review in this regard is given at page Nos. 99 to 106 of the counter booklet. iv. The contents of para 4 (viii)(d) are denied in entirety. It is denied that in two projects i.e. "Bihar Danapur Project" and "Bisharampur Project", retention money amounting to Rs. 0.80 crores had been written off as on 31.03.2017. It is averred that the retention money in Bihar -Danapur Project and Bisharampur Project was done on account of the following: a) Bihar Urban Infrastructure Development Corporation Ltd. had awarded a contract value of Rs. 70.18 crores to the Corporate Debtor in the year 2011 for designing, providing, laying, testing & commissioning of water supply distribution system, construction of RCC, Pump House & Staff quarters on turnkey basis with operation and maintenance of complete system for 5 years in Danapur town to the Corporate Debtor. As per the terms of the Agreement, the Bihar Urban Infrastructure Development Corp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....quest of the Corporate Debtor, one of the consortium bankers, opened an irrevocable letter of credit No. 001LM02151400016, dated 20.05.2015 for an amount of Rs. 4,98,83,400/- on the beneficiary, M/s. Agastya Tradelinks, Hyderabad for supply of Ms. Sheets as per Corporate Debtors Purchase Order dated 11.05.2015. iii. It is averred that Rs. 35,03,400/- was erroneously charged as interest expenses instead of discount. It is averred that the rectified entry was subsequently made and the Corporate Debtor made every effort to recover the discounted amount of Rs. 35,03,400/- from the beneficiary of the letter of credit. 6. Written-off of Cash Balance: The contents of para 4(viii)(f) are denied in entirety. It is denied that cash amounting to Rs. 10.00 lakhs has been written-off claiming that there were cash thefts at three sites. It is also denied that the write-off pertains to three sites namely "Indore Project Office", Feeder Separation 3 lot 12 and Feeder separation 3 lot 19". It is also averred that the said written off of cash balance was done in the aforesaid projects are described at page Nos. 112 to 114. 7. It is averred that majorly the aforesa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tality being baseless and vague. ii. The contents of para (a), para 1(a), para 11(a) of the reply of Respondents 1 to 4 being matter of record merits no response. iii. The contents of para (b) & para 1(b) of the reply are denied being wrong and baseless and the instant application filed by the Applicant is untenable against the Respondents. iv. The contents of Para(c) of the Reply are denied for want of knowledge. v. The contents of para 1(c) of the reply are denied being matter of record. It is denied that the applicant has failed to bring on record any documents/reasons in support of the alleged transactions. vi. The contents of para 11(b) & 11(e) of the reply are denied being wrong and baseless. It is vehemently denied that the applicant has failed to make out a case under Section 66 of IBC against the Respondents. vii. The contents of para 11(g) & 11(h) of the Reply are denied being wrong and baseless. It is wrong to say that mere vague and general allegations are made out against the Respondents. viii. The contents of para III(c)- (d) of the Reply are denied being false and baseless. It is wrong to say tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sactions, undervalued transactions and wrongful trading being carried out by the Respondents. xv. The contents of paras 4(a), 4(b), 4(c), 4(d), 4(e), 4(f) of the Reply are admitted to the extent which are matter of record. xvi. The contents of para 5 of Reply are denied being wrong and baseless. The Respondents have given preference to repay the unsecured creditors over other secured loan. xvii. The contents of paras 6 and 7 of the reply are denied being wrong and baseless. The write off of the debtors is an attempt to keep the assets of the Corporate Debtor beyond the reach of the creditors of the Corporate Debtor and the Respondents are liable for the impugned transactions and accordingly liable to pay to the Applicant such sums, in respect of the benefits received by them. xviii. The contents of para 8 of the reply are denied being wrong and baseless. The write off of retention money is an attempt to keep the assets of the Corporate Debtor beyond the reach of creditors of Corporate Debtor and has been done with intent to defraud the creditors of the Corporate Debtor. xix. The contents of para 9 of the Reply are denied being wrong and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iven detailed explanation in respect of the transactions which are said to be preferential, under-valued or fraudulent. The learned counsel contended that the respondents offered convincing and detailed reply to the allegations made in the application filed by the Liquidator. 9. Section 43 of the I&B Code deals with 'Preferential transactions and relevant time'. To be made clear a transaction will not come as a preferential transaction, if such transaction was made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee. 10. The applicant has given details of summary of transactions in tabular form in the application. One transaction under challenge is under section 43 of the I&B Code on the ground that it is a preferential transaction in respect of Rs. 10 lacs. According to the Liquidator an amount of Rs. 10 lacs was taken from Smt. Yerra Padmaja during the financial year 2016-17 and the same was repaid. The contention of the Liquidator is that this is an unsecured loan, which was given preference over secured loans. Therefore, this transaction is in the nature of preferential transaction and this transaction is to be dec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he said amount cannot be written off. This is nothing but a transaction intended to defraud the creditor. 13. As far as these transactions are concerned the respondents have given a detailed reply commencing from pages 24 to 54 of their counter. The respondents narrated the circumstances under which Security Deposits and other deposits were written off. It is not necessary to reproduce the detailed explanation given by the respondents with regard to writing off the Security Deposits and other deposits. The deposits traced back to the year 2005. These were the deposits made in 2005 in some cases. We are very much convinced with regard to the detailed explanation given by the respondents as to why Security Deposits relating to various projects were written off from time to time. The contention of the Liquidator is that these amounts were written off with a view to defraud the creditors. We are unable to agree with the opinion taken by the Liquidators that these are the transactions intended to defraud the creditors. The company was expected to write off these deposits in the circumstances stated by the respondents. We do not find any fraud involved in writing off the deposits in r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....S. Sheets, as per the corporate debtor's Purchase Order dated 11.05.2015 and the beneficiary Proforma Invoice No. 120 dated 11.05.2015. 18. The learned counsel contended that an amount of Rs. 35,03,400/- was erroneously charged as interest expenses instead of discount. The learned counsel contended that the corporate debtor tried to recover this money from the company, viz. Messrs Agastya Trade Links. Thus, the corporate debtor was unable to recover from Messrs Agastya Trade Links. The documents are shown at ANNEXURE R-9 COLLY. So the respondents are admitting that there was some mistake in the entry as the amount represents discount, but not charged to interest. However, money could not be collected from Messrs Agastya Trade Links. The explanation offered by the respondents is convincing since there is an error in the entry. 19. The last contention of the learned counsel for the Liquidator is that there was writing off an amount of Rs. 10 lacs on the ground that there were cash thefts at three sites. The respondents gave detailed explanation as to why a sum of Rs. 10 lacs was written off which was pointed out by the Transaction Auditor as one of the fraudulent transactio....