TaxTMI 
TaxTMI 
2021 (3) TMI 552
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.... the purpose of avoiding it and section 66 is to be invoked where it is noticed that there is fraudulent trading or wrongful trading as the case may be. 2. The above transactions falling within the confines of the respective sections are to be invoked in relation to the promoters or such other persons as may have been detailed in the respective sections itself. 3. However, during the course of submissions made by learned counsel for the applicant on September 10, 2020 it was represented that this application is required to be treated only as an application under section 66 of the IBC, 2016, even though the provisions as stated above in paragraph 1 supra have been reflected in the title portion of the application. In relation to the same, learned counsel for the applicant points out that both the pleadings as well as reliefs, which have been sought for, points out to the invocation of section 66 of the IBC, 2016 and not the other provisions, viz., section 43 or 45 of the IBC, 2016 and in the circumstances this Tribunal is required to treat this application only as an application filed under section 66 of the IBC, 2016, on a standalone basis. 4. For this purpose, reference i....
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.... Papers India P. Ltd., and Rs. 378.73 lakhs to another related party M/s. Sivasakthi International which attract preferential transactions as per section 43 of the IBC, 2016, page Nos. 4 and 5. (b) Former directors did not hand over the cash balance of Rs. 12.31 lakhs to the IRP when the CIRP commenced-page No. 5. (c) Receivables written off arbitrarily for Rs. 649.39 lakhs from M/s. Sakal Papers P. Ltd., Pune, is to be recovered from the promoter- directors for causing wrongful loss to the corporate debtor-page No. 35. (d) Payments made to customers and written-off for a sum of Rs. 50.28 lakhs, is to be recovered from the promoter-directors for causing wrongful loss to the corporate debtor-page No. 36. (e) Loans given to parties and written off for Rs. 43.49 lakhs, is to be recovered from the promoter-directors for causing wrongful loss to the corporate debtor-page No. 36." 6. In relation to each of the transactions as referred to in paragraph 8(a) to (e), learned counsel for the applicant relies upon the Forensic Audit Report as annexed in Volume II document No. 8 from page Nos. 54 to 386. For the purpose of establishing that the corporate d....
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.... M/s. Sivasakthi International adopting the similar modus of operandi by the corporate debtor is also brought forth in the Forensic Audit Report as well as in the application filed by the applicant/RP. However, the amount which is reflected is to the extent of Rs. 378.73 lakhs as compared to the one as given in relation to Trinity Papers India P. Ltd. After analysing the financial statements of the corporate debtor for the financial years 2016-17 ; 2017-18 and 2018-19 and it is again concluded in relation to the said M/s. Siva- sakthi International that there has been a clear case of diversion of funds and preferential transaction as per section 43 of the IBC, 2016. 10. Coming to the allegations as made in page No. 5 clause (b) relating to paragraph 8 of the application that former directors of the corporate debtor did not hand over the cash balance of Rs. 12.31 lakhs to the IRP when the CIRP commenced, attention of this Tribunal in support of the said allegation is drawn to page Nos. 31 and 39 of Volume I of the application by learned counsel for the RP and in this regard it is seen that the applicant seeks to rely upon the balance-sheet drawn by the corporate debtor as of Marc....
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....ution professional who is present in person represents that the said company is not a related party to his knowledge. 13. In relation to clause "d" of paragraph "8" as given in page No. 5 of the application concerning payments made to the customers and written off in a sum of Rs. 50.28 lakhs it is contended that the same is recoverable from the promoter-directors for causing wrongful loss to the corporate debtor. Learned counsel for the applicant for this purpose relies upon page No. 185, volume II, being the ledger account of VKS Agencies (India) P. Ltd., as maintained in the books of the corporate debtor read with the documents annexed at page No. 386 being the communication dated November 16, 2019 sent by M/s. VKS Agencies (India) P. Ltd., to one M/s. K. S. P. V. and Co., as a reply to the correspondence dated November 14, 2019 sent by the said M/s. K. S. P. V. and Co. 14. Learned counsel for the applicant places reliance to sustain the allegations made in the application upon the report of the Forensic Auditor and in this connection page No. 92 of the Forensic Auditor's report is pointed out. It is further submitted that a sum of Rs. 30.78 lakhs was written off on Apr....
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....ve the corporate debtor a sum of Rs. 50.28 lakhs that too when the corporate debtor is suffering huge loss and since the respondents are responsible for the write off, they are liable to contribute the said sum into the account of the corporate debtor. 18. In relation to clause "e" of paragraph "8" as given in page No. 5 of the application concerning loans given to the following parties, namely : Customer Amount (in lakhs) Hand loan-Lumba, Chennai 15.00 V. Kuppuswamy-loan 12.00 Loan-Subbulakshmi (K. N.) 6.00 Loan-Lakshmi Narasimman-Cni 4.00 Loan-Raj Kumar-Vadavalli, Cbe (Pionee) 3.49 Loan-Omni Paper Converters P. Ltd. 3.00 Total 43.49 and that the above loans have been subsequently written off. 19. It is the submission of learned counsel for the applicant in this connection that the corporate debtor had no objects for providing loans to the third parties. However, despite the same, loans have been given to the abovementioned parties as evidenced from the report of the Forensic Auditor given in page No. 92 of the typed set-volume II and the same has been subsequently written off as bad debts for the financial year 2018-19 with....
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...."2. In respect of its inventories : The inventories have been physically verified by the management at reasonable intervals during the year. In our opinion, the frequency of such verification is reasonable no material discrepancies were noticed at the time of verification." 23. It is hereby noted that the statutory auditors have given qualified opinion, wherein in the heading itself it has been stated that there is material uncertainty relating to going concern, the reporting paragraph begins as follows : "the borrowings from banks and financial institutions have been classified by the lenders as non-performing assets during the year, the company has filed an application to the National Company Law Tri bunal voluntarily on this regard." 24. Since there is reportedly material uncertainty relating to "going concern", as per their qualified opinion, the reliance of statutory auditors upon the management's representation at its face value, particularly, with respect to the value of inventory as on March 31, 2019 is a lapse from their side since the standard of care expected from them as statutory auditors of the company requires them to be vigilant such even....
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....cation under sections 43, 45 and 66 of the IBC, 2016. 29. Further, adverting to the contentions raised by learned counsel for the applicant, in so far as diversions of funds to the tune of Rs. 920.31 lakhs to M/s. Trininty Enterprises and M/s. Sivasakthi International is concerned, it was submitted by learned counsel for the respondent that the applicant has not mentioned the exact dates and nature of the alleged transactions, but has only stated that the corporate debtor had diverted the funds to the related party. Further, it was submitted that the applicant has not made any pleading concerning the relief sought regarding the preferential transaction and also the alleged related parties to whom transactions have been made, have not been arrayed as the respondents in the present application. 30. Learned counsel for the respondent further contended that it is wrong on the part of the applicant to state that the respondent has written off certain receivable and debt of the corporate debtor, since no write off has been made during the financial year 2018-19 as the alleged amount written off is still shown as part of the non-current assets of the company vide audited financial s....
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....used the records including the pleading placed on record. As already alluded supra, the applicant even though has filed the present application under sections 42, 45 and 66 of IBC, 2016 has restricted its relief only to section 66(2) of the IBC, 2016, save in relation to relief as sought for in sub- paragraph (c) of the relief portion in the application and as extracted in paragraph 4(c) of the instant order. In this context it is relevant to extract section 66 of the IBC, 2016, which is as follows : "66. Fraudulent trading or wrongful trading.-(1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit. (2) On an application made by a resolution professional during the corporate insolvency resolut....
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.... be a stark contrast in relation to section 66(1) and (2) of the IBC, 2016. It is needless to say that even the scope of sub-sections (1) and (2) of section 66 of the IBC, 2016 are different. While the former, i. e., section 66(1) places emphasis on the aspect of the intention of persons against whom allegations are made, be it is promoters/directors or third parties privy to such act, section 66(2) places emphasis more to say on the attitude of the directors in the conduct of the business prior to the insolvency commencement date, whether knowingly or they ought to have known that the business is heading towards insolvency, however, due diligence was not exercised with a view to minimise the potential loss to the creditors. Thus, in relation to section 66(1) of the IBC, 2016 the "mensrea" is required to be alleged and proved, in so far as the latter (i. e.,) section 66(2) is concerned, it will suffice that despite knowingly or at the least knowledge is expected of the directors of the impending insolvency, however, the directors have either chosen to ignore the distress signal or have done in a casual, whimsical or negligent manner the operations of the corporate debtor thereby re....
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....n is undervalued requires a different enquiry as per sections 45 and 46 of the Code and significantly, such application can also be made by the creditor under section 47 of the Code. The consequences of undervaluation are contained in sections 48 and 49. Per section 49, if the undervalued transaction is referable to sub-section (2) of section 45, the Adjudicating Authority may look at the intent to examine if such under valuation was to defraud the creditors. On the other hand, the provisions of section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons responsible therefor. We are not elaborating on all these aspects for being not necessary as the transactions in question are already held preferential and hence, the order for their avoidance is required to be approved ; but it appears expedient to observe that the arena and scope of the requisite enquiries, to find if the transaction is undervalued or is intended to defraud the creditors or had been of wrongful/fraudulent trading are entirely different. Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by sec....
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....rate debtor and resulting in insolvency, such accounting manipulation or legal infringement is required to be taken note of seriously, particularly by the CoC members, who have advanced substantial loans to the corporate debtor of public money ; in this case by State Bank of India and City Union Bank and to whom the directors or promoters who ran the business are accountable and to be held accountable when they start doing business not with their own capital but with finance from outside. Thus, when the Forensic Audit Report commissioned by the CoC itself returns with serious findings against the respondents, being the promoters, the same is required to be not ignored and is required to be taken in all seriousness. 40. In the circumstances, we direct the Investigative Wing of the Registrar of Companies, Coimbatore to conduct an inspection and inquiry and proceed in accordance with the report prepared under section 207 read with section 208 of the Companies Act, 2013. 41. Now turning our attentions to the two remaining relief which have not been dealt with till now in the reasoning portion of the instant order, namely : (b) Stocks diverted to the extent of Rs. 2,70,46....
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....esolution of the insolvency of the corporate debtor and the petition should not have been filed with a fraudulent or malicious intent, lest the person approaching this Tribunal should become liable to prosecution under section 65 of the IBC, 2016. While the yardstick in relation to the intention on the part of the petitioner approaching this Tribunal seeking for initiation of the CIRP in relation to the corporate debtor under any of the sections, namely be it 7, 9 or 10, is of equal importance, however, when a corporate debtor approaches this Tribunal under section 10 of the IBC, 2016 seeking for the initiation of CIRP on its own, the bar or standard is considerably raised higher in relation to the intention and honesty of purpose, namely the resolution of its insolvency, compared to others and towards the said intent and purpose, the corporate debtor is required to make a true, full and complete disclosures of its affairs as mandated under the provisions of IBC, 2016 as well as the Rules framed thereunder, namely, Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. The disclosures in particular made under form 6 of the said Rules and the annexures filed ....
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....olvency or liquidation'. Therefore, if, as contended by the Government of Karnataka, the CIRP had been initiated by one and the same person taking different avatars, not for the genuine purpose of resolution of insolvency or liquidation, but for the collateral purpose of cornering the mine and the mining lease, the same would fall squarely within the mischief addressed by section 65(1). Therefore, it is clear that the National Company Law Tribunal has jurisdiction to enquire into allegations of fraud. As a corollary, the National Company Law Appellate Tribunal will also have jurisdiction. Hence, fraudulent initiation of CIRP cannot be a ground to bypass the alternative remedy of appeal provided in section 61." 46. The law as laid down above has been followed in the subsequent decision rendered by the hon'ble Supreme Court in the matter of Beacon Trusteeship Ltd. v. Earthcon Infracon P. Ltd. [2020] 10 Comp Cas-OL 553 (SC) ; [2020] 158 CLA 382 (SC). 47. Both the above decisions taken together categorically point out that this Tribunal is required to consider the aspect of "fraud" of which it is vested with the jurisdiction not only in relation of initiation of ....