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2021 (3) TMI 552
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....6 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 is made to the relief portion of the application....
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....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 debtor had diverted a sum of Rs. 541.58 lakhs to a related party, viz., Trinity Papers India P. Ltd., the attention of this Tribunal is ....
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....ort 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 March 31, 2019 as well as notes to the balance-sheet as of March 31, 2019. From the balance-sheet as of March 31, 2019 it is pointed out by learned....
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....age 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 April 1, 2018 while correspondingly the payment is stated to have been made subsequently on June 28, 2018. It is also averred by the applicant that in relation to the transaction as betw....
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....ntribute 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 without furnishing proper documentary evidence and particularly in light of the financial stress which had induced the corporate debtor to file the petition seeking for initiation of the CIRP under section 10 of the IBC, 2016. The ....
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....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 eventualities like threat to the statusquo of going concern while relying upon management's representation. They have opined that the frequency of physical verification by the management at reasonable interval during the year is reasonable and no material discrepancies were noticed at the time of verifica....
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....unsel 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 statements of the company for the financial year 2018-19, which was duly signed by the suspended board and the applicant himself and as such it was submitted that the respondent is unable to comprehend, as to how the Forensic Auditor has reported that a sum Rs. 1,524.55 lakhs has been written off for the financial yea....
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....lief 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 resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if- (a) before the insolvency commencement date, such director or partner knew or ought to have known....
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....es 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 resulting in loss to the creditors of the corporate debtor. As to the present case, the applicant sought the respondents to make contribution to the corporate debtor, under section 66(2) of the IBC, 2016 in relation to the pre-dominant of the reliefs claimed, save, one stated in paragraph supra. 37. In so far the instant case is concerned, the applicability of section 66(3) of the IBC, 2016 may not be of ....
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....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 section 45/46/ 47 or section 66 of the Code. As noticed, the scope of enquiry in relation to the questions as to whether a transaction is of giving preference at a relevant time, is entirely different. Hence, it would be expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority." 39. From the above judgment of the hon'ble apex court, it is to be ....
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.... 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. 2,70,46,147 and (c) Recovery of the cash balance of Rs. 12.31 lakhs 42. In relation to the diversion of the stocks to the extent of Rs. 2,70,46,1477.15 concerned, the applicant in their application and in the written submissions have pleaded that the respondents had declared various stock values at short intervals which does not match with the books of account of the corporate debtor and also there is a sudden decrease in the val....
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...., 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 thereunder are of significant importance for this Tribunal coming to a conclusion the existence of insolvency of the corporate debtor and for initiating the CIRP for its resolution. Thus, furnishing any misleading, wrongful or fraudulent information will in itself vitiate the petition and the proceedings if any initiated thereunder. 44. Thus, any non-co-operation or lack of co-operation on the part of the corporate debtor, its promoters, manage....
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....s 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 CIRP upon a petition being admitted on the part of the parties approaching it, but also of the corporate debtor and its promoters/management in its dealings. 48. Thus the allegations made by the applicant in support of the relief (c) of the respondents not handing over the cash balance as reflected in the financial statements for the year ended March 31, 2019 in a sum of Rs. 12.31 lakhs, it is seen that since the CIRP of the corporate debtor was in itself initiated ....