TaxTMI 
TaxTMI 
2022 (12) TMI 498
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....chi Bench, Kerala). 2. The 'Adjudicating Authority' (National Company Law Tribunal, Kochi Bench, Kerala), while passing the 'Impugned Order' dated 02.06.2022 in IA(IBC)/196/KOB/2021 in IBA/13/KOB/2020 (Filed by the '1st Respondent' / 'Resolution Professional') at Paragraph Nos.24 and 25 had observed the following: - "24. Issue Number (ii) : - It is seen from the records that this IA is filed on the basis of the report filed by the forensic auditor appointed by the Applicant. We have also gone through the report meticulously. In the report, the Forensic Auditor stated as under: - a) Agreement for sale of mortgaged land by the Corporate Debtor It is evident from the above-mentioned observations that, these transactions were deliberately entered into by the suspected Managing Director of the Corporate Debtor, for keeping assets of the Corporate Debtor beyond the reach of the Secured Creditor ie Federal Bank, as this land property was mortgaged as security with the Bank. Furthermore, actual facts were concealed from the bank by misrepresenting that no agreements were existing for the sale of the mortgaged property, while in fact, a sale agreement of the said property was in fo....
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.... to deceive the Corporate Debtor and the buyers 25. From the Forensic Audit it is clear that this is a fit case to direct the Respondents to make good the losses caused to the creditors of the Corporate Debtor as the transactions referred to in the earlier paragraphs are fraudulent transactions, holding that the Respondents are personally liable for such deliberate and wilful default. The Respondents 1 to 6 are jointly and severally responsible to pay Rs. 2,94,77,269/- (Rupees Two Crore Ninety Four Lakh Seventy Seven Thousand Two Hundred and Sixty Nine Only) with interest @ 12% per annum to the account of the Resolution Professional of the Corporate Debtor within two weeks from the date of receipt of this order. and 'disposed of' the said 'Interlocutory Application'. Appellants' Submissions: 3. Challenging the 'impugned order' dated 02.06.2022 in IA(IBC)/196/KOB/2021 in IBA/13/KOB/2020 passed by the 'Adjudicating Authority', (National Company Law Tribunal, Kochi Bench, Kerala), the Learned Counsel for the 'Appellants' submits that the the 'Adjudicating Authority', (National Company Law Tribunal, Kochi Bench, Kerala), while passing the 'impugned order' on 02.06.2022 in IA(IBC)/....
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....to the 'Facts and Circumstances' of the 'Instant Case'. 7. The Learned Counsel for the 'Appellants' submits that the 'Adjudicating Authority', (National Company Law Tribunal, Kochi Bench, Kerala) had himself interpreted the 'Decision' of this 'Tribunal' in 'Aditya Kumar Tiberwal Vs. Omprakash Pandey and Ors. (Comp. App. (AT) (Ins) No.583 of 2021) and in any event the 'impugned order' is in violation of the 'Law' laid down by the Hon'ble Supreme Court in the matter of 'Central Board of Trustees v Indore Composite Pvt. Ltd., (2018) 8 SCC 443 is as under: - "14) Indeed, in the absence of any application of judicial mind to the factual and legal controversy involved in the appeal and without there being any discussion, appreciation, reasoning and categorical findings on the issues and why the findings impugned in the writ petition deserve to be upheld or reversed, while dealing with the arguments of the parties in the light of legal principles applicable to the case, it is difficult for this Court to sustain such order of the Division Bench. The only expression used by the Division Bench in disposing of the appeal is "on due consideration". It is not clear to us as to what was that ....
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....cy Act, 1986, which is extracted hereunder; 213 Fraudulent trading. (1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect. (2)The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company's assets as the court thinks proper. 10.4 On analysing Section 66(2) of BC, 2016 it is to be seen that it deals with 'Wrongful Trading' and for a transaction to qualify under Section 66(2) the following conditions must be satisfied; (a) Liability can be fixed upon only 'Director' or 'Partner'; (b) They knew, or ought to have concluded that there was no reasonable prospect of voiding insolvency proceedings; (c) They did not take due diligence with a view to minimising the potential loss to the company's creditors; 10.5 It can be seen that Section 66(1) of BC, 2016 is akin to the prov....
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....fficient for the payment of its debts and other liabilities and the expenses of the winding up. (6A) For the purposes of this section a company enters insolvent administration if it enters administration at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the administration. (7) In this section "director" includes a shadow director. (8) This section is without prejudice to section 213. 10.6 Thus, there seems to be a stark contrast in relation to Section 66(1) and 66(2) of BC, 2016. It is needless to say that even the scope of sub - section (1) and (2) of Section 66 of BC, 2016 are different. As to the present case, the Applicant sought the Respondents to make contribution to the Corporate Debtor, under Section 66(2) of IBC, 2016. 10.7 The essence of sub-section (2) of Section 66 of IBC, 2016 seems to be that the Directors and Partner should have acted reasonably and responsibly in the time preceding the company's insolvency to avoid wrongful trading proceedings. They must always have put creditors' interests first, and not work for their own benefit. In other words, the Creditor could recover the money ....
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....Court in this regard, the following acts, but not limited to, would amount to 'Wrongful Trading'; (i) Repaying the director loan made to the Company while other creditors were not paid; (ii) Repayment of a loan to a family member; (iii) A director paying his own salary whilst the salary for the employees was not paid; (iv) Buying goods on credit when there is no means to pay for them; (v) Using Customer deposits for cash-flow purposes with no means of supplying goods; (vi) Repaying bank personal guarantees over other creditors; (vii) Not keeping proper accounting records; (viii) Falsification of company records; (ix) Any transfer or sale of assets at anything less than a fair and reasonable commercial value; 10.11 By keeping in mind the scope of Sub-Section (2) of Section 66 of IBC, 2016, this Tribunal is required to examine as to whether the transactions as alleged by the Applicant in the present Application against the Respondents would fall within the confine of 'Wrongful Trading' that is to say that whether the Directors of the Corporate Debtor knew, or ought to have known that there was no reasonable prospect of avoiding insolvency proceedin....
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.... 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. 10.12. From the above judgment of the Hon'ble Apex Court, it is to be noted that specific material fact in relation to the transaction which is sought to be challenged by the Resolution Professional is required to be pleaded in the Application. As to the present case, the Applicant sought to reverse the transactions purported to be done by the Respondents under Section 66 of BC, 2016. Also in the present case, the Applicant has not specifically pleaded as to which transactions he is sought to be reversed under Section 66(1) of BC, 2016 and which transactions falls under Section 66(2) of IBC,2016. 10.13. From the averments and in the submissions made by the Applicant, it is seen that the Applicant is trying to make a sweeping allegation by stating that there were impairments of assets just simply by relying upon the Report of the Auditor. However, the Learned Counsel for the Applicant has miserably failed to prove that the Resp....
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....ion 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 Sections 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. 29.2. In the present case, it is noticed that NCLT in its detailed and considered order essentially dealt with the features of the transaction in question being preferential at a relevant time but recorded combined findings on all these three aspects that the impugned transactions were preferential, undervalued and fraudulent. Appropriate it would have been to deal with all these aspects separately and distinctively. 29.3. We are conscious of the fact that IBC is comparatively a new legislation and various aspects expected therein are in the progression of taking proper shape, pa....
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....resorted to, as opined by this 'Tribunal'. No wonder, a 'Creditor', who was defrauded, will have 'recourse' to an 'alternative remedy', under 'Civil Law'. 36. In the instant Case 'on hand', the 'Appellant' / 'Applicant' before the 'Adjudicating Authority' (National Company Law Tribunal, Division Bench - II, Chennai) had filed IA(IBC)/489(CHE)/2021 in IBA/1099/2019 under Section 66 (1) of the Insolvency and Bankruptcy Code, 2016. In this connection, this 'Tribunal' significantly points out that in respect of an 'Application' (Filed under Section 66 of the Insolvency and Bankruptcy Code, 2016) 'Fraudulent Trading' / 'Wrongful Trading', by the 'Applicant' / 'Resolution Professional' is concerned, 'Tangible Materials' / 'Relevant Facts' are to be pleaded in an 'Unambiguous and Unequivocal Terms', by supplying the necessary details / facts as the case may be. 37. It transpires that the 'Appellant' / 'Applicant' in IA(IBC)/489(CHE)/2021 in IBA/1099/2019 that the 'Appellant' / 'Applicant' had prayed for issuance of 'Direction' to the Respondent 'jointly' and 'severally' to contribute to the 'Assets' of the 'Corporate Debtor', by paying a sum of Rs.75.63 Crore along with 18% interest f....
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....ion Professional', had sought a 'Relief' before the 'Adjudicating Authority', (National Company Law Tribunal, Kochi Bench, Kerala) to pass an 'Order' against the 'Respondents 1 to 6 therein, 'jointly' and 'severally' to contribute Rs.66,70,200/-, being the 'amount' 'withdrawn' from the 'Corporate Debtor', by the 'Directors', from the 'amount' received, against the 'Share Purchase Agreement', executed with Sri Ramani Resorts and Hotels Private Limited with an interest at the rate of 24% per annum for the entire consideration of Rs.1,00,00,000/-, from the date of 'Receipt', till the date of 'Payment'. Besides this, the '1st Respondent' / 'Petitioner' / 'Resolution Professional' had sought 'Relief' against the Respondent Nos.1 to 6 therein, to 'jointly' and 'severally' to contribute Rs.43,87,415/-, being the 'Amount' 'withdrawn' by the 'Directors' from the 'Corporate Debtor', received against the 'Share Purchase Agreement', executed with 'Basel Products India Private Limited', with an 'interest', at the rate of 24% per annum, for the 'entire consideration' of Rs.1,00,00,000/-, from the date of 'Receipt' till the 'date of payment'. 18. The stand of the '1st Respondent' / 'Petitioner' ....
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....jects a 'Plea', that the 'allegations of Fraud', against the '1st Appellant' / '1st Respondent' in IA(IBC)/196/KOB/2021 in IBA/13/KOB/2020 are 'baseless' and 'contrary' to the fact on 'Record'. Moreover, the 'Share Purchase Agreement' with Sri Ramani Resorts and Hotels Private Limited dated 21.11.2022 had not created 'any Debt', upon the Company. Further, the facts on 'Record' indicate that Section 66 of the I&B Code, 2016 is not fulfilled and that the 'Directors' had endeavoured their best, to avoid the 'Insolvency Resolution Process', and continued to 'Litigate' the matter before the 'Hon'ble Supreme Court, on their own risk. 23. It is the version of the '1st Appellant' / '1st Respondent' that in the 'Financial Year 2020-2021' viz., immediately, before the 'Insolvency commencement' date of the 'Corporate Debtor', the Directors had infused their own funds into the 'Company'. It is clear from the 'Record' that the 'Agreement' with 'Basel Products India Private Limited' was concluded on 03.09.2018 and by this time, the 'Agreement' with Sri Ramani Resorts and Hotels Private Limited had already expired and that the 'Respondents' were invoked the 'Appellant' to protect the 'Financial ....
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..../KOB/2021 in IBA/13/KOB/2020 was filed on 09.11.2021, well within the 'permissible time limit' of '135 Days', as per Regulation 35 (3) of the IBBI (Insolvency Regulation for Corporate Persons), Regulations, 2016. In fact, as on 09.11.2021, the 'number of days' of the 'CIRP' was '224 days' and after excluding '90 days', from the CIRP period, by virtue of an 'Order', passed by the 'Adjudicating Authority' (National Company Law Tribunal, Kochi Bench, Kerala), in IA(IBC)/129/KOB/2021 in IBA/13/KOB/2020 and IA(IBC)/196/KOB/2021 in IBA/13/KOB/2020 are in time. Besides this, the 'time limit' specified under the 'Regulation' is not a 'mandatory one' and it is only a 'Directory' in 'character'. 28. According to the '1st Respondent' / 'Petitioner' (before the 'Adjudicating Authority' - National Company Law Tribunal, Kochi Bench, Kerala) that the '6th Respondent' in IA(IBC)/196/KOB/2021 in IBA/13/KOB/2020 was a 'Director' of the Company for 19 years, since 21.10.2003 and further he is liable for the 'act(s)' committed during his tenure, especially, when he had not denied any of the 'Transactions'. Apart from that the 'Claim' that the 6th Respondent (to IA(IBC)/196/KOB/2021 in IBA/13/KOB/2020....
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....er for a meagre sum of Rs.30.74 lakh. Subsequently, the 'Corporate Debtor' filed a 'Civil Suit OS 127 of 2011 before the Learned District Munsiff Court, Nagercoil, to cancel the said 'Transaction' and the matter is pending. Unless the said 'Transactions' are reversed, the 'Appellants' / 'Respondents' are liable to 'indemnify' the 'Corporate Debtor', for such losses. 33. The stand of the '1st Respondent' / 'Applicant' is that after cancellation of 'Power of Attorney' and when the 'Financial Creditor' had enquired into the matter, the 'Appellants' / 'Respondents' had entered into an 'Agreement' and in fact the 'Appellants' / 'Respondents' had stated that no such 'Transactions' were executed and, therefore, the 'Transactions' are 'Fraudulent' in nature, the same being entered into with an intention to deceive the 'Creditors', etc., in reality, the 'Appellants' / 'Respondents' had not denied any of the 'Execution of the Documents', 'Deeds' and 'Transactions'. 34. Apart from that, the 'present Claim' of 'Ramani Resorts' admitted by the 'Resolution Professional' is Rs.5,65,98,301/- and, therefore, the 'Director' with an intention to 'cheat' the 'Creditors' had entered into such 'Agreem....
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....sess the Share' and, therefore, the 'entire Transactions', are 'Fraudulent', which created a 'huge liability' on the 'Corporate Debtor'. Burden of Proof : 38. It is pertinently pointed out by this 'Tribunal' that the 'Resolution Professional', is empowered to 'file' / 'initiate' proceedings for 'Fraudulent' or 'Wrongful Trading'. Furthermore, if the 'Whole Business of Company', is to 'Defraud', then, the ingredients of Section '66' of the I&B Code, 2016 are fulfilled. Undoubtedly, the 'Resolution Professional' is to prove that the 'Business' of the 'Corporate Debtor' was carried out with an 'intent' to 'Defraud' the 'Creditors' of the 'Corporate Debtor' or for any 'Fraudulent Purposes'. In fact, the 'intent' to 'Defraud', is to be 'judged' by its 'effect on the individual', who is an 'object of conduct', in question. To attract the ingredients of Section 66 of the I&B Code, 2016, it is not an 'essential factor', that there should be a 'Debtor' and 'Creditor', relationship. 39. Be it noted, that the expression 'party' to the carrying on of a 'Business', indicates taking positive steps in carrying on the Company's Business in a 'Fraudulent Manner'. In this connection, this 'Tribun....
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....Liability', is whether the 'Director' had exercised 'General Knowledge', 'Skill' and 'Experience', to be expected of a 'Person', carrying out the 'Functions'. The 'Foundation' for the 'Liability', is to whether the 'Concerned' knew or should have known, from the reasonable, and prudent Homo sapiens' perspective. 45. It is brought to the fore that IA(IBC)/196/KOB/2021 in IBA/13/KOB/2020 was filed by the '1st Respondent' / 'Resolution Professional' as 'Petitioner', based on the 'Report' filed by the 'Forensic Auditor', appointed by the 'Resolution Professional'. 46. In the instant case, at this juncture, it is worthwhile for this 'Tribunal' to advert to the 'contents' of the 'Forensic Auditor's Report' as made mention of by the 'Adjudicating Authority', ('Tribunal') in the 'impugned order', which runs as under:- a) "Agreement for sale of mortgaged land by the Corporate Debtor. It is evident from the above-mentioned observations that, these transactions were deliberately entered into by the suspended Managing Director of the Corporate Debtor, for keeping assets of the Corporate Debtor beyond the reach of the Secured Creditor ie Federal Bank, as this land property was mortgaged a....
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....ith M/s Sri Ramani Resorts and Hotels Pvt. Ltd is an intentional violation of the clauses of the original SPA. The intention of K.N.Narayanan Namboodiripad, the suspended Managing Director for entering into such an agreement is suspected to deceive the Corporate Debtor and the buyers. 25. From the Forensic Audit it is clear that this is a fit case to direct the Respondents to make good the losses caused to the creditors of the Corporate Debtor as the transactions referred to in the earlier paragraphs are fraudulent transactions, holding that the Respondents are personally liable for such deliberate and wilful default. The Respondents 1 to 6 are jointly and severally responsible to pay Rs. 2,94,77,269/- (Rupees Two Crore Ninety Four Lakh Seventy Seven Thousand Two Hundred and Sixty Nine Only) with interest @ 12% per annum to the account of the Resolution Professional of the Corporate Debtor within two weeks from the date of receipt of this order." 47. From the contents of the 'Forensic Auditor's Report', the 'Status Report' filed by the '1st Respondent' / 'the Resolution Professional', as aforementioned, and also on the 'basis' of 'facts and circumstances' of the instant Case, it....