TaxTMI 
TaxTMI 
2023 (2) TMI 670
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....in T.P. No.198/CTB/2019 arising out of CP(IB) No.4686/CTB/2019. By the Impugned Order, the Adjudicating Authority dismissed the application filed by the Resolution Professional (present Appellant) under Sections 43 and 66 of the IBC seeking avoidance of certain preferential and fraudulent transactions carried out by the suspended directors of the Corporate Debtor. Aggrieved by this impugned order the present appeal has been preferred. 2. Put briefly, the factual matrix of the present case, necessary to be noticed for deciding the appeal are as follows: Tayal Foods Ltd/Corporate Debtor was admitted into Corporate Insolvency Resolution Process ("CIRP" in short) on 03.10.2019. The Appellant was initially appointed as Interim Resolution Professional and later confirmed as Resolution Professional on 20.12.2019 with the approval of Committee of Creditors ("CoC" in short). Towards conduct of the CIRP process, the Resolution Professional sought documents and information pertaining to the Corporate Debtor from the suspended management. Since the documents were allegedly not provided by the suspended management of the Corporate Debtor, the Resolution Professional filed a....
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....rds, having come to the opinion that some suspicious transactions had been undertaken by the suspended management which needed auditing, the Resolution Professional appointed a TA. To conduct the exercise of transaction audit, the TA sought documents from the suspended management of the Corporate Debtor. However, as no documents were provided by the suspended management despite repeated reminders, the TA proceeded ahead on the basis of documents provided by members of CoC which included the financial statement, bank statement and stock audit report. Having audited the documents, the TA had arrived at the conclusion that certain transactions fell in the category of Sections 43 and 66 of the IBC and included it in his draft TAR. The draft TAR was sent by the Appellant to the suspended management by email on 11.09.2020 for their comments. But it did not elicit any response. Thereafter the TA finalized the Transaction Report which the Resolution Professional sent by email to the suspended management on 29.09.2020 for comments which also remained un-responded. In the interim, since the CoC had approved the Resolution Plan, the Resolution Professional had already moved a Section 30 appli....
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....s tour expenses, the Learned Counsel for the Appellant challenged this finding on the ground that there are no documents substantiating the expenditure and with the Corporate Debtor having turned into NPA on 13.03.2018, this expenditure for promotion or expansion of business is not justifiable. The fourth transaction relates to transfer of Rs. 1,11,60,000/- from December 2017 to February 2018 to Jaipal Consultancy Pvt. Ltd./Respondent No. 4. It has been submitted that this company was incorporated on 10.10.2017 with Respondents No.1 and 2 as Directors for the purpose of siphoning funds from the bank account of the Corporate Debtor. It has been submitted that the above preferential transactions meet all the ingredients of Section 43 of there being an antecedent debt; preference having been shown to related parties; and transactions not being in the ordinary course of business which has been missed out by the Adjudicating Authority. 6. It is further submitted that the suspended directors had entered into fraudulent sale of stocks with fictitious debtors and misrepresented the stock statement which attracts Section 66 of IBC. The TA after reviewing the Balance sheet and Stock state....
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....ay from ICD. It was, therefore, pointed out that this delay of nearly 17 months is violation of Regulation 35-A thereby rendering the application non-maintainable. Further it was argued that the excuse made by the Appellant of non-cooperation by the suspended management is based on flimsy grounds since the Respondents had handed over the factory to the Resolution Professional in 15.10.2019 along with all documents lying at the premises. It was thus submitted that the Adjudicating Authority had rightly dismissed the application filed by the Appellant under Sections 43 and 66 of the IBC Code on the grounds that there was delay on the part of the Resolution Professional in filing the application in breach of timelines specified and that no opinion has been formed and no determination made by the Appellant as required under Regulation 35-A. 9. The Learned Counsel for the Respondents further denied that the ground raised by the Resolution Professional of lack of cooperation from the erstwhile management of the Corporate Debtor which had led to the filing of Section 19(2) application by the Resolution Professional was not based on facts. It was stated that the Resolution Professional ....
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....e TAR cannot be relied upon since there is no definite conclusion made to establish whether the transactions have taken place in the ordinary course of business or otherwise. 11. We have duly considered the detailed arguments and submissions advanced by the Learned Counsel for both the parties and perused the records carefully. 12. The principal issues before us for consideration are as delineated under: - (i) Whether the application filed by the Resolution Professional with regard to transactions under Sections 43 and 66 is rendered non-maintainable on grounds of non-compliance to Regulation 35-A if it is not filed on or before 135th day of ICD and if formation of opinion and making a determination on such transactions does not take place on or before the 75th day and 115th day of ICD respectively and whether these periods stipulated by the said Regulation is mandatory or directory. (ii) Whether the transactions conducted by the Respondents which find mention in the application of the Resolution Professional were not in the ordinary course of business and thus fell in the category of preferential transactions and fraudulent trading in terms of Sections 43 a....
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....ompleted by 25.01.2021 being the 115th day of ICD. The Respondents have claimed that the Appellant had failed to follow the time period prescribed under Regulation 35-A to form an opinion on or before the 75th day of ICD and thereafter to make a determination on or before 115th day of ICD. The Learned Counsel for the Respondent contended that the vital essence of Regulation 35-A to form an opinion and determination being missing, this amounted to violation of Regulation 35-A. We find that the Adjudicating Authority in the impugned order has also held that it is not convinced with the submissions of Resolution Professional on not adhering to specified timelines. 16. Challenging the impugned order, the Learned Counsel for the Appellant contended that the timelines prescribed under Regulation 35-A are not mandatory but directory in nature. In support of their contention reliance has been placed on the judgment of this Tribunal in Aditya Kumar Tibrewal v. Om Prakash Pandey, 2022 SCC Online NCLAT 142. We find that this Tribunal in the above matter has deliberated at length on whether the time-period prescribed in Regulation 35-A is mandatory or directory. This Tribunal has held there....
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....ver, a power or authority is conferred with a direction that certain regulation or formality shall be complied with, it would neither be unjust nor incorrect to exact a rigorous observance of it as essential to the acquisition of the right of authority." The Tribunal has therefore held that timeline prescribed in Regulation 35-A of CIRP is directory and not mandatory and has held as follows: - "11. viii ........ One of the objective of the Code is to maximize the assets of the Corporate Debtor. In event the actions taken by the Resolution Professional after the timeline prescribed in Regulation 35A of the CIRP regulations are to be annulled, the undervalued and fraudulent transactions will go out of the reach of the Resolution Process, reach of the Court and shall cause great inconvenience and injustice to Corporate Debtor. Hence, we are of the view that timeline prescribed in Regulation 35A of the CIRP Regulations is only directory and any action taken by the Resolution Professional beyond the time prescribed under Regulation 35A of the CIRP Regulations cannot be held to be non-est or void only on the ground that it is beyond the period prescribed under Regulation 35A ....
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....g of Section 19(2) application has also been placed by way of an additional affidavit (page 37-67). These repeated reminders, to our mind, substantiates the contention of the Appellant that cooperation was not forthcoming from the ex-management. 19. It has also been submitted that on account of non-cooperation in furnishing of information by the suspended management, the Resolution Professional was compelled to file a Section 19 application on 15.11.2019 before the Adjudicating Authority. We also note that the reminder emails mentioned in the immediately preceding paragraph seeking information/documents also formed part of record before the Adjudicating Authority in the Section 19 application. Further, the Learned Counsel for the Appellant submitted that delay was also on account of delayed receipt of TAR. The TA's work was hindered due to outbreak of COVID-19 and consequential lockdown. Since the scourge of the Covid-19 pandemic was raging during this period, this explanation is not unfounded. Cumulatively seen, we are therefore satisfied that the reasons for delay in submission of application under Sections 43 and 66 of IBC as put forth by the Appellant have sufficient force i....
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....y the transaction auditor, etc. Such factors often being outside the control of the Resolution Professional, there is therefore a distinct possibility of delay in making a determination, beyond the timelines specified in the CIRP Regulations. While admitting some delay in determination of opinion by the Resolution Professional in the present case, it was submitted that this was on account of delay in submission of report by the TA and for this delay the fault was attributable to the suspended management as documents were not provided by them to the TA despite repeated reminders. We also note that the draft TAR prepared by the TA was sent by the Appellant to the suspended management by email on 11.09.2020 for comments. But it did not elicit any response. Even the final TAR which was sent by email to suspended management on 29.09.2020 for comments remained un-responded. We therefore have no hesitation in pointing out that the suspended management of the Corporate Debtor by not parting with information on time and refusing to comment on the final TAR has also been a critical and contributory factor in causing delay in the determination of the opinion and to that extent cannot be absol....
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.... down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44. (2) A corporate debtor shall be deemed to have given a preference, if- (a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and (b) the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53. (3) For the purposes of sub-section (2), a preference shall not include the following transfers- (a) transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee; (b) any transfer creating a security interest in property acquired by the corporate debtor to the extent that- (i) such secur....
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....r as it may deem fit, if- (a) before the insolvency commencement date, such director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and (b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor. Explanation.-For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor. 27. Next, we take note of the findings returned by the Adjudicating Authority in this regard which is as extracted hereunder: "................this Tribunal is not convinced with the submissions of RP on not adhering to specified timelines or bringing in sufficient reasons that transactions referred therein are convincingly fraudulent or preferential. Such, transactions have been sufficiently e....
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....relevant time is reckoned, as per sub-section (4) of Section 43 of the Code, in two ways: (a) if the preference is given to a related party (other than an employee), the relevant time is a period of two years preceding the insolvency commencement date; and (b) if the preference is given to a person other than a related party, the relevant time is a period of one year preceding such commencement date..... ****** ****** ****** 21.4. Sub-section (3) of Section 43 specifically excludes some of the transfers from the ambit of sub-section (2). Such exclusion is provided to: (a) a transfer made in the ordinary course of business or financial affairs of the corporate debtor or transferee; (b) a transfer creating security interest in a property acquired by the corporate debtor to the extent that such security interest secures new value...... ****** ****** ****** "28.6.1.......It remains trite that an activity could be regarded as 'business' if there is a course of dealings, which are either actually continued or contemplated to be continued with a profit motive. As regards the meaning and essence of the expression "ordinary course of business", reference ....
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...., this transfer was for meeting personal needs and thus fell outside the scope of day to day operations and therefore not in the normal course of business. This related party transaction took place on 21.03.2018 and hence was within the look back period. 31. The second transaction in question is a sum of Rs.3 lakh transferred by the Corporate Debtor to Meena Agarwal/Respondent No. 2, an erstwhile Director of the Corporate Director purportedly for her emergent medical needs on 17.01.2018 which happens to be within the look back period. However, the medical records filed by the Respondents without accompanying bills pertain to a period between 01.04.2019 to 03.04.2019 which is nearly one year after the date of transfer of funds and hence the expenditure cannot be viewed as expenditure to meet emergent medical needs. In any case, medical expenses should have been cleared from the personal account of Respondent No.2 not being an expense incurred in the ordinary course of business of the Corporate Debtor. The reason for medical emergency seems to be an afterthought to justify the transaction since the amount was withdrawn on 17.01.2018 while Meena Aggarwal was admitted in the hospita....
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....he TA found that Respondent No.4 does not exist on the GST portal and did not complete annual filing with the Registrar of Companies. The TA has noted that there is no explanation available on record as to the purpose and nature of these payments. No records were submitted to establish regular or repetitive business transactions with these parties in the past. There is not much to show either by the Respondents that the above transactions were part of an undistinguished and undisputed common flow of business. What is more intriguing is that the Adjudicating authority in the impugned order has not even commented on this transaction having erroneously noted that the Appellant has not pressed allegation against Respondent No.4. This gross error seems to have occurred because the Adjudicating Authority had simply copied the submissions made by the present Respondents without applying own judicial mind. In this regard, we note that the Learned Counsel for the Appellant asserted that such practice of copy and paste has been castigated by the Hon'ble Supreme Court and placed reliance in the judgement delivered in the matter of UPSC v. Bibhu Prasad Sarangi (2021) 4 SCC 516. 35. The last....