TaxTMI 
TaxTMI 
2024 (10) TMI 155
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Resolution Professional of the Corporate Debtor impugning certain transactions of the Corporate Debtor prior to Resolution/Liquidation Process of the Corporate Debtor under the Code and consequently seeking for a declaratory and other relief(s) by this Adjudicating Authority. Narration of facts by the Resolution Professional: 2. An application for initiation of Corporate Insolvency Resolution Process against the Corporate Debtor was filed by Edelweiss Asset Reconstruction Company Limited under section 7 of the Code. The Corporate Debtor was admitted into CIRP on 27-3-2019 vide an order passed by this Tribunal in CP/1055/IB/2018 and Mr. Pankaj Srivastava was appointed as the Interim Resolution Professional to carry out the functions mentioned under the Code. 3. Pursuant to the receipt of the aforesaid order on 12-3-2018, the IRP made a Public Announcement on 29-3-2019 in accordance with Section 15 of the Code read with Regulation 6 of Chapter III of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. 4. In the course of the 2nd Committee of Creditors ("CoC") meeting held on 27-5-2019, a resolution was....
X X X X Extracts X X X X
X X X X Extracts X X X X
....te transactions were reported. 10. It is stated that the transaction auditor reported certain transactions, which in the considered opinion of the Applicant cast serious doubt that the same may either be preferential, fraudulent or wrongful and therefore, the Applicant has preferred the present Application. 11. According to the Applicant, following heads of transactions are the 'Fraudulent Transactions' which are sought to be remedied by way of this Application: CONSOLIDATED TABLE OF FRAUDULENT TRANSACTIONS Particulars of the Transaction Total Amount A - Share Application money converted to Loan Rs. 16,72,11,639/- B - Investments to Related Parties Rs.12,22,36,108/- C - Unaccounted Rental Incomes Rs. 31,20,000/- D - Unjustified Salary Amount Rs.52,84,560/- TOTAL Rs. 29,78,52,307/- 12. A - CONVERSION OF SHARE APPLICATION MONEY TO UNSECURED LOAN: 12.1 It is stated that on perusal of the Transaction Audit report (hereinafter referred to as the 'Report') it can be inferred that the corporate entities M/s. City Square Enterprises (P) Ltd (hereinafter referred to as 'Respondent No. 5') and M/s. New....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tune of Rs, 6,71,73,170. It is stated that the arbitrary conversion of share application money to loan amount had been done with anintent to defraud the creditors of the Corporate Debtor herein thereby casting a strong cloud of suspicion on the impugned agreements itself. It is stated that the Audited Balance Sheet and e-Form AOC-4 filed with Ministry of Corporate Affairs for the year ending on 31-3-2015 show that these amounts were the share application money but the alleged agreements were dated 29-1-2015. 12.6 It is stated that the required Stamp Duty was not paid for the consideration involved in the agreements and these were not the registered agreements. The Corporate Debtor had not obtained any consent from the secured Financial Creditor before entering into such agreements with other parties as the Financial Creditor had a security interest created in its favor for the said properties. 12.7 It is stated that the Loan cum Lease agreement entered for office property located at "Royal Corner" says that all the 6 units are given to Respondent No. 3 but during physical verification of property by the applicant, it is found that 2 office units were given on rent....
X X X X Extracts X X X X
X X X X Extracts X X X X
....015 by virtue of which the possession of properties forming part of subject matter of agreements was vested with the Respondent No. 3. 12.11 Based on the above, it is stated that the aforementioned facts portray the uncertainty as the validity and correctness of the Loan cum lease agreement and do not appear to give any rights to Respondent No. 5 to keep in their control and custody, the assets owned by the Corporate Debtor when the Corporate Debtor is undergoing CIRP. 12.12 It is stated that the Authorized Representative of the suspended Directors of the Corporate Debtor had filed two Claim Forms to the IRP vide an email dated 27-5-2019 of Respondent No. 5 and 6 which were acknowledged by the Applicant vide an email dated 29-5-2019. Subsequently, the IRP vide an email dated 31-5-2019 sought for clarifications on the nature of transactions between the Respondents Nos. 5 and 6 herein with the Corporate Debtor and also sought for documents evidencing the existence of such transactions. 12.13 It is stated that the Applicant had sought for loan agreements and/or any supporting documents in relation to the transactions between the Corporate Debtor, Respondent ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rties, most of which were related to the Corporate Debtor. The applicant has formulated a table showing the investments made by the Corporate Debtor with various entities. 13.3 It is stated that the Corporate Debtor made huge investments into numerous entities which are the related parties to the Corporate Debtor despite the Ancillary objectives of the Corporate Debtor allow the investments to be made, which can be only out of the surplus funds or for advancing the main objects of the Company. It is stated that the Corporate Debtor had been used as a tool to route money and create a diversion of funds to various companies without determining or analyzing the actual risks involved in the company. It is also stated that some of them have been struck-off as per the public records available in the website of the Ministry of Corporate Affairs. 13.4 It is stated that during the FY 2016-17, post the sales of fixed assets of the company, a further investment of Rs. 4,86,13,000 was made in M/s. Sagar Power NP Ltd. It is stated that when the Corporate Debtor was having other creditors including a secured creditor to whom a total liability of Rs. 16.49 Crores was owed as on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....average of about Rs. 88,000/- were made. However, in the month of March 2016, the salary payment suddenly jumped up to Rs. 52,84,560/- (Rupees fifty two lakhs eighty four thousand five hundred and sixty only) with no reasonable explanation. It is further stated that such unreasonable payment in cash has been clearly done as a means to siphon off money from the account of the Corporate Debtor by the ex-management, and is hit by Section 66 of the Code, having been carried out with a fraudulent intention to prejudicially affect the creditors of the Corporate Debtor. 16 In conclusion, it is stated that the erstwhile promoter and the respondents who have been unduly benefitted out of the various aforementioned transactions of the Corporate Debtor have fraudulently entered the transactions covered under section 66 of the Code and they reaped the benefits of some fraudulent transactions and thus they should be held accountable and liable for the losses sustained by the other creditors of the Corporate Debtor who have been prejudiced by the tainted actions of the erstwhile promoters/management of the Corporate Debtor and the respondents. The Applicant has placed on record the following ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uding the creditors. That the RP cannot enlarge the scope of the Transaction Audit to question every transactions which have been entered since 2014. * With respect to the investments by the Corporate Debtor, is stated that the investments made thereof are not made in any manner prejudicial to the interest of the Corporate Debtor, its creditors or its stake holders. That all the investments were made in accordance with the provision of 186 of the Companies Act, 2013 at arm's length. * That the salary payments were also made with bonafide intent and there is no element of fraud in the same. * On merits, the respondents by indicating & extracting several portions of the Transaction Audit Report contended that the view and observation of the Auditor is prejudicial and not independent. It is contended that the entire exercise of the applicant preferring this application is on the instructions of the M/s. Edlweiss ARC Limited and not an independent act by the applicant. 18. REPLY OF R5 & R6 (COMPANIES) An extensive reply dated 6-2-2022 vide SR. No. 3086 has been filed commonly by the two respondents which are the related companies of the Corporate De....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt has given his report based on financial data pertaining to the Corporate Debtor and any grievances which the Applicant has regarding the manner in which the said entries have been certified cannot be subject matter of proceedings before this Adjudicating Authority especially when there is no plea of fraud against the answering respondent. 20. Heard the submissions of the Ld. Counsel for the Resolution Professional and the Respondents and perused the pleadings, notes of submissions and citations placed on record. 21. With respect to the reply of the 9th and 10th Respondent Companies, the said companies were admittedly struck-off from the Register of Companies although the earstwhile Directors have filed their replies but since they are not the party to the present petition in their personal capacity, their replies, on behalf of the non-existing-entities cannot not considered. 22. During the pendency of the present application, we were informed that the 2nd Respondent had demised and thus the relief sought against the said respondent cannot be proceeded with. The Resolution Professional being satisfied with the explanation provided by the 7th Respondent by way of rejoinde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rried out by such director or partner, as the case may be, in relation to the corporate debtor. 25. Perusal of the above provision requires a Resolution Professional to establish that 'business' of a Corporate Debtor has been carried on with intent to defraud creditors or for any fraudulent purpose. Thus, this Adjudicating Authority is bound to examine and satisfy itself whether the impugned business/transactions attribute malice and thus constitute fraud. 26. Apart from satisfying statutory requirement, it may be apposite to refer to judgements relevant for adjudication of the present avoidance application which discuss and lay down the correct proposition of law when it come to the adjudication of an avoidance application, especially which such an transaction relates to that of a fraudulent transaction under section 66 of the Code. 27. The judgement of the Hon'ble NCLAT in the case Regen Powertech (P.) Ltd. v. Wind Construction (P.) Ltd. [2022] 145 taxmann.com 383 (NCLAT - Chennai) [Company Appeal (AT) (CH)(Ins) No. 349 of 2022, dated 23-9-2022] is reproduced below: 35. As a matter of fact, the 'aspect' of 'Fraudulent Trading' require....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... proof. In our normal life we are sometimes faced with unexplainable phenomenon and strange coincidences, for, as it is said, truth is stronger than fiction. Perusal of the above judgement would make it abundantly clear that for a fraud like any other charge whether made in civil or criminal proceedings, must be established beyond reasonable doubt. In the present case, the Applicant for all the four impugned transactions has primarily relied on the Transaction Audit alone which is also clearly disputed by the respondents. 29. Similarly, this Tribunal in the case Anuj Bajpai, RP of Tollways (Ujjain) (P.) Ltd. v. Surendra Lodha, Suspended Director [IA/2874/2021 Inn CP(IB)4106/MB/2018, dated 11-8-2023] held as under: Further, the work order was issued by the corporate debtor to Rajmal. The Respondent No. 2 paid an amount of Rs. 74,20,000/-to Rajmal on behalf of the corporate debtor. Hence, pursuant to this transaction the tripartite agreement was entered between the parties, wherein, the corporate debtor agreed to pay the amount of Rs. 75 lakhs to Respondent No. 2 against the work order done by Rajmal. Thus, it seems to be legitimate reason to make payment to the Respon....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... there may be a possible suspicion, however, in the present case, there is no disbursement after the year 2016. Hence, this Adjudicating Authority cannot conclude that these salaries were disbursed for defrauding the creditors of the Corporate Debtor. 34. On the aspect of rental income, it is seen that the agreements executed with 5th & 6th Respondent are bonafide in nature. The applicant has failed to establish with material and reason as to how and why these agreements were entered into are for the purpose of defrauding the creditors of the Corporate Debtor. The applicant has only suspicion on the genuineness of the transactions and has not sought for any application to setaside the agreements as no material is available to establish the same. Thus, we conclude that the Applicant has failed to establish a case for intervention under section 66 of the Code. 35. In conclusion, upon detailed consideration of all the materials placed on record, this Adjudicating Authority holds that the Application has been filed on mere suspicion and the Resolution Professional has not established a case of fraudulent trading under section 66 of the Code. It is also noteworthy to observe that ....