It is incumbent upon this Adjudicating Authority to independently examine the nature of each transaction, the underlying material relied upon by the Transaction Auditor, the explanation offered by the Respondent No.1, 2 & 6 and, ultimately, whether the ingredients of the provision sought to be invoked stand established.
The Hon’ble Supreme Court in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited & Ors., (2020) 8 SCC 401, while examining the scheme of avoidance transactions, has emphasised that the requirements and consequences under the respective provisions of the Code are distinct and have to be examined with reference to the statutory ingredients applicable to the particular transaction.
We are, therefore, required to examine the transactions individually rather than accept the aggregate amount reflected in theTransaction Audit Report as an amount automatically recoverable from the Respondents.
However, as already observed hereinabove, the mere absence of supporting documentation, the existence of an outstanding balance, or the inability of the Transaction Auditor to verify an accounting entry cannot, by itself, establish that the business of the Corporate Debtor was carried on with an intent to defraud its creditors or for any fraudulent purpose within the meaning of Section 66 of the Code.
Likewise, the mere fact that trade receivables remained outstanding or became difficult to recover does not establish that the underlying sales were fictitious or that such receivables were deliberately created with any fraudulent intent.
The statutory requirement is not satisfied merely because a transaction remains inadequately substantiated or incapable of verification at a subsequent stage.
The Transaction Audit Report does not identify, out of the aggregate amount, the particular commission payments which were made to fictitious entities, entities connected with the Respondents, or persons who had rendered no corresponding services. Nor has the Applicant demonstrated that the entire aggregate amount represented payments made without any underlying commercial activity.
A general observation that adequate supporting documents were not available cannot, by itself, justify fastening liability upon the Respondents for the entire amount reflected under this head.
The Applicant has not been able to establish the precise inventory which was allegedly diverted or fraudulently written off, or sold unaccounted and the value thereof, or the manner in which the Respondents derived or conferred any corresponding benefit through such transactions.
In the absence of material enabling a definite finding regarding the fraudulent nature and quantum of the transactions, no direction for contribution can be issued under Section 66 of the Code merely on the basis of the reconstructed loss or the inability of the Transaction Auditor to verify the stock position.
The mere difference between the contractual rent and the rent ultimately recognised in the books cannot, without more, satisfy the requirements of Section 66 of the Code. The alleged shortfall of Rs. 10.07 lakh, therefore, does not constitute a fraudulent transaction on the basis of the material presently available.
The Applicant was required to establish that the deposits were made to fictitious or related entities, that they were not supported by any genuine commercial arrangement, or that the funds were diverted for a fraudulent purpose.
The rectification and adjustment entries without any supporting basis indicate manipulation of books of account resulting into loss to the Corporate Debtor and finally to the creditors. We are, therefore, of the considered view that the transactions aggregating to Rs. 5,812.52 lakh under Transaction H stand established as fraudulent transactions within the meaning of Section 66 (2) of the Code.
Excerpts of the Order;
# 1. The present Application was originally filed by the Resolution Professional under Section 25(2)(j) read with Sections 45, 66, 67 and 60(5) of the Insolvency and Bankruptcy Code, 2016 (hereinafter as, “the Code”), in respect of certain transactions of the Corporate Debtor identified in the Transaction Audit Report dated 22.10.2021 prepared by M/s. PVRN & Co., Chartered Accountants, for the period from 01.04.2018 to 22.10.2020, seeking following reliefs: -
a) Allow the instant application;
b) Declare that the transactions, as reflected in the Transaction Audit Report and pointed out in the instant Application to be undervalued, in terms of Section 45 of IBC;
c) Pass appropriate orders in terms of Section 66 of IBC specifically directing the Respondents to make such contributions to the assets of the Corporate Debtor as this Tribunal may deem fit;
d) Pass appropriate orders in terms of Section 67 of IBC as against such transactions;
e) Pass such other / further and other reliefs as this Court may deem fit and proper in the facts and circumstances of the present case.
# 2. The Corporate Insolvency Resolution Process of the Corporate Debtor (Radha Madhav Corporation Limited) commenced pursuant to the order dated 22.10.2020 passed by this Adjudicating Authority in CP(IB) No. 669/9/NCLT/AHM/2019, whereby the petition filed by Mr. Harish Kumar Vedkumar Anand under Section 9 of the Code was admitted and Mr. Kedar Ramratan Ladha was appointed as the Interim Resolution Professional. Subsequently, Mr. Sanjay Badrilal Punglia came to be appointed as the Interim Resolution Professional in place of Mr. Ladha. In the first meeting of the Committee of Creditors held on 10.12.2020, Mr. Rajeev Dhingra was selected to act as the Resolution Professional and his appointment was confirmed by this Adjudicating Authority on 07.01.2021.
# 3. It is stated that, after taking charge as the Resolution Professional, the Applicant appointed M/s. PVRN & Co., Chartered Accountants, on 25.02.2021 as the Transaction Auditor for conducting a transaction audit for the period from 01.04.2018 till the Insolvency Commencement Date, i.e. 22.10.2020. The transaction audit was undertaken for the purpose of examining the transactions of the Corporate Debtor and identifying transactions which could fall within the ambit of the avoidance provisions contained in the Code.
# 4. According to the Applicant, during the course of the transaction audit, the Transaction Auditor sought various records and supporting documents from the suspended management, including valuation reports, stock registers, agreements, invoices, scheme workings, party confirmations, recovery records, GST reconciliations and other supporting material in respect of the transactions under examination. It is stated that the requisite records and documents were not furnished despite repeated requests.
# 5. The draft Transaction Audit Report was received on 18.08.2021 and was shared with the suspended management for their response. Thereafter, reminders were issued on 24.08.2021, 26.08.2021, 03.09.2021 and 13.09.2021, calling upon them to furnish their explanations and supporting documents. Respondent No. 1, on behalf of the erstwhile management, submitted a response dated 25.09.2021 and, according to the Applicant, stated that supporting documents and justification in respect of the transactions would be furnished. It is, however, the Applicant’s case that the promised supporting documents were not subsequently provided.
# 6. It is further stated that, after considering the response received from the erstwhile management, a detailed final draft of the Transaction Audit Report was issued on 01.10.2021. The draft report was thereafter placed before the 8th meeting of the Committee of Creditors held on 14.10.2021. The Transaction Auditor was also present in the said meeting to explain the findings of the audit. The Applicant states that the suspended management had been informed in advance of the said meeting but did not remain present.
# 7. The final Transaction Audit Report was prepared on 20.10.2021, with the response of the erstwhile management being appended thereto, and was submitted to the Applicant on 22.10.2021. The final report was thereafter placed before the 9th meeting of the Committee of Creditors held on 28.10.2021. The present application was subsequently filed on 16.12.2021.
# 8. On the basis of the Transaction Audit Report and the material available to the Applicant, the present application originally sought to challenge various transactions of the Corporate Debtor. Subsequently, the application was amended pursuant to the order dated 03.01.2022, whereby, inter alia, allegations relating to schemes and discount expenses and certain discrepancies concerning GST returns were incorporated.
# 9. The allegations are separately pleaded under different heads, which are set out hereinbelow: -
9.1. Sale of fixed assets at an alleged undervalue The Applicant has alleged that during the Financial Year 2019-20, the Corporate Debtor disposed of certain fixed assets, including a motor car which was transferred on 30.09.2019. According to the Applicant, the written down value of the motor car was Rs.16.72 lakh, whereas the recorded consideration was only Rs.7.50 lakh, resulting in a book loss of Rs.9.22 lakh. It is further stated that the consideration was adjusted against a provision and that no valuation report, transfer document or other material justifying the consideration was furnished. The Applicant has, accordingly, alleged that the transaction was undertaken for a consideration significantly lower than the value of the asset and falls for consideration under Sections 45 and 46 of the Code.
9.2. Discrepancies relating to inventory and stock The Applicant has further questioned the substantial reduction in the inventory of the Corporate Debtor during the relevant period. It is stated that the stock reflected in the books of the Corporate Debtor stood at Rs.8,080.50 lakh as on 31.03.2019 and had reduced to Rs.313.60 lakh as on the Insolvency Commencement Date. The Applicant has also referred to confirmations received from certain depots which allegedly reflected nil stock, contrary to the position appearing from the records of the Corporate Debtor. According to the Applicant, the actual movement, sale and availability of the inventory could not be verified in the absence of stock registers, dispatch records and other supporting documents.
9.3. Advances to suppliers remaining unadjusted The Applicant has alleged that advances aggregating to Rs.861.04 lakh remained outstanding and unadjusted as on the Insolvency Commencement Date. It is specifically stated that an amount of Rs. 313.36 lakh was outstanding against Swastik Sanitarywares Limited, apart from several other outstanding balances. According to the Applicant, no sufficient material was made available to establish the supply of goods against such advances, their adjustment against subsequent transactions or recovery thereof.
9.4. Outstanding trade receivables The Applicant has further alleged that trade receivables aggregating to Rs.2,412.28 lakh remained outstanding as on the Insolvency Commencement Date. It is stated that only Rs.97.47 lakh of such receivables was less than ninety days old, whereas a substantial portion of the outstanding amount had remained unpaid for a considerably long period. The Applicant has questioned the absence of material showing effective recovery efforts in respect of such receivables.
9.5. Amount written off under the head “Shortage and Claim” The Applicant has questioned an amount of Rs.1,139.97 lakh reflected under the head “Shortage and Claim”. It is stated that the said amount formed a substantial component of the selling and distribution expenses of the Corporate Debtor. According to the Applicant, the relevant party wise details, shortage reports, claim documents and material showing the basis on which such amounts were written off or incurred were not made available during the course of the transaction audit.
9.6. Schemes and other discount expenses The Applicant has also questioned an amount of Rs.2,506.72 lakh reflected towards schemes and other discount expenses. It is alleged that substantial amounts were adjusted against sales under the said head and that the relevant scheme circulars, approvals, details of beneficiaries, invoice linkage and other documents supporting the grant of such discounts were not furnished during the transaction audit.
9.7. Commission expenses A substantial part of the allegations concerns commission expenses aggregating to Rs.45,957.03 lakh, as reflected in the detailed computation relied upon by the Applicant. The Applicant has referred to commission, incentive and other similar payments recorded in the books of the Corporate Debtor and has alleged that the relevant agreements, approvals, supporting documents and justification for the payments were not furnished. The application contains party wise details and ledger entries in respect of the said expenditure.
9.8. Inter party adjustments The Applicant has questioned inter party adjustments aggregating to Rs.8,201 lakh. It is alleged that various payments and liabilities of the Corporate Debtor were adjusted through third parties and that complete records establishing the underlying transactions, the basis of such adjustments and the corresponding settlement of liabilities were not made available.
9.9. Rectification and adjustment entries The Applicant has further questioned transactions aggregating to Rs.5,812.52 lakh recorded under the head of rectification and adjustment. It is alleged that substantial entries and adjustments were made through the said account, resulting in corresponding changes in the books of the Corporate Debtor, without the underlying basis and supporting documentation being made available during the transaction audit.
9.10. Inventory written off Apart from the reduction in inventory referred to above, the Applicant has separately questioned the inventory allegedly written off during the relevant period. According to the Applicant, the Transaction Auditor reconstructed a gross loss of Rs. 5,365.60 lakh for the Financial Year 2019-20 and Rs. 571.50 lakh up to 22.10.2020, aggregating to Rs. 5,937.10 lakh. However, the Applicant has not separately quantified the alleged loss under this head on account of the nonavailability of stock registers and the consequent inability to verify the actual quantity and value of the inventory written off.
9.11. Purchases from suppliers identified as non-existent in GST proceedings The Applicant has relied upon a notice dated 02.08.2021 issued by the GST authorities, wherein three suppliers recorded in the books of the Corporate Debtor were allegedly identified as non-existent. On the basis of the purchases recorded from such suppliers, the Applicant has questioned transactions aggregating to Rs.3,028.88 lakh, apart from a tax component of Rs.151.45 lakh. According to the Applicant, adequate supporting material establishing the actual receipt of goods against such purchases was not made available during the transaction audit.
9.12. Alleged short recovery of rent The Applicant has also questioned an alleged shortfall in rental income amounting to Rs.10.07 lakh. It is stated that, on the basis of the lease agreements examined during the transaction audit, rent aggregating to Rs.178.27 lakh was allegedly payable for the relevant period, whereas only Rs.168.20 lakh was reflected as having been booked or collected.
9.13. Differences between books of account and GST returns The Applicant has further alleged discrepancies between the books of account of the Corporate Debtor and its GST returns for the Financial Year 2018-19. The alleged difference in respect of purchases has been quantified at Rs.18,292.76 lakh, whereas the difference in respect of sales has been quantified at Rs.1,696.76 lakh. These allegations were incorporated in the application pursuant to the amendment allowed on 03.01.2022.
9.14. Security deposits The Applicant has questioned security deposits aggregating to Rs.142.10 lakh. It is alleged that the relevant details concerning the parties with whom such deposits were made, the underlying agreements and the recoverability thereof were not made available.
9.15. Use of the premises and machinery of the Corporate Debtor The Applicant has alleged that certain associate concerns of the suspended management were using the premises and machinery belonging to the Corporate Debtor without payment of appropriate rent or user charges. Specific reference has been made to M/s. Pep Cee Pack Industries, which, according to the Transaction Audit Report, was using machinery belonging to the Corporate Debtor without payment of rent. The Applicant has further alleged that associate concerns occupied portions of the premises of the Corporate Debtor without appropriate consideration.
# 10. Thus, apart from the allegations relating to the sale of the motor car, for which a book loss of Rs. 9.22 lakh has been alleged and which has been sought to be examined under Sections 45 and 46 of the Code, the Applicant has raised various transactions under Section 66, the quantified value whereof is stated to aggregate to approximately Rs. 900.61 Crores, besides the allegations relating to inventory and the use of the assets of the Corporate Debtor which have not been independently quantified.
# 11. During the course of the proceedings, the Respondents were served with notice of the present application. However, neither did they appear through counsel nor in person. Consequently, vide order dated 07.12.2022, the Respondents were proceeded against ex-parte. Thereafter, on 25.08.2023, the Respondent No.1, 2 & 6 filed an Interlocutory Application IA No. 985 of 2023 seeking setting aside of the ex-parte order dated 07.12.2022. The said application was dismissed by this Adjudicating Authority vide order dated 08.09.2023, inter alia, on the ground that no satisfactory explanation had been furnished for the inordinate delay of about seven months in filing the application and that no sufficient grounds had been made out for setting aside the ex-parte order.
# 12. Aggrieved by the order dated 08.09.2023, the Respondent No.1, 2 & 6 preferred Company Appeal (AT) (Ins.) No. 1487 of 2023 before the Hon’ble NCLAT. The Hon’ble NCLAT, vide order dated 22.11.2023, allowed the appeal preferred by the Respondents. Pursuant thereto, IA No. 985 of 2023 was restored, and the reply filed therein on behalf of the Respondents was taken on record and annexed to the present I.A. No. 876 of 2021.
# 13. Respondent Nos. 1 (Mitesh Anilkumar Agarwal), 2 (Abhishek Anilkumar Agarwal) and 6 (Anil Jayramdas Agarwal) have filed their reply opposing the present application and denying the allegations levelled against them and making following submissions: -
13.1. The Respondent No.1, 2 & 6 have raised an objection to the maintainability of the application on the ground that it is a composite application invoking Sections 45 and 66 of the Code in respect of different transactions, notwithstanding that the requirements, nature of enquiry and consequences under the said provisions are distinct. It is their case that separate applications ought to have been filed in respect of the transactions alleged to be undervalued and those alleged to constitute fraudulent trading.
13.2. The Respondent No.1, 2 & 6 have further contended that the present application is substantially a reproduction of the findings contained in the Transaction Audit Report and does not disclose any independent application of mind or determination by the Resolution Professional. According to them, Regulation 35A of the CIRP Regulations required the Resolution Professional to form an opinion regarding the existence of avoidance transactions within 75 days from the Insolvency Commencement Date and thereafter make a determination within 115 days. It is contended that there is nothing on record to demonstrate compliance with the said requirements and that the Resolution Professional could not have outsourced his statutory functions to the Transaction Auditor and merely reproduced the findings of the Transaction Audit Report.
13.3. It is also the case of the Respondent No.1, 2 & 6 that the application does not contain specific pleadings regarding the individual role of the Respondent No.1, 2 & 6 or establish that they carried on the business of the Corporate Debtor with an intent to defraud its creditors or for any fraudulent purpose. According to them, mere losses or unsuccessful commercial decisions cannot, by themselves, attract Section 66 of the Code. It is further contended that the application does not establish that the Respondent No.1, 2 & 6 derived any undue benefit from the transactions in question, nor does it specifically identify the transaction for which each Respondent is sought to be held liable.
13.4. In respect of the allegations under Section 45 of the Code, the Respondent No.1, 2 & 6 contend that the Applicant has failed to establish that any asset of the Corporate Debtor was transferred without consideration or for a consideration significantly lower than its value. It is further contended that, even assuming that any transaction were found to be undervalued, the application does not establish that the Respondent No.1, 2 & 6 were the beneficiaries thereof.
13.5. The Respondent No.1, 2 & 6 have specifically denied the Applicant's assertion that the draft Transaction Audit Report and subsequent reminders were shared with them. They contend that no such report or reminders were received by them. It is further stated that, upon commencement of CIRP, they had handed over the relevant documents to the then Interim Resolution Professional, Mr. Kedar Ramratan Ladha, and that they were unaware whether all such documents were subsequently handed over to the present Resolution Professional. They have also stated that non-attendance of the suspended management in the meetings of the Committee of Creditors could not give rise to any adverse inference.
13.6. The Respondent No.1, 2 & 6 have furnished their explanation in respect of the transactions questioned in the application, as follows:
A. Sale of motor car: The Respondent No.1, 2 & 6 contend that an amount of Rs.25 lakh was payable by the Corporate Debtor to its then Chief Financial Officer, Mr. Anil Kantaria. According to them, the motor car was transferred to him towards adjustment of the said outstanding liability. They further contend that the vehicle was transferred at its market value, although the amount recorded as the transfer consideration was Rs.7.50 lakh on account of the adjustment made against the outstanding dues.
B. Inventory and stock: It is stated that, prior to the commencement of CIRP, the business of the Corporate Debtor had come to a halt and, in the absence of demand from distributors, the stock was sold to stock lot buyers at distressed prices. The Respondent No.1, 2 & 6 contend that the goods were perishable in nature and a substantial part thereof had to be discarded. They have further stated that the stock was approximately valued at Rs.28 crore and was ultimately sold for Rs.30.13 crore, which, according to them, was higher than its procurement cost. It is also stated that more than Rs.26 crore was deposited by the depot holders and certain shop owners and that no claims were raised by them.
C. Advances to suppliers: The Respondent No.1, 2 & 6 contend that the advances in question were made in the ordinary course of business. It is stated that the Corporate Debtor dealt in more than 1,800 products and that the suppliers were required to manufacture products according to the formulations provided by the Corporate Debtor and pack them under its designated packaging. According to the Respondent No.1, 2 & 6, advance payments to such suppliers formed part of the day-to-day business operations and did not constitute diversion of funds.
D. Outstanding trade receivables: The Respondent No.1, 2 & 6 submit that credit facilities were extended to customers in the ordinary course of business to secure repeated orders. They contend that certain customers subsequently failed to make payments on account of their deteriorating financial condition. It is further stated that the relevant records concerning such customers were maintained by the employees of the Corporate Debtor, who continued to remain on its payroll under the control of the Resolution Professional.
E. Selling and distribution expenses and commission expenses: The Respondent No.1, 2 & 6 contend that the expenditure under these heads was incurred towards promotion and marketing of the products of the Corporate Debtor, including expenses incurred for marketing meetings, out of pocket expenses and travel. According to them, the said expenditure was duly recorded in the books of account, which had been handed over upon commencement of CIRP, and the mere incurring of such expenditure does not establish any intention to defraud the creditors.
F. Inter party adjustments and rectification and adjustment entries: The Respondent No.1, 2 & 6 do not dispute that inter party adjustments were undertaken but contend that the same were commercial arrangements between parties carrying on business with each other. According to them, where an amount was payable by Party A to the Corporate Debtor and a corresponding amount was payable by the Corporate Debtor to Party B, Party A was requested to make payment directly to Party B to avoid multiple transactions. It is stated that no claims have been filed by the parties in respect of such adjustments and that the adjustments were made to avoid non-payment to creditors.
G. Inventory written off: The Respondent No.1, 2 & 6 submit that inventory write offs were unavoidable considering that the Corporate Debtor dealt in perishable goods. According to them, the drastic fall in sales prior to the commencement of CIRP resulted in certain goods expiring and consequently being discarded and written off in the books of account. They contend that the resulting loss was unavoidable and not attributable to any fraudulent conduct on their part.
H. Purchases from suppliers referred to in the GST proceedings: The Respondent No.1, 2 & 6 deny that any bogus purchases were made. According to them, the suppliers may have failed to deposit the GST with the concerned authorities, but all payments made by the Corporate Debtor were inclusive of GST. They contend that the failure of the suppliers to deposit GST was beyond their control and that the payment of GST had been duly recorded in the books of account handed over to the Resolution Professional.
I. Rent: The Respondent No.1, 2 & 6 have contended that the tenants and customers of the Corporate Debtor faced financial hardship during the COVID 19 pandemic. According to them, relaxation in the normal rent was granted to the tenants during the said period to prevent them from vacating the premises, which would otherwise have resulted in no rental income and further losses to the Corporate Debtor.
13.7. The Respondent No.1, 2 & 6 have accordingly contended that the transactions identified in the Transaction Audit Report do not establish either undervalued transactions or fraudulent trading and that the present application is liable to be dismissed.
13.8. In support of their contentions, the Respondent No.1, 2 & 6 have relied upon
- Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd.,
- Corporation Bank v. Amtek Auto Ltd.,
- Allahabad Bank & Ors. v. SPS Steels Rolling Mills Ltd. & Ors.,
- Jayesh Sanghrajka v. Divine Investments, Smt. Sudipa Nath v. Union of India & Ors., Usha Ananthasubramanian v. Union of India,
- Security and Finance Pvt. Ltd. v. B.K. Bedi & Ors.,
- Official Liquidator, Milan Chit Fund and Finance Pvt. Ltd. v. Joginder Singh Kohli,
- Premier Credit and Motors Co. (P.) Ltd. (In Liquidation) v. Shafiqur Rehman,
- Edelweiss Asset Reconstruction Company v. RTIL Ltd., and
- R. Ramela Rangasamy, Liquidator v. Kandrikar Shahid Mansoor & Ors.
# 14. In the rejoinder, the Applicant has reiterated that Respondent Nos. 1, 2 and 6 were the Directors with suspended powers and were managing and controlling the affairs of the Corporate Debtor during the relevant period in which the transactions under consideration were undertaken: -
14.1. The Applicant has further stated that, subsequent to the filing of the present application, the Resolution Plan submitted by M/s. Vama Construction came to be approved by this Adjudicating Authority vide order dated 01.08.2022 in I.A. No. 78 of 2022. It is stated that the Resolution Plan continues to remain in force and a Monitoring Committee has been constituted. The erstwhile Resolution Professional, who is presently the Chairperson of the Monitoring Committee, has been authorised to continue with the prosecution of the present application. In this regard, reliance has been placed upon the communication dated 15.09.2022 issued on behalf of Alchemist Asset Reconstruction Company Limited, authorising him to handle and pursue the applications filed under Sections 43, 45 and 66 of the Code, with the expenses relating thereto to be borne by the Monitoring Committee.
14.2. With regard to the objection concerning Regulation 35A of the CIRP Regulations, the Applicant has contended that the timelines prescribed therein do not provide a period of limitation for filing an avoidance application and are procedural in nature. It is further stated that the Transaction Auditor required various records and documents for completion of the audit, which were not furnished by the suspended management despite repeated requests. According to the Applicant, an application under Section 19(2) of the Code was also initiated on account of non-cooperation and nonIA furnishing of complete data and books of account. The Applicant has, therefore, contended that the Respondent No.1, 2 & 6 cannot rely upon the time taken in completion of the transaction audit when, according to the Applicant, the delay was attributable to their own non-cooperation.
14.3. The Applicant has also disputed the allegation that the present application was filed without independent application of mind or that the Resolution Professional had delegated his statutory functions to the Transaction Auditor. It is stated that the Transaction Audit Report was considered by the Applicant, placed before the Committee of Creditors in its 8th meeting held on 14.10.2021, and the Transaction Auditor was present during the meeting. The Applicant has further stated that the suspended management had been given advance intimation of the said meeting but did not attend the same. The final Transaction Audit Report was thereafter submitted on 22.10.2021 and placed before the Committee of Creditors in its 9th meeting held on 28.10.2021. According to the Applicant, the reply furnished by Respondent No. 1 was appended to the final report, though the Transaction Auditor did not find any reason to alter the findings contained in the draft report. It is thus contended that the decision to institute the present application was taken after due consideration of the Transaction Audit Report and the material available on record.
14.4. In response to the objection regarding the applicability of Section 66 of the Code, the Applicant has maintained that the transactions identified in the Transaction Audit Report were undertaken with an intent to defraud the creditors of the Corporate Debtor and that the Respondent No.1, 2 & 6 have not specifically controverted the findings in respect of the transactions in question. The Applicant has further contended that the judgments relied upon by the Respondent No.1, 2 & 6 have been cited without demonstrating their applicability to the factual matrix of the present case.
14.5. The Applicant has further stated that it came to his knowledge that certain associate concerns of the suspended management were using areas belonging to the Corporate Debtor without the same being disclosed to the Resolution Professional and without payment of rent. According to the Applicant, the complete particulars regarding the areas so utilised, the period of such use and the rent receivable could not be ascertained due to the non-availability of the relevant information. It is further contended that the said conduct resulted in the Corporate Debtor being deprived of rental income.
14.6. Insofar as the allegations concerning undervalued transactions are concerned, the Applicant has reiterated that the Corporate Debtor was called upon to furnish justification, explanations and supporting documents in respect of the sale of fixed assets, which were not provided during the course of the transaction audit. The Applicant has also reiterated the discrepancy in respect of the stock position of the Corporate Debtor, particularly the difference between the stock balances reflected in the records of the Corporate Debtor and the confirmations received from OM RMCL Depot, National RMCL Depot and Misri Marketing, which stated that no stock of the Corporate Debtor was lying with them as on the Insolvency Commencement Date. The Applicant has further contended that the Transaction Auditor was unable to verify the actual position in the absence of the stock registers and other supporting documents and that the available material indicated that the stock may have been sold at a loss or written off.
14.7. The Applicant has, accordingly, reiterated that the transactions identified in the present application require examination under Sections 45 and 66 of the Code and has sought leave to place such further documents or affidavits on record as may be necessary for the proper adjudication of the present application.
# 15. The Applicant filed an Additional Affidavit on 06.04.2026 vide e-mode, placing on record the current status of the implementation of the Resolution Plan. It is stated that the Resolution Plan submitted by M/s. Vama Construction was approved by this Adjudicating Authority vide order dated 01.08.2022 in I.A. No. 78 of 2022. Though the order approving the Resolution Plan was challenged before the Hon’ble NCLAT and the appeals came to be dismissed, the Deputy Commissioner, UTGST, Daman has preferred an appeal before the Hon’ble Supreme Court, which, according to the Applicant, remains pending. It is, however, stated that there is no stay on the approval or implementation of the Resolution Plan.
# 16. The Applicant has further stated that the Resolution Plan has since been completely implemented and the Monitoring Committee has consequently ceased to function. The Successful Resolution Applicant has taken over the functioning of the Corporate Debtor. It is further stated that the Resolution Plan does not specifically provide as to whether the Successful Resolution Applicant or the creditors would carry forward the pending PUFE/avoidance transactions.
# 17. In these circumstances, it is stated that, after the order dated 17.02.2026, the Successful Resolution Applicant, in a meeting held on 25.03.2026 in the presence of representatives of Alchemist Asset Reconstruction Company Limited, resolved that Alchemist Asset Reconstruction Company Limited, being the largest financial creditor, would prosecute the present application. It was further resolved that any proceeds arising from the present application would be for the benefit of the creditors of the Corporate Debtor. A communication dated 02.04.2026 to this effect was addressed to the erstwhile Resolution Professional. The Applicant has accordingly prayed that Alchemist Asset Reconstruction Company Limited be permitted to prosecute the present application.
# 18. Pursuant to the aforesaid developments, I.A. No. 759 of 2026 came to be filed seeking substitution of the Applicant and consequential amendment in the cause title, so as to substitute Alchemist Asset Reconstruction Company Limited, being the Financial Creditor authorised to prosecute the present application, in place of the erstwhile Resolution Professional. The said application was allowed by this Adjudicating Authority vide order dated 12.06.2026, and the consequential amendment in the cause title was permitted accordingly.
# 19. Written submissions came to be filed on behalf of the Applicant on 04.08.2026 and on behalf of the Respondent No.1, 2 & 6 on 02.12.2024. The Applicant also filed a summary of the transactions under consideration on 06.08.2024 through e mode. The aforesaid pleadings and documents have been taken on record.
# 20. We have heard the counsel for the applicant as well as the counsel for the Respondent No.1, 2 & 6, ex-parte against the other Respondents and have perused the material available on record.
# 21. Observation and Findings: -
21.1. The principal question which arises for consideration is whether the transactions identified by the Transaction Auditor satisfy the statutory requirements of Sections 45 and 66 of the Code. While the Transaction Audit Report constitutes an important piece of material for examining the transactions of the Corporate Debtor, the conclusions recorded therein cannot, by themselves, be treated as conclusive. It is incumbent upon this Adjudicating Authority to independently examine the nature of each transaction, the underlying material relied upon by the Transaction Auditor, the explanation offered by the Respondent No.1, 2 & 6 and, ultimately, whether the ingredients of the provision sought to be invoked stand established.
21.2. It is necessary to distinguish the scope of Sections 45 and 66 of the Code. Section 45 deals with transactions where an asset or assets of the Corporate Debtor have been transferred either without consideration or for a consideration the value of which is significantly less than the value provided by the Corporate Debtor. The mere fact that a transaction has resulted in a loss or that an asset has been sold for an amount lower than its book value would not, by itself, establish an undervalued transaction. The statutory requirement is that the transaction must satisfy the parameters specifically contemplated under Section 45 of the Code. The Hon’ble Supreme Court in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited & Ors., (2020) 8 SCC 401, while examining the scheme of avoidance transactions, has emphasised that the requirements and consequences under the respective provisions of the Code are distinct and have to be examined with reference to the statutory ingredients applicable to the particular transaction.
21.3. Section 66(1) of the Code, on the other hand, is attracted where the business of the Corporate Debtor has been carried on with an intent to defraud its creditors or for any fraudulent purpose and the persons sought to be made liable were knowingly parties to the carrying on of the business in such manner. Thus, every irregular transaction, accounting discrepancy, commercial loss or failure to maintain complete supporting records cannot automatically be characterised as fraudulent trading. The Applicant is required to establish, on the basis of the material on record, the fraudulent purpose or intent contemplated under Section 66 and the participation of the persons against whom contribution is sought. The Hon’ble NCLAT has also reiterated that where the evidence establishes the underlying fraudulent transactions and the fraudulent intent, Section 66 may be attracted; conversely, the provision cannot be invoked merely on the basis of an unsubstantiated allegation of fraud.
21.4. The principle that an audit or forensic report cannot substitute the judicial determination required under Section 66 is also well recognised. In Jayesh Sanghrajka v. Divine Investments & Ors., M.A. No. 1893 of 2019, decided on 23.03.2021, the NCLT, Mumbai Bench held that the burden lies upon the applicant to establish that the transactions were fraudulent and that the existence of an audit report or suspicious circumstances, without establishing the requisite fraudulent intent, would not by itself justify an order under Section 66. Likewise, in The Official Liquidator, High Court, Calcutta v. Padam Kumar Khaitan & Ors., (2011) 161 Comp Cas 402 (Cal), the Calcutta High Court emphasised the necessity of specific material and particulars against the persons sought to be made liable. We are, therefore, required to examine the transactions individually rather than accept the aggregate amount reflected in theTransaction Audit Report as an amount automatically recoverable from the Respondents.
# 22. A copy of Transaction Audit Report of 22.10.2021 for the Period 01.04.2018 to 22.10.2020 in the case of Radha Madhav Corporation Limited appears on pages 79 to 224 of the Application.
# 23. The shares of the company were listed on BSE and NSE and its paid-up capital was of Rs 91.30 crores and company’s registered office was in Daman and it was engaged in the business of Flexible Packaging and had five manufacturing units located in Daman (four) and one at Pant Nagar.
# 24. The promoter shareholders of the company were Anil J Agarwal, Sulochana Devi Anilkumar Agarwal, Mitesh Anilkumar Agarwal, Abhishek Anilkumar Agarwal, and Vandana Mitesh Agarwal. All were holding 25.87% shares and rest of shares 74.13% were held by public. The Transaction Audit Report has given a synopsis of the Balance Sheet as on 31.03.2019, 31.03.2020 and 22.10.2020.
# 25. We shall now consider each of the transaction alleged by the Applicant to attract provisions of sections 45 or 66 of the Code.
Sale of Fixed Assets
25.1. The first transaction relates to the sale of certain fixed assets during the Financial Year 2019-20. Insofar as the motor car is concerned, the Transaction Auditor has recorded that the written down value of the vehicle was Rs. 16.72 lakh whereas the sale consideration recorded was Rs. 7.50 lakh, resulting in a book loss of Rs. 9.22 lakh. The sale of car took place on 30.09.2019 and information on cost is not available. The transaction is reported on page 39 of the Report. The Transaction Auditor has also referred to the absence of a valuation report or other material to establish that the sale consideration represented the fair value of the vehicle. The Applicant has, on this basis, sought to treat the transaction as an undervalued transaction under Section 45 of the Code.
25.2. The Respondent No.1, 2 & 6 have offered an explanation that an amount of Rs. 25 lakh was payable by the Corporate Debtor to its then Chief Financial Officer and that the transfer of the motor car was effected towards adjustment of the said liability. The TAR shows that information on the cost of motor car was not available, and car was sold to Dhanvidya Givan and mode of payment is stated to be adjusted with provision. The reasons for selling the car at a price even less than the written down value, which is generally far less than the market price, is not properly explained. We understand that fair market value could not be determined by the valuer at the time of transaction audit because car was sold already and was not in possession of the Corporate Debtor or the Resolution Professional.
25.3. The transaction was identified as an undervalued transaction in the audit report and the suspended management was asked for their explanation which was not provided. The transaction took place with the key managerial person of the corporate debtor within the relevant period as per section 46 of the Code and we are satisfied that the transaction was undertaken that involves transfer of an asset for a consideration which is significantly less than the value of the consideration. It is seen that the consideration was also not received but was as adjusted by the Corporate Debtor from the alleged payable to the purchaser.
25.4. Considering the provisions of Section 48(1)(a) of the Code, it is directed that the property transferred be vested in the corporate debtor. Considering that the property in question is a car and might have lost value due to its age, usage, and model, the beneficiary of the transaction is directed to pay the shortfall in value, at the time of transaction, of Rs 9.22 lakh and an interest at the rate of 12% of this amount for the period starting from the date of transaction till date of payment.
25.5. Accordingly, the relief sought in respect of Transaction considered as undervalued transaction is allowed.
Advances to Suppliers, Outstanding Trade Receivables, Shortage and Claim, Schemes and Other Discount Expenses
25.6. Under the head of “Advance to Suppliers”, the Applicant has questioned advances aggregating to Rs.861.04 lakh which remained outstanding against various suppliers as on the Insolvency Commencement Date. The principal basis for the allegation is that sufficient material regarding the adjustment, recovery or utilisation of such advances was not made available to the Transaction Auditor.
25.7. Page 63 of the TAR (page 141 of the Application) deals with this issue. A list of 30 parties (plus 308 other parties up to Rs. 5 lakhs) with figures of balances as on 22.10.2020 totalling to Rs. 861.04 lakhs is given. These remain unadjusted as on 22.10.2020. The report notes that management did not provide reasons for advances given to suppliers, copy of agreements if any and any other supporting documents along with recoverability status of outstanding balances of Rs. 8.61 crores. No justification and supporting documents were made available by the management.
25.8. Pages 78 of the TAR has information on the confirmations sent to the suppliers. Pages 79 contains reply of confirmations received from some suppliers.
25.9. The next category transaction concerns “trade receivables” aggregating to Rs. 2,412.28 lakh. The basis of the objection is that substantial receivables had remained outstanding beyond the relevant credit period and sufficient details regarding their recovery were not made available to the Transaction Auditor.
25.10. Pages 80 and 81 of the TAR discusses this issue. The management provided party-wise bifurcation of outstanding of balance of customers, however, it was observed that there was a variation between balances reported in the financials and the party-wise bifurcation provided by the management. There were differences but no justification was provided by the management. Information on aging of debtors. The report states that most of the balances (Rs. 2315.28 lakhs) were outstanding from 31.03.2013 against which the provision for doubtful debt of Rs. 1898.90 lakhs was outstanding as on 22.10.2020. The management did not provide any reason and supporting documents for justifying the efforts made for the recovery of debts.
25.11. The Application proposes outstanding balances of trade receivables of Rs. 2412.28 lakhs within the ambit of section 66 of the Code.
25.12. Under the head of Selling and Distribution Expenses, the Application notes that expenses under the headings “Shortage and Claim” for an amount of Rs. 1,139.97 lakh, Business Promotion of Rs. 338.38 lakhs, training fee and other expenses of Rs. 27.12 lakhs has been questioned. These expenses are for the years 2018-2019, 2019-2020, and 2020-2021 (till 22.10.2020). The Transaction Auditor has observed that the supporting records, including party wise details, shortage reports, claim documents and other material explaining the basis upon which the amounts were recognised or written off, were not made available.
25.13. The Transaction Auditor has also questioned expenditure aggregating to Rs. 2,506.72 lakh under the head of “schemes and other discount expenses”. The principal basis for raising the objection is the nonavailability of scheme circulars, approvals, beneficiary details, invoice linkage and other supporting documents in respect of the expenditure claimed.
25.14. Upon conjoint consideration of the aforesaid transactions, it is evident that the primary basis on which these transactions have been questioned by the Transaction Auditor is the non-availability of supporting records and the consequential inability to independently verify the underlying entries. However, as already observed hereinabove, the mere absence of supporting documentation, the existence of an outstanding balance, or the inability of the Transaction Auditor to verify an accounting entry cannot, by itself, establish that the business of the Corporate Debtor was carried on with an intent to defraud its creditors or for any fraudulent purpose within the meaning of Section 66 of the Code.
25.15. Insofar as the advances to suppliers are concerned, no material has been brought on record to establish that the advances were made to suppliers that were fictitious entities, that the advances were made for a non-genuine purpose, or that the amounts were diverted for the benefit of the Respondent No.1, 2 & 6 or any other person. The TAR shows that confirmation letters were sent to these suppliers and most of those were delivered and some of them replied also. Likewise, the mere fact that trade receivables remained outstanding or became difficult to recover does not establish that the underlying sales were fictitious or that such receivables were deliberately created with any fraudulent intent. The letters were sent to some of these parties and those letters were delivered also. It has been claimed that receivables were outstanding for a longtime and no efforts were made by the management to collect these amounts.
25.16. Similarly, in respect of selling and distribution expenses like shortage and claim expenses as well as scheme and other discount expenses, the Transaction Auditor has not identified any specific entry which has been demonstrated to be fictitious or fraudulently created. No material has been brought on record to establish that the alleged shortage or claim entries were fabricated, that the corresponding amounts were diverted, or that any particular scheme or discount was extended to a fictitious or ineligible beneficiary for the purpose of conferring an undue benefit upon the Respondents or any other connected person.
25.17. The figures for advances, receivables or expenses are based on the financial statements. No doubt, the absence of proper supporting records raises serious concerns regarding the maintenance of accounts and internal controls of the Corporate Debtor. However, such deficiencies cannot, without further material establishing the fraudulent nature of the underlying transaction and the knowing participation of the Respondents, be elevated to a finding of fraudulent trading under Section 66 of the Code. The statutory requirement is not satisfied merely because a transaction remains inadequately substantiated or incapable of verification at a subsequent stage.
25.18. The Resolution Professional has not submitted anything during the pendency of the proceedings to indicate that efforts were made by him to collect the receivables outstanding for many years, or to collect the advances from the suppliers when no goods were supplied after the CD was initiated into CIRP. We consider that making simply observations on the accounts do not bring the transactions within the purview of section 66 of the Code. Something concrete is required to be provided to the Adjudicating Authority to support the claims.
25.19. The transactions were undertaken in various years and appears to be in the regular course of business. We are, therefore, of the considered view that the material placed on record is insufficient to establish the ingredients of Section 66 in respect of Transactions noted above.. Accordingly, the relief sought in respect of the aforesaid transactions is liable to be rejected.
Commission Expenses
25.20. The Applicant has relied upon the Transaction Audit Report to question commission related entries aggregating to approximately Rs.459.47 crore. The Report contains extensive party wise and ledger wise details comprising payments, adjustments, transfers, commission liabilities and other entries routed through the relevant accounts. The Transaction Auditor has questioned the transactions principally on the ground that sufficient justification and supporting documentation were not available.
25.21. The issue is discussed in paragraph 8.1.3 of the TAR under the heading, “Commission Incentive and Scheme Expenses”. The information is given for FY 2018-19, FY 2019-20, and FY 2020-21 (till 22.10.2020) under the head commission expenses recognised, Bank Payment, Adjusted with Advance Against Commission, Transfer to various parties numbering 150 and then closing balance. The Comment notes that for the verification of commission expenses, the management has provided the calculation of commission expenses on sample basis. However, the review of books of accounts, it was observed that the management has recognised commission expenses on quarterly basis. However, the calculations of commission were not accompanied by any supporting documents and in absence of any reasonable justification and supporting documents, the commission liability has been considered within the ambit of fraudulent transactions under section 66 of the IBC, 2016. The Commission liability recognised through Profit and Loss account (28,377.56 lakhs) and recognised through debtor ledgers (16,447.23 lakhs) and opening balance of Rs 1132.24 lakhs has been considered as fraudulent.
25.22. Upon examining the nature of the material relied upon, we find that the aggregate amount cannot be treated as representing a single transaction or, for that matter, a quantified loss suffered by the Corporate Debtor. The figure is an aggregation of a substantial number of ledger entries comprising payments, adjustments, transfers and other accounting movements. We are unable to understand how the commission liability in full can be considered as fraudulent until it is proved that no commission has been paid. Full liability in the profit and loss account is considered fraudulent even when the TDS has been deducted and party-wise ledgers have been refereed. Unable to understand the liability recognised through debtor ledgers. The expenses is that recognised through the profit and loss account. After the preparation of TAR, the RP has not carried out any independent verification to support the allegations. The Application is based on the TAR. The basis of allegations of total transactions of commission amounting to Rs 459.57 crores as fraudulent has not been established. No supporting documents, for example any finding of tax authorities, regarding bogus or non-genuine nature of the commission expenses are placed on record. Before fastening liability upon the Respondents under Section 66 of the Code, it was incumbent upon the Applicant to identify the particular transactions which were fictitious or fraudulent and to establish how such transactions resulted in a corresponding loss to the Corporate Debtor.
25.23. The Transaction Audit Report does not identify, out of the aggregate amount, the particular commission payments which were made to fictitious entities, entities connected with the Respondents, or persons who had rendered no corresponding services. Nor has the Applicant demonstrated that the entire aggregate amount represented payments made without any underlying commercial activity. A general observation that adequate supporting documents were not available cannot, by itself, justify fastening liability upon the Respondents for the entire amount reflected under this head.
25.24. It is also material that the aggregate figure is derived from various computations and ledger movements and, therefore, before any quantified liability could be fastened upon the Respondents, the specific entries constituting the alleged fraudulent loss were required to be identified and established. In the absence of such transaction wise identification and corresponding material demonstrating fraudulent intent or purpose, we are unable to hold that the entire amount of approximately Rs. 459.47 crore constitutes fraudulent trading within the meaning of Section 66 of the Code.
25.25. Accordingly, the relief sought in respect of the above transaction is rejected.
Stock Discrepancy and Inventory Write Off
25.26. Transactions B and I both concern the inventory of the Corporate Debtor and are, therefore, taken up conjointly. Under Transaction B, the Applicant has relied upon the discrepancy between the stock position reflected in the records of the Corporate Debtor and the confirmations received from OM RMCL Depot, National RMCL Depot and Misri Marketing, which reportedly stated that no stock of the Corporate Debtor was lying with them as on the Insolvency Commencement Date. The material on record further indicates that the inventory of the Corporate Debtor had reduced from Rs. 8,080.50 lakh as on 31.03.2019 to Rs. 313.60 lakh as on 22.10.2020.
25.27. Transaction I concerns the alleged inventory write offs. The Transaction Auditor, on the basis of the available financial and inventory data, reconstructed a gross loss of Rs. 5,365.60 lakh for the Financial Year 2019- 20 and Rs. 571.50 lakh up to 22.10.2020. However, the Transaction Audit Report itself records that the actual inventory written off could not be independently verified due to the non-availability of the relevant stock records and supporting material.
25.28. The issue is discussed in paragraphs 9.1, 9.2, and 9.3 of the Transaction Audit Report. Paragraph 9.1 deals with inventories as per financials. The total inventory of raw material, packing materials, work-in-progress, finished goods, and stock-in-trade as on 31.03.2018, 31.03.2019, 31.03.2020, and 22.10.2020 was of Rs 7081.80 lakhs, 8080.50 lakhs, 970 lakhs, and 313.60 lakhs respectively.
25.29. Paragraph 9.2 provides information on location wise details of inventories and an inventory of Rs 313.60 lakhs was available with 30 franchisees.
5.30. Paragraph 9.3 has working of COGS to turnover ratio and the Report has a comment that the CD incurred a loss of Rs 6480.70 lakhs in FY 2019-20 and Rs 650.30 lakhs in FY 2020-21. It notes that, the COGS to sales ratio was increased from 88.34% to 267.41%, and 781.40% in FY 2019-2020 and FY 2020-21 respectively and that implies that the stock might have been sold at loss or write off during the audit period. The Corporate Debtor has not provided the stock registers to verify the daily movement in inventories, transactions of sale at undervalued price and stock written off.
25.31. The Respondent No.1, 2 & 6 have contended that the Corporate Debtor was dealing in perishable products and that, owing to the deterioration of its business and the absence of demand, substantial quantities of inventory had either been sold at reduced prices or had expired and were required to be discarded. Insofar as the discrepancy in the depot stock is concerned, the Respondent No.1, 2 & 6 have further asserted that the stock had been disposed of to stock lot buyers and other purchasers in order to avoid complete wastage.
25.32. The applicable accounting treatment of inventory also assumes relevance. A reduction in the value of inventory, or its write down or write off, is not by itself indicative of a fraudulent transaction. The critical question is whether the Applicant has established the actual quantity and value of inventory which was allegedly diverted, improperly written off or otherwise dealt with for a fraudulent purpose. In the present case, neither the Transaction Audit Report nor the material placed before us enables a definite quantification of such alleged loss. The Transaction Auditor itself was unable to verify the actual inventory written off. Further, there is nothing on record to prove the actual availability of stock on the date of CIRP commencement or later, it appears that no physical stock taking was done during the CIRP and no shortage or excess stock working was done. The TAR only provides figures based on the record and the actual problem has not been identified.
25.33. The discrepancy arising from the confirmations received from the three depot holders undoubtedly raises a serious question regarding the correctness of the stock records maintained by the Corporate Debtor. This discrepancy has also not been specifically questioned to the suspended board members. However, the said discrepancy cannot, without establishing the subsequent movement or disposition of the specific stock allegedly reflected in the books, lead to a finding that the entire difference represented a fraudulent diversion attributable to the Respondents. The primary stock registers, stock movement records, dispatch records, expiry records and other contemporaneous documents which could have enabled such determination are not available on record.
25.34. Thus, while the material gives rise to doubts regarding the maintenance and verification of inventory records, the Applicant has not been able to establish the precise inventory which was allegedly diverted or fraudulently written off, or sold unaccounted and the value thereof, or the manner in which the Respondents derived or conferred any corresponding benefit through such transactions. In the absence of material enabling a definite finding regarding the fraudulent nature and quantum of the transactions, no direction for contribution can be issued under Section 66 of the Code merely on the basis of the reconstructed loss or the inability of the Transaction Auditor to verify the stock position.
25.35. Accordingly, the relief sought in respect of Transactions B and I, concerning stock, is rejected.
Short Rent
25.36. Under Transaction K, the Applicant has questioned the difference between the rent recoverable under the lease arrangements and the rent actually recognised in the books of the Corporate Debtor. The Transaction Audit Report records that rent of Rs. 178.27 lakh was recoverable, whereas an amount of Rs. 168.20 lakh was booked, resulting in an alleged shortfall of Rs. 10.07 lakh.
25.37. The Respondent No.1, 2 & 6 have explained that, during the COVID 19 pandemic, concessions were granted to tenants facing financial difficulties in order to ensure that they continued to occupy the premises and that some rental income continued to accrue to the Corporate Debtor. According to the Respondent No.1, 2 & 6, the alternative was the possibility of the tenants vacating the premises, resulting in a complete loss of rental income.
25.38. We find that a concession or waiver in rent, particularly during an exceptional commercial period, cannot by itself be treated as an act of fraudulent trading. For the purposes of Section 66, it was incumbent upon the Applicant to establish that the concession was granted for a fraudulent purpose or that the Respondents knowingly caused a loss to the Corporate Debtor with an intent to defraud its creditors. No material has been brought on record to demonstrate that the benefit of the alleged concession was extended to any related party or that the same was not a commercial decision taken in the circumstances then prevailing.
25.39. The mere difference between the contractual rent and the rent ultimately recognised in the books cannot, without more, satisfy the requirements of Section 66 of the Code. The alleged shortfall of Rs. 10.07 lakh, therefore, does not constitute a fraudulent transaction on the basis of the material presently available.
25.40. Accordingly, the relief sought in respect of Transaction K is liable to be rejected.
Security Deposits
25.41. The Applicant has further questioned security deposits aggregating to Rs. 142.10 lakh, principally on the ground that complete particulars regarding the counterparties, contractual basis, maturity and recoverability of such deposits were not made available. The Transaction Audit Report notes that the balance of security deposits had increased to Rs. 142.10 lakh as on the Insolvency Commencement Date and that the relevant supporting information was not available for verification.
25.42. However, the mere existence of an outstanding security deposit cannot, by itself, establish fraudulent trading. A security deposit is reflected as an asset of the Corporate Debtor and its subsequent recoverability is a separate question. In order to invoke Section 66, the Applicant was required to establish that the deposits were made to fictitious or related entities, that they were not supported by any genuine commercial arrangement, or that the funds were diverted for a fraudulent purpose.
25.43. No such material has been placed before us. The absence of a counterparty wise reconciliation and documents regarding recoverability may undoubtedly make it difficult to verify the asset, but the inability to verify the balance cannot, by itself, establish that the amount was fraudulently transferred or diverted by the Respondents. No document has been placed on record by the RP to prove that it had made any efforts to recover the security deposit made by the Corporate Debtor.
25.44. We are, therefore, unable to hold that Transaction M satisfies the ingredients of Section 66 of the Code. Accordingly, the relief sought in respect of Transaction M is liable to be rejected.
Purchases from Suppliers Found to be Non-Existent
25.45. Under this head, the Applicant has questioned purchases aggregating to Rs. 3,028.88 lakh made from certain suppliers which were found to be non-existent in the proceedings initiated by the GST Department. The Transaction Auditor has specifically relied upon the notice dated 02.08.2021 issued by the GST authorities, wherein the concerned suppliers were found to be non-existent, and has consequently raised serious doubts regarding the genuineness of the purchases recorded by the Corporate Debtor.
25.46. Unlike the transactions dealt with hereinabove, the allegation in the present case does not rest merely upon the non-availability of supporting documents or an inability on the part of the Transaction Auditor to verify the entries. The genuineness of the very suppliers from whom the purchases were purportedly made had been examined in proceedings conducted by the GST Department, which resulted in a finding that such suppliers were non-existent. The Respondent No.1, 2 & 6 have not placed on record any material to dislodge or rebut the said finding.
25.47. Page 131 of the TAR notes that GST has classified parties as non-existent and the name of parties (Santosh Ganesh Gholap, Augt Overseas Private Limited, and Savitri Trading Company) and corresponding purchase transactions (amount taxable) of Rs 3028.88 lakhs is given.
25.48. The Respondent No.1, 2 & 6 have sought to contend that the Corporate Debtor had actually received the goods and that any subsequent failure on the part of the suppliers to comply with their GST obligations could not render the purchases fictitious. We are unable to accept the said explanation in the absence of any contemporaneous material demonstrating the actual movement and receipt of goods corresponding to the purchases in question. Significantly, despite the serious findings recorded by the GST Department and the observations contained in the Transaction Audit Report, the Respondents have not produced material such as transport documents, goods receipt records, corresponding stock entries or any other cogent evidence to substantiate their plea that the underlying goods were actually received by the Corporate Debtor.
25.49. The conduct of the Respondents in the present proceedings is also relevant. As noted from the record, the Respondents were served in the matter but neither entered appearance nor participated in the proceedings, as a consequence of which they were proceeded ex parte. Even thereafter, the application seeking recall of the ex parte order was filed after a considerable delay. Although the ex parte order was subsequently set aside pursuant to the order of the Hon'ble NCLAT and the Respondents were permitted to place their defence on record, the explanations subsequently furnished by them have remained largely general in nature and have not been supported by the primary records necessary to rebut the specific allegations arising from the GST proceedings and the Transaction Audit Report.
25.50. The Respondents were admittedly in a position to explain the transactions and produce the underlying records pertaining to the alleged purchases. The alleged non-existent parties were specific and the suspended management could have produced documents of purchase, place of delivery of goods, entries in the stock register, subsequent sale or consumption and payments etc., but the same has not been done. The genuineness of the transactions is not proved. Once a specific finding had emerged from an independent statutory authority that the suppliers from whom purchases aggregating to Rs. 3,028.88 lakh were claimed to have been made were nonexistent, and the Respondents failed to produce the primary material within their knowledge and possession to demonstrate the actual receipt of goods, an adverse inference necessarily follows. The Respondents cannot merely rely upon a general assertion that goods were received in the ordinary course of business and thereby shift the burden back upon the Applicant.
25.51. We also find that the conduct of the Respondents in relation to the transaction audit proceedings assumes significance. The Transaction Auditor has repeatedly recorded the non-availability of relevant records and supporting documents necessary for verification of various transactions. While such non availability, in isolation, may not be sufficient to establish fraudulent trading in every case, the present transaction stands on a different footing. The findings of the GST Department, coupled with the failure of the Respondents to produce the primary evidence of actual purchase and receipt of goods despite having had sufficient opportunity to do so, leads to the conclusion that the purchases in question were not genuine transactions undertaken in the ordinary course of business.
25.52. We are, therefore, of the considered view that the purchases aggregating to Rs. 3,028.88 lakh from the suppliers found to be non-existent cannot be treated as genuine purchases of the Corporate Debtor. The Respondents, having failed to provide any satisfactory explanation or contemporaneous evidence to rebut the findings of the GST Department, are liable to be held responsible for causing the aforesaid loss to the Corporate Debtor. This transaction of non-genuine purchase resulted into payment by the Corporate Debtor resulting into business loss and depletion in the cash/asset of the Corporate Debtor. These transactions were undertaken by the suspended director with the intention of siphoning off the funds of the corporate debtor and these transactions were undertaken with their full knowledge and therefore provisions of section 66(1) of the Code are clearly applicable. The said transaction, therefore, stands established as a fraudulent transaction attracting the provisions of Section 66 of the Code.
Difference Between Books of Account and GST Returns
25.53. The Applicant has further relied upon the discrepancies noticed between the books of account of the Corporate Debtor and the GST returns. The Transaction Audit Report records a difference of Rs. 18,292.76 lakh in respect of purchases and Rs. 1,696.76 lakh in respect of sales. The Transaction Auditor has noted that the management did not provide a reconciliation of these differences and, consequently, the same could not be independently verified.
25.54. The issue concerns difference in sales and purchase figures as per Income Tax Return and GST Return.
25.55. The magnitude of the discrepancies is undoubtedly substantial and the failure to provide a proper reconciliation raises serious concerns regarding the correctness of the financial and tax records maintained by the Corporate Debtor. Nevertheless, the existence of a difference between the books of account and the GST returns does not, by itself, establish that an equivalent amount has been diverted or that the business was carried on with a fraudulent intent.
25.56. Such differences may arise for a variety of reasons, including differences in the period of recognition of transactions, credit notes, amendments in returns, reversals, classification of transactions and other accounting or tax adjustments. In the absence of a transaction wise reconciliation, it is not possible to determine the precise nature of the discrepancy or to conclude that the entire difference represents a fraudulent transaction.25.57. It is significant that the Transaction Aud
it Report itself does not identify the particular transactions comprising the alleged differences which were fictitious or fraudulent. Nor has the Applicant established how the discrepancies translated into a corresponding loss to the Corporate Debtor or the manner in which the Respondents knowingly participated in any fraudulent activity.
25.58. We are, therefore, unable to treat the aggregate differences between the books of account and the GST returns as an amount liable to be contributed by the Respondents under Section 66 of the Code. The discrepancies may have warranted further investigation or reconciliation, but the statutory ingredients necessary for fastening liability under Section 66 have not been established on the basis of the material presently available. The RP has not placed anything on record to support its allegation based on any order by the Income Tax or GST authority. Accordingly, the relief sought in respect of Transaction L is liable to be rejected.
Use of Premises and Machinery of the Corporate Debtor
25.59. The Transaction Auditor has further observed that certain premises and machinery belonging to the Corporate Debtor were allegedly being utilised by other concerns, including M/s. Pep Cee Pack Industries, without the Corporate Debtor receiving appropriate consideration or rental charges. The Report has, therefore, raised an issue regarding the utilisation of the assets of the Corporate Debtor by such concerns.
25.60. Unlike a mere accounting discrepancy, the allegation under this head concerns the possible use of assets belonging to the Corporate Debtor for the benefit of another entity without corresponding consideration. If established, such use could constitute an improper diversion of the assets or resources of the Corporate Debtor and may warrant appropriate consequences under the Code.
25.61. However, the material placed on record does not sufficiently establish the precise assets which were utilised, the period for which such utilisation continued, the terms on which the assets came to be used, or the consideration which the Corporate Debtor ought reasonably to have received. Most importantly, the Transaction Audit Report does not provide a reliable quantification of the alleged loss or benefit derived from such use.
25.62. In the absence of the aforesaid particulars, we are unable to determine any specific amount which can be directed to be contributed to the assets of the Corporate Debtor. A finding under Section 66 cannot be founded merely upon the possibility that another concern derived some benefit from the use of the assets of the Corporate Debtor, without establishing the nature, extent and financial consequence of such benefit.
25.63. Accordingly, while the material raises a serious concern regarding the utilisation of the premises and machinery of the Corporate Debtor, the Applicant has not established the transaction and consequential loss with sufficient certainty to warrant a quantified direction under Section 66 of the Code. The Applicant has not subsequently carried forward the verification after receipt of the TAR. This Adjudicating Authority consider these allegations as mere observations and no serious effort was made by the RP to provide full information on the transactions and the rent which should have been charged. The relief sought in respect of Transaction N is, therefore, liable to be rejected.
Inter Party Adjustments
25.64. The next transaction concerns inter party adjustments aggregating to Rs. 8,201 lakh. The Transaction Auditor has observed that substantial balances pertaining to different parties were adjusted against one another through journal and adjustment entries. The Applicant has alleged that such adjustments were carried out without adequate supporting documents or contemporaneous authorisations and that the same resulted in manipulation of the books of account of the Corporate Debtor.
25.65. The Respondents, in their reply, have not disputed that inter party adjustments were undertaken. Their explanation, in substance, is that where a particular party owed an amount to the Corporate Debtor and the Corporate Debtor, in turn, owed an amount to another party, the former was instructed to make payment directly to the latter. According to the Respondents, such adjustments were undertaken in the ordinary course of business and did not result in any loss to the Corporate Debtor.
25.66. In the present case, the transactions under this head aggregate to Rs. 8,201 lakh. The magnitude of the amount itself required the Respondents to place before the Transaction Auditor and this Adjudicating Authority the contemporaneous instructions, confirmations, authorisations or other records demonstrating the basis of each adjustment. Further, such adjustment through journal entries result into by passing the payments/receipt/cash flow from the accounts of the Corporate Debtor. The consideration does not pass through bank account of the corporate debtor and provides all opportunities to manipulate the accounts. It was incumbent upon them to establish that, for every corresponding adjustment, there existed a genuine receivable due to the Corporate Debtor, a genuine liability payable by the Corporate Debtor and an actual discharge of such liability through the alleged inter party arrangement.
25.67. However, the Transaction Auditor has specifically recorded that the requisite supporting documents and justification for the adjustments were not made available. Even after the Respondents were afforded an opportunity to contest the present proceedings and place their defence on record, no transaction wise explanation supported by the underlying contemporaneous material has been produced. Instead, the Respondents have sought to justify the entire set of transactions by a general assertion that inter party settlements were a regular feature of the business operations of the Corporate Debtor.
25.68. Such a general explanation cannot discharge the burden of explaining accounting adjustments aggregating to Rs. 8,201 lakh. The relevant records relating to the underlying transactions were particularly within the knowledge and control of the Respondents, who were responsible for the affairs and financial management of the Corporate Debtor during the relevant period. Once the Transaction Auditor specifically identified the adjustments and called upon the persons concerned to provide the basis and supporting documentation thereof, it was incumbent upon the Respondents to substantiate the transactions. Their failure to do so, despite sufficient opportunity, cannot operate to the detriment of the Corporate Debtor and its creditors.
25.69. The conduct of the Respondents also assumes significance in this regard. The present proceedings reveal a consistent pattern of non-availability of primary records and evasive explanations in respect of substantial transactions identified during the Transaction Audit. While, as observed hereinabove, absence of records by itself may not invariably establish fraudulent trading, the position is materially different where the very nature of the entries results in the adjustment and extinguishment of substantial receivables and liabilities of the Corporate Debtor. In the absence of any contemporaneous record demonstrating that such adjustments corresponded to genuine and duly authorised transactions, the explanation of the Respondents cannot be accepted.
25.70. We are, therefore, of the considered view that the Respondents have failed to establish the genuineness or commercial basis of the inter party adjustments aggregating to Rs. 8,201 lakh. The material placed on record, read with the failure of the Respondents to provide any transaction wise explanation or supporting evidence despite repeated opportunities, establishes that the accounts of the Corporate Debtor were manipulated through such adjustment entries without any verifiable basis.
25.71. The said conduct cannot be regarded as a mere accounting irregularity or an ordinary commercial arrangement. The unexplained extinguishment and adjustment of receivables and liabilities of the Corporate Debtor, aggregating to Rs. 8,201 lakh, has directly prejudiced the financial position of the Corporate Debtor and its creditors. Such an adjustment provided ample opportunities ot the suspended management to allow favour to some parties through adjustment entries at the cost of others because the money was not routed through the books of account of the Corporate Debtor. We hold that the directors did not exercise due diligence in minimising the potential loss to the creditors of the Corporate Debtor and provisions of section 66(2) are attracted. We, therefore, hold that the transactions falling under Transaction G stand established as fraudulent transactions within the meaning of Section 66 of the Code.
25.72. Accordingly, all the Respondents, being the persons responsible for the conduct of the affairs of the Corporate Debtor during the relevant period, are liable to contribute an amount of Rs. 8,201 lakh to the assets of the Corporate Debtor in respect of Transaction G, subject to the observations and final directions recorded hereinbelow regarding the manner in which such liability is to be effectuated.
Rectification and Adjustment Account
25.73. We now proceed to Transaction H, which concerns entries aggregating to Rs. 5,812.52 lakh routed through the “Rectification and Adjustment Account”. The Transaction Auditor has observed that substantial balances pertaining to various parties were transferred, adjusted and, in certain instances, written off through this account. The relevant entries were questioned on the ground that no adequate supporting documents, contemporaneous explanations or accounting basis were made available to establish the necessity or legitimacy of such rectifications.
25.74. The Respondents have sought to explain the entries by contending that the Rectification and Adjustment Account was used for correcting accounting errors, passing adjustment entries and settling inter party transactions. It is their case that such entries were part of the regular accounting operations of the Corporate Debtor and were not intended to cause any loss or prejudice to the Corporate Debtor.
25.75. We are unable to accept such a general explanation. A rectification entry, by its very nature, must be traceable to an identifiable error or discrepancy in the original accounting entry. Similarly, an adjustment entry must disclose the basis upon which one balance is altered, transferred or extinguished against another. Where entries aggregating to Rs. 5,812.52 lakh are routed through a single account described as “Rectification and Adjustment Account”, it was incumbent upon the Respondents to demonstrate the original entry, the error or circumstance necessitating rectification, the authority for passing the adjustment and the corresponding accounting effect thereof.
25.76. The Transaction Audit Report records that the requisite underlying documents and explanations were not made available for verification. The Respondents, even in the present proceedings, have not furnished any transaction wise reconciliation explaining the entries constituting the aforesaid aggregate amount. No material has been produced to establish the original nature of the balances transferred through the account, the reasons for their adjustment or the persons in whose favour such entries ultimately operated.
25.77. This is not a case where the Applicant seeks to draw an inference of fraud merely from the absence of a particular supporting document. The very manner in which substantial balances of the Corporate Debtor were routed through a generic rectification and adjustment account required a clear accounting trail. Once the Transaction Auditor specifically identified these entries and called upon the persons responsible for the affairs of the Corporate Debtor to explain them, the Respondents were required to provide a cogent and transaction wise explanation. Their failure to do so assumes significance particularly when the entries directly resulted in alteration, transfer or extinguishment of balances reflected in the books of the Corporate Debtor.
25.78. The Respondents cannot be permitted to rely upon the mere nomenclature of the account or a general assertion that the entries were passed in the ordinary course of business. Such explanation, without identification of the underlying error, transaction or liability sought to be rectified, renders the accounting entries incapable of verification. The records necessary to explain these transactions were admittedly within the knowledge and control of the persons managing the affairs of the Corporate Debtor during the relevant period.
25.79. The cumulative circumstances, namely, the substantial quantum of the entries, their routing through a common rectification and adjustment account, the absence of any transaction wise basis or supporting material and the failure of the Respondents to furnish a satisfactory explanation despite repeated opportunities, lead us to conclude that these entries were utilised to manipulate the accounts of the Corporate Debtor and to alter or extinguish its financial balances without any verifiable commercial or accounting basis.
25.80. The rectification and adjustment entries without any supporting basis indicate manipulation of books of account resulting into loss to the Corporate Debtor and finally to the creditors. We are, therefore, of the considered view that the transactions aggregating to Rs. 5,812.52 lakh under Transaction H stand established as fraudulent transactions within the meaning of Section 66 (2) of the Code. The directors did not exercise due diligence in minimising the potential loss to the creditors of the Corporate Debtor. The Respondents have failed to establish any legitimate basis for the entries or to rebut the findings of the Transaction Auditor.
25.81. Accordingly, all the Respondents, being the persons responsible for the conduct of the affairs of the Corporate Debtor during the relevant period, are liable to contribute an amount of Rs. 5,812.52 lakh to the assets of the Corporate Debtor in respect of Transaction H, subject to the final directions regarding the manner in which the liability is to be enforced.
# 26. Accordingly, in light of the above, we hold that the transactions under the following heads stand established as fraudulent transactions (section 66 of the Code).
- Transaction Amount
- G. Inter Party Adjustments Rs. 8,201.00 lakh
- H. Rectification and Adjustment Account Rs. 5,812.52 lakh
- J. Purchases from Non Existent Suppliers Rs. 3,028.88 lakh
- Total Rs. 17,042.40 lakh
# 27. Accordingly, Transactions G, H and J stand established for a total amount of Rs. 17,042.40 lakh, equivalent to Rs. 170.424 crore. The remaining transactions examined hereinabove do not, on the basis of the material presently available, satisfy the threshold for grant of relief under Section 66 of the Code and are accordingly rejected. The transaction relating to the alleged use of the premises and machinery of the Corporate Debtor has not been considered for determination in the present findings.
# 28. Having held that Transactions G, H and J stand established and attract the provisions of Section 66 of the Code, the next question which arises for consideration is the manner in which the liability is to be fastened upon the Respondents. The transactions in question were undertaken during the period when the Respondents were responsible for and involved in the conduct and management of the affairs of the Corporate Debtor. The nature of the transactions, particularly the substantial inter party adjustments, the entries routed through the Rectification and Adjustment Account and the purchases recorded from suppliers found to be non-existent, cannot be regarded as isolated or inadvertent accounting discrepancies. As held hereinabove, these transactions formed part of the financial affairs of the Corporate Debtor and were undertaken in circumstances in which their genuineness and underlying commercial basis have remained unexplained.
# 29. Accordingly, the Respondents are held jointly and severally liable to contribute an amount of Rs. 17,042.40 lakh, equivalent to Rs. 170.424 crore, to the assets of the Corporate Debtor in respect of Transactions G, H and J. Consequently, the Applicant shall be entitled to recover the aforesaid amount from the Respondents jointly and severally, and payment by any one or more of the Respondents shall operate as a discharge of the liability to the extent of the amount so realised.
# `30. Further, the transaction relating to sale of car at a price less than the written down value has also held to be of the nature of undervalued transaction. This issue is discussed and a finding is given in paragraphs 25.1 to 25.5 of this Order.
# 31. In view of the foregoing observations and findings, the present interlocutory application is partly allowed in terms of the following directions: -
i. Transactions G, H and J, as discussed hereinabove, are held to be established and to fall within the ambit of Section 66 of the Insolvency and Bankruptcy Code, 2016.
ii. Respondents are held jointly and severally liable to contribute an amount of Rs.17,042.40 lakh, equivalent to Rs.170.424 crore, to the assets of the Corporate Debtor.
iii. The aforesaid amount shall be paid to the Applicant within a period of 45 days from the date of pronouncement of this order.
iv. Upon realization of the aforesaid amount, that shall be distributed among the Applicant and other creditors of the Corporate Debtor in accordance with the approved Resolution Plan and the applicable provisions of the Code and Regulations.
v. In the event of non-compliance with any direction for contribution made pursuant to Section 66, the Applicant shall be at liberty to seek enforcement of this order by initiating appropriate execution proceedings in accordance with law before the competent forum.
vi. The reliefs sought in respect of the remaining transactions, as discussed and dealt with hereinabove, are rejected.
# 32. Accordingly, I.A. No. 876 of 2021 in CP (IB) No. 669 of 2019 stands partly allowed in the above terms and is disposed of. Further, I.A. No. 985 of 2023, having already resulted in restoration of the defence of Respondent Nos. 1, 2 and 6 pursuant to the order of the Hon’ble NCLAT dated 22.11.2023, stands disposed of. There shall be no order as to costs.
# 33. A certified copy of this order be issued, if applied for, upon compliance with all requisite formalities
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