NCLT Bengaluru (02.02.2022) in Addanki Haresh Vs. H.P. Arun Kumar & Ors. [I.A. No.482 of 2020 in C.P. (IB) No.320/BB/2019] Adjudicating Authority directed the related parties (suspended directors of CD) to return the money of preferential payments received by them during the period of two years prior to DOC, observing;
The respondents except claiming that the transactions were done in the ordinary course of business, were not able to substantiate the said submission.
Excerpts of the order;
# 1. The Resolution Professional of the Corporate Debtor - M/s. Right Engineers and Equipment India Private Limited filed the instant I.A. against the Respondents under section 43 of the Insolvency and Bankruptcy Code, 2016 read with Rule 11 of the National Company Law Tribunal Rules, 2016 seeking the following reliefs:
"a. Declare that the payment of Rs.49.83 Lacs constitute preferential transactions, violating Section 43 of IBC.
b.. Reverse the Advance repayment transactions made to Respondents as detailed in Paragraph 8 above, and direct the amount of Rs.49.83 Lacs paid by the Corporate Debtor to the Respondent be returned and vested in the Corporate Debtor.
c.. Such other orders as this Hon'ble Tribunal may deem fit in the facts and circumstances of the case, in the interest of justice and equity."
# 2. A common reply vide Diary No.1043 dated 23.03.2021 has been filed on behalf of Respondent Nos. 1 and 2, who are the suspended Board of Directors of the Corporate Debtor, opposing the I.A. The Respondent No.3, who is the wife of the Respondent No.2, also filed the reply / objections vide Diary No. 1042 dated 23.03.2021, seeking dismissal of the I.A. against her in limine on the ground that no relief is claimed against her in the I.A.
# 3. The Applicant / Resolution Professional thereafter filed Additional Affidavit on 08.11.2021 seeking a direction against the Respondent No.3 to restore an amount of Rs.11,50,000/- in addition to the amount of Rs.49,83,107.90/ claimed against the Respondent Nos. 1 and 2 in I.A. No.482 of 2020.
# 4. In view of the Additional Affidavit filed by the Applicant in the I.A., the Respondent No.3 was permitted to file objections to the said Affidavit, and accordingly she filed additional objections / reply vide Diary No.3309 dated 02.12.2021. The Applicant / Liquidator filed a common rejoinder vide Diary No.3413 dated 06.12.2021 to the original reply / objections filed on behalf of Respondent Nos. 1, 2 and 3 and also to the additional reply / objections filed by the Respondent No.3.
# 5. Heard Mr. Addanki Haresh, for the Applicant / Liquidator in person and Mr.Vinod Sunder Raman, Authorised Representative for the Respondent Nos. 1, 2 and 3 and perused the pleadings on record.
# 6. It is submitted by the Applicant / Liquidator that this Adjudicating Authority in CP (IB) No.320/BB/2019 filed by M/s. Sri M. Visveswaraya Co-operative Bank Ltd. filed against the Corporate Debtor - M/s. Right Engineers and Equipment India Pvt. Ltd. under section 7 of the I&B Code, 2016, vide its order dated 29.10.2019 admitted the CP and initiated the Corporate Insolvency Resolution Process (CIRP) and appointed the Applicant as the Interim Resolution Professional (IRP). Thereafter, the Applicant was appointed as the Resolution Professional (RP). This Adjudicating Authority, vide order dated 02.12.2020, in I.A. No.484 of 2020 ordered that the Corporate Debtor – M/s. Right Engineers and Equipment India Pvt. Ltd. is to be liquidated and appointed the Applicant as the Liquidator to initiate the liquidation process.
# 7. It is further submitted by the Applicant / Liquidator that since the Audited Balance Sheets upto March, 2019 were showing certain transactions and transfer of funds to the Related Parties; M/s. Nagadheep Satyanrayana & Co., Chartered Accountants, Bangalore, were appointed and after their resignation M/s. Hegde Raj & Ullody, Chartered Accountants, Bangalore, were appointed to conduct the Forensic Audit for reviewing of the accounts for a period of two years in case of Related Parties and for a period of one year in other cases before the commencement of CIRP. At the 8th Meeting of the Committee of Creditors (COC) held on 09.11.2020, the draft Forensic Audit Report submitted by the Auditors was discussed.
The Committee identified the following:
(a) Potential Preferential Transactions covered by section 43 - Rs.81.33 Lacs
(b) Potential Fraudulent Transactions covered by section 66 – Rs.78.81 Lacs
Mr. Nagaraj, one of the suspended Director of the Company and the Respondent herein, requested the CoC and the RP to give some time to explain about the said transactions since in his view the transactions were conducted during the business expediency. The Forensic Auditor after discussing with the suspended Directors of the Company i.e. Respondent Nos. 1 and 2 herein, submitted the final Forensic Report (Annexure-4) and the relevant portions of the same read as under:
"FORENSIC REPORT – RIGHT ENGINEERS & EQUIPMENT INDIA PRIVATE LIMITED
Annexure - 1 Related party loan repayment
# 8. The Applicant / Liquidator, submits that since the Respondent Nos. 1 and 2 have not paid the said amount of Rs.49.83 Lacs, the amount classified as preferential transactions to the Corporate Debtor, he filed the instant application.
# 9. The Applicant / Liquidator submits that since it was observed that certain transactions were missed, the Forensic Auditor was requested to review the transactions once again and in view of the additional information and the additional report dated 03.11.2021 furnished by the Forensic Auditors, it was found that the Respondent No.3, who is the wife of the Respondent No.2, is liable to return an amount of Rs.11,50,000/- to the Corporate Debtor and accordingly he filed the Additional Affidavit on 08.11.2021 seeking the said additional direction against the Respondent No.3.
# 10. The Authorised Representative appearing for the Respondent Nos.1, 2 and 3 in support of their submission that the I.A. is liable to be dismissed drawn our attention to certain "Disclaimers, Exclusions and Limitations", of the Forensic Audit Report. Accordingly, submitted that the Forensic Audit Report cannot be given effect to. Similarly, in respect of the claim against the Respondent No.3, it is submitted that the additional report said to have been submitted almost after one year from the original Forensic Audit Report that too without giving any opportunity to the Respondent No.3, is liable to be rejected.
# 11. It is seen that in respect of the original Forensic Audit Report as well as the additional Forensic Audit Report, the observations made by the Forensic Auditors and the figures arrived there to were supported by the Bank Statements. The Respondent Nos. 1, 2 and 3 failed to dispute the said Bank Statements basing on which the Auditors have prepared the Forensic Audit Report. Hence the amount referred above falls under the ambit of preferential transaction and hence the Respondents are liable to refund the same to the Corporate Debtor. It is also seen that the Audit was completed in 2021 only, and hence there is no delay either in filing the instant Application or the Additional Affidavit seeking additional directions against the Respondent No.3.
# 12. It is not in dispute that the amounts finalised against the Respondent Nos. 1 and 2 was after due deliberations and discussions and after providing sufficient opportunity to the Respondent Nos.1 and 2 by the Forensic Auditors. The Respondent Nos. 1 and 2 failed to show any valid document against the well examined Forensic Audit Report. Further, even in respect of the claim made by the Respondent No.3, the Respondents failed to show any valid document, in support of their submissions. The respondents except claiming that the transactions were done in the ordinary course of business, were not able to substantiate the said submission.
# 13. In the circumstances and for the aforesaid reasons, the instant I.A. is allowed as under:
i. The subject transactions are declared as Preferential Transactions in terms of Section 43 of the I&B Code, 2016.
ii. The Respondent No.1 is directed to restore an amount of Rs.24,29,874/- (Rupees Twenty Four Lakhs Twenty Nine Thousand Eight Hundred and Seventy Four only) to the Corporate Debtor within 30 days from the date of receipt of this order.
iii. The Respondent No.2 is directed to restore an amount of Rs.25,53,233/- (Rupees Twenty Five Lakhs Fifty Three Thousand .
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Blogger’s Comments; Provisions of the Code in respect of “Preferential Transactions”.
# Section 3(27) “property” includes money, goods, actionable claims, land and every description of property situated in India or outside India and every description of interest including present or future or vested or contingent interest arising out of, or incidental to, property;
Section 43. Preferential transactions and relevant time. -
(1) Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44.
(2) A corporate debtor shall be deemed to have given a preference, if–
(a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and
(b) the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53.
(3) For the purposes of sub-section (2), a preference shall not include the following transfers–
(a) transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee;
(b) any transfer creating a security interest in property acquired by the corporate debtor to the extent that –
(i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest, and was used by corporate debtor to acquire such property; and
(ii) such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property:
Provided that any transfer made in pursuance of the order of a court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor.
Explanation. – For the purpose of sub-section (3) of this section, “new value” means money or its worth in goods, services, or new credit, or release by the transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the liquidator or the resolution professional under this Code, including proceeds of such property, but does not include a financial debt or operational debt substituted for existing financial debt or operational debt.
(4) A preference shall be deemed to be given at a relevant time, if –
(a) It is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or
(b) a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date.
# Section 44. Orders in case of preferential transactions. -
(1) The Adjudicating Authority, may, on an application made by the resolution professional or liquidator under sub-section (1) of section 43, by an order:
(a) require any property transferred in connection with the giving of the preference to be vested in the corporate debtor;
(b) require any property to be so vested if it represents the application either of the proceeds of sale of property so transferred or of money so transferred;
(c) release or discharge (in whole or in part) of any security interest created by the corporate debtor;
(d) require any person to pay such sums in respect of benefits received by him from the corporate debtor, such sums to the liquidator or the resolution professional, as the Adjudicating Authority may direct;
(e) direct any guarantor, whose financial debts or operational debts owed to any person were released or discharged (in whole or in part) by the giving of the preference, to be under such new or revived financial debts or operational debts to that person as the Adjudicating Authority deems appropriate;
(f) direct for providing security or charge on any property for the discharge of any financial debt or operational debt under the order, and such security or charge to have the same priority as a security or charge released or discharged wholly or in part by the giving of the preference; and
(g) direct for providing the extent to which any person whose property is so vested in the corporate debtor, or on whom financial debts or operational debts are imposed by the order, are to be proved in the liquidation or the corporate insolvency resolution process for financial debts or operational debts which arose from, or were released or discharged wholly or in part by the giving of the preference:
Provided that an order under this section shall not -
(a) affect any interest in property which was acquired from a person other than the corporate debtor or any interest derived from such interest and was acquired in good faith and for value;
(b) require a person, who received a benefit from the preferential transaction in good faith and for value to pay a sum to the liquidator or the resolution professional.
Explanation-I: For the purpose of this section, it is clarified that where a person, who has acquired an interest in property from another person other than the corporate debtor, or who has received a benefit from the preference or such another person to whom the corporate debtor gave the preference, -
(a) had sufficient information of the initiation or commencement of insolvency resolution process of the corporate debtor;
(b) is a related party, it shall be presumed that the interest was acquired, or the benefit was received otherwise than in good faith unless the contrary is shown.
Explanation-II. – A person shall be deemed to have sufficient information or opportunity to avail such information if a public announcement regarding the corporate insolvency resolution process has been made under section 13.
# Section 46. Relevant period for avoidable transactions. -
(1) In an application for avoiding a transaction at undervalue, the liquidator or the resolution professional, as the case may be, shall demonstrate that –
(i) such transaction was made with any person within the period of one year preceding the insolvency commencement date; or
(ii) such transaction was made with a related party within the period of two years preceding the insolvency commencement date.
(2) The Adjudicating Authority may require an independent expert to assess evidence relating to the value of the transactions mentioned in this section.
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