NCLT Kolkata (2024.05.17) in Rachna Jhunjhunwala (RP) of Power Max (India) Pvt. Ltd. [(2024) ibclaw.in 522 NCLT, I.A. (IB) (Plan) No. 2/KB/2024 in Company Petition No. 104/KB/2022] Held that;.
The Insolvency and Bankruptcy Code, 2016 casts huge responsibilities on the Resolution professional to deal with avoidance transactions under Sections 43, 45, 50 and 66 during the corporate insolvency resolution process of a corporate debtor.
In fact, the Code contemplates that it is the Resolution Professional alone who would form an opinion and determine avoidance transactions and take it up with the Adjudicating Authority by way of application for appropriate orders.
The members of the committee of creditors who participate in the CIR Process neither can devote their time on a full-time basis nor equipped to form an opinion and determine the avoidance transactions in a corporate debtor undergoing CIRP/ liquidation.
It is the duty of the Resolution Professional to bring it to the notice of the CoC, as to where the borrowed funds have gone, particularly in case where the “haircut” is as high as 92% like in the present case.
While the look back period for fraudulent transactions under Sections 43, 45 and 50 is two years and there is no limit on look back period for fraudulent transactions under Section 66 of the I&B Code.
Unless the audit period covers a period beyond two years, at least from the period when the corporate debtor starting making losses / default in payment of debts, we are of the view that no fraudulent transactions can meaningfully be found or unearthed.
Hence, we direct the Resolution Professional to examine the last 6 years Financial Statements, IT Returns, GST Returns, cash flow and fund flow statements in detail and place it before the CoC of the Corporate Debtor with appropriate justification and the basis for forming opinion that there were no avoidance transactions, in the form of a report. A copy of the said report also be filed with this Adjudicating Authority.
Blogger’s Comments; Let’s look into the provisions of Section 66(2).
# Section 66. Fraudulent trading or wrongful trading. -
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(2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution
to the assets of the corporate debtor as it may deem fit, if-
(a) before the insolvency commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and
(b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor.
The fact that CD’s net worth has turned negative, should put directors or partners, as the case may be, on notice of the reasonable prospect of the incipient insolvency of the company. Thus the duty is imposed on the management of the CD under section 66(2)(b) to initiate insolvency proceedings under section 10 to minimize the losses to the creditors. Directors or partners, as the case may be, can be asked to contribute towards the assets of the CD, an amount equal to the losses of the CD after the net worth of the CD turned negative.
Whenever the net worth of the CD turns negative, directors or partners, as the case may be, should take a conscious decision, preferably through board resolution/AGM to either file for insolvency proceedings under section 10 or to continue to run the business of CD on profitable prospects.
In my view, it should be made incumbent on the management/auditors to file for insolvency within 60 days, when the net worth of the company turns negative in the audited financials, and the management has not taken any steps to infuse fresh capital. Management should not be allowed to run the company on funds of creditors.
Excerpts of the order;
On the PUFE Transactions:
# 69. However, it is evident that the CoC has been constituted with only one member which is Indian Bank (Secure Financial Creditor). The claim received from Indian Bank is for Rs. 43.08 Crore that has been admitted in full by the Resolution Professional (RP).
# 70. We find that the amount allocated to Indian bank in the Resolution Plan of SRA is of Rs. 3.82 Crore only resulting in a huge reduction of 91.15%, compared to the admitted claim. Similarly, in the case of Government dues, against the admitted claim of Rs. 2.01 Crore, only Rs. 0.03 Crore has been provided resulting in massive reduction of 98%. Further, in case of Operational Creditors other than the employees, workman and Government dues, against the admitted claim of Rs. 3.09 Crore, only a Rs. 0.03 Crore has been allocated, again leading to large scale reduction of 99%.
# 71. We find that against total admitted claim from various creditors for Rs. 48.36 Crore, only Rs. 4.01 Crore has been proposed and allocated which is almost 92% “haircut”. If we consider the total claims received as against the admitted claim, then the “haircut” is even more at 95%.
# 72. We find that the Resolution Professional in Form H as well as in the Supplementary Affidavit stated that no transactions were observed under Regulation 39(2) of the CIRP Regulations which envisages that the RP shall submit to the committee, all resolution plans which comply with the requirements of the Code and regulations made thereunder along with the details of following transactions, if any, observed, found or determined by him:
(a) preferential transactions under section 43;
(b) undervalued transactions under section 45;
(c) extortionate credit transactions under section 50; and
(d) fraudulent transactions under section 66, and the orders, if any, of the adjudicating authority in respect of such transactions.
# 73. The Insolvency and Bankruptcy Code, 2016 casts huge responsibilities on the Resolution professional to deal with avoidance transactions under Sections 43, 45, 50 and 66 during the corporate insolvency resolution process of a corporate debtor. In fact, the Code contemplates that it is the Resolution Professional alone who would form an opinion and determine avoidance transactions and take it up with the Adjudicating Authority by way of application for appropriate orders.
# 74. The members of the committee of creditors who participate in the CIR Process neither can devote their time on a full-time basis nor equipped to form an opinion and determine the avoidance transactions in a corporate debtor undergoing CIRP/ liquidation.
# 75. If the Resolution Professional misses to determine the avoidance transactions and fail to file applications before the Adjudicating Authority, then no way diverted or syphoned of funds if any can be got back and made available for distribution and insolvency resolution of the corporate debtor.
# 76. In the present case, we find that total admitted claims is of Rs. 48.36 Crore, the liquidation value is Rs. 4.08 Crore and the value of the Resolution Plan is of Rs. 4.01 Crore, leading to a “haircut” of about 92%.
# 77. It is the duty of the Resolution Professional to bring it to the notice of the CoC, as to where the borrowed funds have gone, particularly in case where the “haircut” is as high as 92% like in the present case.
# 78. We have noted that during the CIR Process, the RP has appointed a transactional auditor who has examined only two financials’ years i.e., 2020-2021 and 2021-2022, and unaudited Trial Balance of 2022-2023, and came to conclusion that there are no avoidance transactions. While the look back period for fraudulent transactions under Sections 43, 45 and 50 is two years and there is no limit on look back period for fraudulent transactions under Section 66 of the I&B Code.
# 79. Unless the audit period covers a period beyond two years, at least from the period when the corporate debtor starting making losses / default in payment of debts, we are of the view that no fraudulent transactions can meaningfully be found or unearthed. Further, the transactional audit report merely reports changes in various accounts when compared to the previous year.
# 80. Hence, we direct the Resolution Professional to examine the last 6 years Financial Statements, IT Returns, GST Returns, cash flow and fund flow statements in detail and place it before the CoC of the Corporate Debtor with appropriate justification and the basis for forming opinion that there were no avoidance transactions, in the form of a report. A copy of the said report also be filed with this Adjudicating Authority.
# 81. The RP shall comply with the direction within a period of four weeks from the date of pronouncement of the order. This direction shall not affect the approval of the Resolution Plan.
# 82. The Resolution Plan shall form part of this Order and shall be read along with this order for implementation. The Resolution Plan thus approved shall be binding on the Corporate Debtor and all other stakeholders involved in terms of Section 31 of the I&B Code, so that the revival of the Corporate Debtor Company shall come into force with immediate effect without any delay.
# 83. The Moratorium imposed under section 14 of the Code by virtue of the order initiating the CIR Process, shall cease to have effect from the date of this order.
# 84. The Resolution Professional shall submit the records collected during the commencement of the proceedings to the Insolvency & Bankruptcy Board of India for their record and also return them to the Resolution Applicant or New Promoters after completing the report mentioned in para 80 of this order.
# 85. Liberty is hereby granted for moving any application, if required, in connection with the successful implementation of this Resolution Plan.
# 86. A copy of this Order is to be submitted to the Registrar of Companies (RoC) to whom the company is registered, by the Resolution Professional.
# 87. The Resolution Professional shall stand discharged from his duties with effect from the date of this Order. However, she is required to comply with our direction mentioned in Para 80 of the order.
# 88. The Resolution Professional is further directed to hand over all records, premises/ factories/ documents to the Resolution Applicant to finalise the further line of action required for starting the operation. The Resolution Applicant shall have access to all the records/ premises/ factories/ documents through the Resolution Professional to finalise the further line of action required for starting the operation.
# 89. The Registry of this Adjudicating Authority is directed to send e-mail copies of the order forthwith to all the parties and their Learned Counsels for information and for taking necessary steps.
# 90. In terms of the view above, the interlocutory application being I.A. (IB) (Plan) No. 2/KB/2024 along with the main company petition being Company Petition No. 104/KB/2022 shall stand disposed of accordingly.
# 91. Certified copies of this order, if applied for with the Registry of this Adjudicating Authority, be supplied to the parties upon compliance with all requisite formalities. 92. File be consigned to the record. D. Arvind Bidisha Banerjee
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