NCLT Hyderabad (2021.04.09) in Mr. Ashish Arjunkumar Rathi RP For Ind-Barath Power (Madras) Ltd Vs Kanumuru Raju Raghu Rama Krishna & Ors. [IA No. 157 of 2019 in CP IB No.150/9/ HDB/ 2017.] held that;
"In view of the above discussion this Adjudicating Authority is of the considered view that sufficient material is not placed on record by the resolution applicant to give a finding that the controversial transactions in this case amounts to fraudulent trading with intent to defraud creditors of the corporate debtor."
If we take note of the above Disclaimer declared by the Auditor, then we have to hold that this Audit Report, on the basis of which the Resolution Professional wanted us to infer that the transactions in dispute are fraudulent in nature, etc., is too inconclusive report. The Auditor himself is not confident about the finding recorded by him for want of sufficient material before him. If we keep out of our consideration such inconclusive Audit Report, we have to hold that there is no additional and sufficient material brought on record by the Resolution Professional so as to enable us to record a different finding on the disputed transaction which this Adjudicating Authority has already recorded in its order dated 08.05.2018
It is not in dispute that the Liquidator (then Resolution Professional) has sold the Corporate Debtor as a going concern. It means that the Corporate Debtor was a going concern throughout the CIRP period and hence it has to be held that the entire loan amount has not been misused as alleged by the RP.
The expressions 'fraud' or fraudulent transaction' have not been defined in I&B Code, 2016. Hence as per section 3(37) of the I&B Code, 2016, we have to consider the definition of 'fraud' as it appears in section 17 of the Indian Contract Act, 1872,
The Financial creditors are having knowledge of the controversial transactions, did not choose to initiate any legal action except writing letters, sending notices. .… “
Before we conclude with this order, there is one more aspect which needs our serious consideration. It is not in dispute that now some members of the Consortium of Lenders have filed an F.I.R. against the respondents and officers of the Axis Bank alleging that the disputed transactions are fraudulent in nature. Central Bureau of Investigation (CBI) has registered a crime and has started investigation into the matter. Now at this stage, can this Adjudicating Authority, in its limited jurisdiction, record finding that the transaction in dispute is per se fraudulent in nature. In our considered opinion it would be against the cannons of justice. Let the prime investigating agency investigate into the allegations. Let the competent court, during the trial, record findings of fact.
Excerpts of the Order;
# 1. Mr. Ashish Arjunkumar Rathi, Resolution Professional, now Liquidator of the Corporate Debtor/ M/s. Ind- Barath (Madras) Limited filed this application under section 66 of the Insolvency and Bankruptcy Code, 2016 directing the respondents herein to make contributions to he assets of the Corporate Debtor on the allegations that the ex- management of the Corporate Debtor and related parties carried on the affairs of the Corporate Debtor in a fraudulent manner with intent to defraud its creditors.
# 2. It is not in dispute that respondents no.1 to 4 are the suspended Directors of the Corporate Debtor, whereas respondents no.5 to 13 are related parties. It is alleged that the related parties are the beneficiaries of such fraudulent transactions being carried by the suspended management of the Corporate Debtor.
# 3. The following facts are not in dispute:
3.1 One M/s Rohan Varma Constructions Private Limited Operational Creditors of the Corporate Debtor had filed application under section 9 of the I&B Code, 2016 against the Corporate Debtor to initiate Corporate Insolvency Process (CIRP) of the Corporate Debtor. On 14.08.2017 the Corporate Debtor was admitted in CIRP. Initially, one Mr. Kranti Kumar Kedari, Resolution Professional having Registration No.IBBI/ IPA-001-IP-P00173/ 2017-18/ 10342 appointed as Interim Resolution Professional (IRP). He took over the management and affairs of the Corporate Debtor suspending its Directors. Thereafter, Committee of Creditors (CoC) was formed. The CoC, in its first meeting held on 25.09.2017 appointed the applicant as Resolution Professional replacing the IRP. On 16.01.2018, the Resolution Professional had filed application (bearing IA No.40 of 2018) under section 66 of the I&B Code, 2016 against the same respondents. This Adjudicating Authority by speaking order dated 08.05.2018, rejected the said application observing in para 71 that:
"This Adjudicating Authority is of the considered view that in order to give a finding under section 66 of the Code there must be a clinching and conclusive evidence, mere opinions or prima facie evidence is not sufficient."
3.2 It has further been observed in para 80 that,
"In view of the above discussion this Adjudicating Authority is of the considered view that sufficient material is not placed on record by the resolution applicant to give a finding that the controversial transactions in this case amounts to fraudulent trading with intent to defraud creditors of the corporate debtor."
3.3 In para 82 of the order, this Adjudicating Authority, however, gave liberty to the Resolution Professional to file a fresh application under section 66 of the I&B Code, 2016 in the following words:
"The Resolution Professional is also at liberty, at any subsequent stage to place sufficient material on record, relating the controversial transactions under appropriate provisions of the IB Code."
3.4 This Adjudicating Authority was pleased to reject the first application of the Resolution Professional under section 66 of the I&B Code, 2016 against the same respondents holding that there was no sufficient evidence on record to direct the respondents to make contribution to the assets of the Corporate Debtor, because of lack of evidence that they had carried the business of the Corporate Debtor in a fraudulent manner with intent to defraud its creditors.
# 4. At this stage, it would be proper to look into as to what were the controversial transactions allegedly done by the respondents and (i) Whether they can be said to be fraudulent and done with intent to defraud the creditors? and (ii) What was the material then placed before this Adjudicating Authority by the RP, which this Adjudicating Authority found to be insufficient?
# 5. The Resolution Professional has called in question two transactions, namely, Joint Lenders had granted and disbursed in favour of the Corporate Debtor some of the loan amounts. Those amounts were kept in a Trust and Retention Account (for short TR Account') bearing No.9100020017066895, maintained with Axis Bank. There was agreement entered into by and between the Corporate Debtor and the Consortium of Lenders, known as, Trust and Retention Agreement (for short TR Agreement'). As per the terms of the said TR Agreement, the Corporate Debtor was supposed to utilize the loan amount subject to the conditions mentioned in that Agreement dated 24.02.2011. The terms of the Agreement were amended on 19.01.2015. As per some of the terms and conditions of TR Agreement, the Corporate Debtor was obliged to use the amount for construction and implementation of 660 MV coal-based Thermal Power Project at Sasthavinallur and Pallakkurichi villages, Sattankulam Taluk, Tuticorin District in the State of Tamil Nadu. As per the Resolution Professional's own assertion, the Corporate Debtor was engaged in the business of generation and distribution of electricity (Para 9 of the application).
# 6. According to the RP, the suspended management of the Corporate Debtor, in the year 2016, used some amount from the TR Account and created Fixed Deposits from that account. They pledged those Fixed Deposits with Bank of India and UCO Bank and allowed its subsidiary companies, viz. Respondents no.6 to 11 to raise loan against those Fixed Deposits. The Resolution Professional alleged that this act of Ex- Management of the Corporate Debtor is amounting to siphoning off the loan amount in contravention of the terms of the TR Agreement dated 19.01.2015. The Resolution Professional alleged that it is a fraudulent transaction carried by the suspended management of the Corporate Debtor while doing its business and it was done with intent to defraud the creditors.
# 7. There is no dispute to the fact that the suspended management of the Corporate Debtor had created Fixed Deposits using the amounts in TR Account and sought loan to its subsidiary companies pledging those Fixed Deposits. The real question is whether it can be called a 'fraudulent transaction' with intent to defraud the creditor while doing business or it was breach of the terms of the loan agreement?
# 8. The above admitted facts were also available on record when this Adjudicating Authority rejected the first application of the Resolution. Professional under section 66 of the I&B Code holding that there was no enough material on record. The Resolution Professional was allowed to file second application under section 66 of the Code provided he gets sufficient material and if so advised.
# 9. After rejection of the Resolution Professional's first application under section 66 of the Code, the Resolution Professional collected and produced on record some additional evidence in the form of Forensic Audit Report dated 24.12.2018 prepared by M/s Haribhakti & Co. We have gone through that report. We have heard the learned counsel for the Resolution Professional and the learned senior counsel for the respondent at length. We perused the additional material which was brought on record by the RP.
# 10. It is seen from the perusal of the Forensic Auditor's Report that the report is in the form of opinion having number of riders. The Forensic Auditor recorded his conclusion against each transaction which he has examined as follows:
"Disclaimer
1. As it is practically not possible to study all aspects of a process in its entirety thoroughly during the limited time period of an audit, based on our methodology for conducting Special review of business processes, we conducted a review of the process and held discussions with the process owners and other key people in the process during the planning stage of audit which helped us in identifying specific areas where control weaknesses & process gaps may exist.
2. The identification of the issues in the report is mainly based on the review of records, sample verification of documents/ transactions and physical observation of the events. As the basis of sample selection is purely judgmental in view of the time available, the outcome of the analysis may not be exhaustive and representing all possibilities, though we have taken reasonable care to cover the major eventualities.
3. This report does not comment upon any change/ development taken place in the process and functioning of processes after the last date of our field work.
4. Our observations are based on data provided to us by Resolution Professional."
# 11. If we take note of the above Disclaimer declared by the Auditor, then we have to hold that this Audit Report, on the basis of which the Resolution Professional wanted us to infer that the transactions in dispute are fraudulent in nature, etc., is too inconclusive report. The Auditor himself is not confident about the finding recorded by him for want of sufficient material before him. If we keep out of our consideration such inconclusive Audit Report, we have to hold that there is no additional and sufficient material brought on record by the Resolution Professional so as to enable us to record a different finding on the disputed transaction which this Adjudicating Authority has already recorded in its order dated 08.05.2018. We cannot review our own order in absence of cogent and sufficient material.
# 12. Apart from the above, still we examine these disputed transactions to find out whether they constitute ingredients stated under section 66 of the I&B Code. Section 66 of the Code reads as under:
"Fraudulent trading or wrongful trading.
66. (1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.
(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 Appeal to Supreme Court. Civil court not to have jurisdiction. Expeditious disposal of applications. Fraudulent or malicious initiation of proceedings. Fraudulent trading or wrongful trading. 5 10 15 20 25 30 35 40 4536 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. Explanation. For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor."
A perusal of the above provision makes it clear that,
(a) The Resolution Professional has to form an opinion that the ex- management of the Corporate Debtor carried business of the Corporate Debtor in a fraudulent manner to defraud the creditors.
(b) This Adjudicating Authority while passing order has to record its finding that before commencement of insolvency of the Corporate Debtor, such Directors ought to have known that there was no reasonable prospects of avoiding CIRP of the Corporate Debtor.
(c) Such Directors did not exercise due diligence to minimize the potential loss in respect of such Corporate Debtor. and
(d) There is a presumption of fact that such Directors had exercised due diligence that there was reasonable prospect of a person carrying out same transaction as carried out by such Directors.
# 14. The presumption of fact as noted above appears to be based on a principle that no one wishes to put his business in CIRP at the cost of his losing control thereon.
# 15. In view of the above, if we examine the transaction in dispute, we find that from the loan amount, the Corporate Debtor had created Fixed Deposits and sought loan to its subsidiary companies pledging those Fixed Deposits. It was done in the year 2016, viz. almost five years after the Consortium of Lenders granted and disbursed the Corporate Debtor some amounts of loan. The Resolution Professional has averred that under section 25(1) of the I&B Code the Corporate Debtor has issued notice dated 19.02.2014 for withdrawal of an amount of Rs. 1452 crores in order to invest the said amount in plant and machinery, for carrying some civil work, to invest some amount in fixed assets for laying transmission lines, etc. In view of this it was for the Resolution Professional to put on record the material indicating that though the Corporate Debtor has shown the above expenses, in fact, those amounts were not spent at all for the purpose for which it is shown to have been spent.
# 16. It is not in dispute that the Liquidator (then Resolution Professional) has sold the Corporate Debtor as a going concern. It means that the Corporate Debtor was a going concern throughout the CIRP period and hence it has to be held that the entire loan amount has not been misused as alleged by the RP.
# 17. Section 66 of the I&B Code speaks about fraudulent transaction. The expressions 'fraud' or fraudulent transaction' have not been defined in I&B Code, 2016. Hence as per section 3(37) of the I&B Code, 2016, we have to consider the definition of 'fraud' as it appears in section 17 of the Indian Contract Act, 1872, in order to understand what does 'fraud' or 'fraudulent transaction' mean. Section 17 of the Indian Contract Act, 1872 reads as under:
"17. 'Fraud' defined.-'Fraud' means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:
(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent. Explanation.-Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak2, or unless his silence, is, in itself, equivalent to speech.
Illustrations
(a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse's unsoundness. This is not fraud in A.
(b) B is A's daughter and has just come of age. Here the relation between the parties would make it A's duty to tell B if the horse is unsound.
(c) B says to A-"If you do not deny it, I shall assume that the horse is sound". A says nothing. Here, A's silence is equivalent to speech.
(d) A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B's willingness to proceed with the contract. A is not bound to inform B."
# 18. It suggests that while entering into any contract/ agreement, if any party to the contract or its agent with intent to deceive another party, conceals some material facts thereto or promises something without any intention to perform that promise or does some act during the contract, which is specifically declared to be fraudulent, it is fraud. In this case, the fact that the Corporate Debtor (its suspended management) had used some amount from TR Account to create Fixed Deposits. The material on record certainly indicate that it was done within the knowledge of the Consortium of Lenders. Not only that TR Account holder Bank, viz. Axis Bank allowed the management of the Corporate Debtor to use some amount from that account to create Fixed Deposits. In our considered opinion such a transaction cannot be termed to be a fraudulent one within the meaning of section 66 of the I&B Code, 2016.
# 19. In fact, this Adjudicating Authority, in its earlier order dated 08.05.2018 passed in ΙΑ No.40 of 2018 in C.P.(I.B.) No. 150/9/HDB/2017, has recorded finding that,
"77. The Financial creditors are having knowledge of the controversial transactions, did not choose to initiate any legal action except writing letters, sending notices. .… “
# 20. It is not in dispute that the transaction of withdrawal of the amount to create Fixed Deposits had taken place in the year 2015. It cannot be said that in the year 2015, the suspended management of the Corporate Debtor had foreseen that the I&B Code would be promulgated in the year 2016 and with intent to push the Corporate Debtor in CIRP, the suspended management of the Corporate Debtor took a decision to create Fixed Deposits from that loan account.
# 21. Despite all above, we now consider the allegations of the Resolution Professional that by creating Fixed Deposits by using the amount lying in the loan account, the suspended management had siphoned off that amount. It is not in dispute that those Fixed Deposits were pledged with Bank of India and UCO Bank to get loan for some of its subsidiary companies. It is also not in dispute that since those debtor-companies did not pay loan, the lender banks had encashed those pledged Fixed Deposits and adjusted the loan amount. The Resolution Professional did not bring on record any material to show that the loan raised by those subsidiary companies was used by the suspended management of the Corporate Debtor for their own benefit with intent to defraud the creditors.
# 22. It is submitted by the learned counsel for the Resolution Professional that the Comptroller and Auditor General of India in his Report has stated that as per the guidelines of the Reserve Bank of India, if any loan availed from Bank or financial institution or utilised for a purpose unrelated to the operations of the borrower, it would be termed as siphoning off the funds. We have examined the transactions in dispute with the above angle. Still it cannot be said that creating Fixed Deposits. by using some part of the loan amount to raise funds for subsidiary companies, which were also related in business and in co-related activities of the Corporate Debtor. In our considered opinion, for want of sufficient material it cannot be said that it was an act of siphoning off the amount.
# 23. Second transaction called in question by the Resolution Professional is that the Corporate Debtor gave advance to M/s Sokeo Power Pvt Ltd in 2014. It was independent transaction carried out by the Corporate Debtor and the creditors having no relations thereto except the allegation that the Corporate Debtor ought not to have advanced such amount and the amount was given in advance to defraud them. In fact, this Adjudicating Authority in para 76 of its earlier order dated. 08.05.2018 passed in IA No.12 of 2018 in C.P.(I.B.) No. 150/9/HDB/2017, has recorded finding that,
"76. Therefore, the transaction relating to advance money paid to Sokeo Power Private Limited was nearly four years prior to the commencement of the IB Code and such transactions can never be termed as a fraudulent transaction .. … “
# 24. We do not find any reason to record any finding other than the finding of fact recorded by this Adjudicating Authority while rejecting the earlier application filed by the RP.
# 25. Before we conclude with this order, there is one more aspect which needs our serious consideration. It is not in dispute that now some members of the Consortium of Lenders have filed an F.I.R. against the respondents and officers of the Axis Bank alleging that the disputed transactions are fraudulent in nature. Central Bureau of Investigation (CBI) has registered a crime and has started investigation into the matter. Now at this stage, can this Adjudicating Authority, in its limited jurisdiction, record finding that the transaction in dispute is per se fraudulent in nature. In our considered opinion it would be against the cannons of justice. Let the prime investigating agency investigate into the allegations. Let the competent court, during the trial, record findings of fact.
# 26. In view of the evidence and the material on record and the submissions made at the Bar, we are of the considered opinion that the RP/ Liquidator could not establish that the transactions in dispute are fraudulent in nature. This finding is recorded for want of sufficient material before us and hence the respondents cannot be called upon to contribute to the assets of the Corporate Debtor as per section 66 of the I&B Code, 2016. We pass the following order.
# 27. The application is rejected.
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