Jitendra Lohia Vs. Nikhil Chowdhury and 13 others - Simply by repeating the extracts or observations made in the forensic auditors report, the RP could not make an independent determination about the nature of transactions as required by Regulation 35A (2) of the CIRP Regulations.

 NCLT Kolkata (06.05.2022) in Jitendra Lohia Vs. Nikhil Chowdhury and 13 others [I.A.(IB) No. 208 /KB/2021 in C.P (IB) No.204/KB/2019 ] held that;

• We have carefully seen the averments of the application and corresponding reply of the respondents. We have noticed that the allegations made in application do not constitute anything actionable against the respondents. 

• It was the duty of the RP to come to a conclusive determination before filing an application with the Adjudicating Authority. 

• Simply by repeating the extracts or observations made in the forensic auditors report, the RP could not make an independent determination about the nature of transactions as required by Regulation 35A (2) of the CIRP Regulations.

Excerpts of the order;

# 1. The Court is convened by video conference today.

 

# 2. This IA (IB) No. 208/KB/2019 has been filed by the Resolution Professional in C.P.(IB) No. 204/KB/2019. It is submitted that the CIRP in this matter was commenced vide order dated 4thOctober, 2019 and the IRP appointed in this matter was confirmed as RP in the first meeting of the CoC on 9th January, 2020, when the RP/applicant herein intimated the suspended board of Directors i.e. Respondent No.1 and 2 about the CIRP and sought necessary information, details of assets as well as other records pertaining to the Corporate Debtor.

 

# 3. The applicant further appointed a Transaction Auditor to carry out investigation into the transactions of the Corporate Debtor and the Report was provided by the Transaction Auditor, wherefrom it is clear that several transactions have been carried out in favour of the related parties i.e. Respondent No.2 and 3 to 14 in the three years preceding the commencement of the CIRP and that such transactions would amount to preferential transactions in terms of section 43 of the Code.

 

# 4. It is submitted that the Transaction Audit Report also highlighted various other actions undertaken by the suspended board of directors that are in violation of the provisions of the Companies Act. The RP/applicant has further submitted that necessary orders may be passed for investigation into the affairs of the Corporate Debtor, for which the present application under section 43 read with section 60(5) of the Code has been filed.

 

# 5. The applicant has placed on record the following preferential transactions, which are as under:-

“(a) That amount received from various related parties and few debtors amounting to Rs.1,20,58,852/-, the substantial portion of such receipt amounting to Rs.1,01,74,773/- was transferred to the related parties mainly to Camellia Infrastructure Limited, Multiple Resorts Private Limited and Winston Fashion Private Limited within a span of a day or two from days of receipt. The total payments to related parties reported in the Transaction Audit Report includes such aggregate transfers, which is within the look back period of 2 years preceding from 5th October, 2017 to 4th October, 2019.

(b) Details are being shown through chart below: 

 

Particulars	Withdrawals	Depositing	Net payments
CAMELLIA INFRASTRUCTURE  LTD	82,60,000.00	2,10,000.00	80,50,000.00
MULTIPLE RESORT PVT  LTD	30,60,000.000	15,05,000.00	15,55,000.00
WINSTON FASHION PVT  LTD	5,69,773.00	--	5,69,773.00
Total	1,18,89,773.00	17,15,000.00	1,01,74,773.00

 

# 6. It is further submitted by the applicant that the respondent has submitted its reply to the points raised by the Transaction Auditor but could not satisfactorily substantiate whether the Transactions were done in the ordinary course of business.

 

# 7. It is submitted that various other discrepancies were observed by the Transaction Auditor. However, the Transaction Auditor has not classified  any such transaction under sections 43, 45, 50 and 66 of the Code.

 

# 8. It is submitted that the Respondents are creditors to the Corporate Debtor and as such any transactions made to them during the look back period of two years amounts to preferential transaction in terms of section 43 of the IBC.It is further submitted that relevant data and documents were not provided by the Corporate Debtor justifying the transaction, as such it is apparent from that the transactions were preferential transactions to ensure that no funds were available with the Corporate Debtor, which could be appropriated by the creditors to satisfy their outstanding dues and thus the transactions were carried out just to defraud the creditors of the Corporate Debtor. It is further submitted by the applicant that all these transactions ought to be reversed so as to reflect the correct balance in the Corporate Debtor account as on the CIRP initiation date.

 

# 9. It is submitted that the Respondents knowingly carried on business in a detrimental manner and are obliged to make such contribution to the assets of the Corporate Debtor as deemed fit and proper.

 

# 10. The applicant has further submitted that the affairs of the Corporate Debtor were not being managed in a diligent manner. It is further submitted that the suspended board of Directors were also not fully cooperating with the applicant and have not provided clear and complete books of accounts and other relevant information and, therefore, in these circumstances investigation into affairs of the Corporate Debtor in terms of section 213 of the Companies Act, 2013 may be ordered.

 

# 11. The applicant has further sought directions upon respondent no.3 to 6 to jointly and severally contribute and pay a sum of Rs.80,50,000/- in terms of section 44 because Respondent No.3 to 6 have received the benefit by completely depriving the secured Financial Creditor. It is further submitted that Respondent Nos. 7 to 11 be directed to jointly and severally contribute and pay a sum of Rs.15,55,000/- to the company in terms of the section 44 of the Code. Since they have received the benefit preferentially by completely depriving the secured Financial Creditors and similarly Respondent No.2 and 12 to 14 be directed jointly and severally to contribute a sum of Rs. 5,69,773/- in terms of section 44 of the Code, since these respondents have received the benefit preferentially by completely depriving secured Financial Creditor. 

 

# 12. Ld. Counsel for the applicant has made his best attempts to justify the averments and allegations made in the application, which are completely  based on the Transaction Auditor’s Report.

 

# 13. In reply to the application, all the respondents have vigorously opposed the averments and allegations made in the application. It is stated that the Transaction Auditor’s Report does not bear any definite conclusion in respect of the criteria required to be fulfilled in order to prefer the  instant application. It is stated that no independent opinion or determination has been formed by the Resolution Professional in the said application. It is stated that the application and allegations made out are reproductions of what is stated in the Transaction Auditor’s Report without application of mind. It is stated that the Transaction Auditor’s Report contains several disclaimers /limitations which will appear from the report itself and the same renders the report totally unreliable and even from the report, it is ex-facie clear that no definite conclusion has been formed by the Transaction Auditor and that he has proceeded mechanically without application of mind on the basis of erroneous surmises and conjectures. It is stated that even though it is ex-facie clear from the said application that no definite conclusion has been formed by the Transaction Auditor and that the Transaction Auditor’s Report contains several disclaimers/ limitations rendering the report totally unreliable, the Resolution Professional has proceeded mechanically without application of mind on the basis of erroneous surmises and conjectures to prefer the said application. It is stated that the said report categorically failed to identify and /or establish any of the alleged transactions within the scope and ambit of section 43 of the said Code, 2016. It is stated that it is evident from the said report that the auditor as appointed has not established the fact whether such transactions had taken place in the nature of ordinary course of business or otherwise. It is stated that the said application has been filed after inordinate delay and beyond the time limit as specified by the Insolvency and Bankruptcy Code, 2016 and its Regulations. It is stated that said application has been made in violation of Rule 35A of the IBBI (Resolution Process for Corporate persons) Regulations, 2016 and is thus not maintainable.

 

# 14. It is denied that the transactions were carried out just to defraud creditors of the Corporate Debtor. It is denied that all these transactions ought to be reversed so as to reflect the correct balance in the corporate debtor’s account as on the CIRP initiation date. It is denied that the aforesaid transactions are clearly preferential in terms of Section 43 of the IBC, 2016. It is denied that these transactions are clearly within the definition of the transactions in terms of Section 44 of the IBC, 2016 and hence, the application is filed to reverse the effect of such transactions and seek order in respect of the respondents who knowingly carried on business in a detrimental manner and are obliged to make such contribution to the assets of the Corporate Debtor as deemed fit and proper. It is denied that the prayer for necessary direction upon Respondent No.1 & 23 to jointly and severally to contribute or repay a sum of Rs. 1,01,74,773.00 in terms of section 44 of IBC, 2016 should be granted. It is stated that the respondent no.1 & 2 have always rendered co-operation in a time bound manner and diligently and have never knowingly carried on business in a manner detrimental to the other creditors.

 

# 15. It is stated that the respondents are not the Creditors of the corporate debtor and no payment as alleged have been made to the respondents from the Corporate Debtor. It is stated that the payments made to the respondents by the Corporate Debtor are in ordinary course of business and are financial affairs of the respondents. Hence, the question of putting the respondents in a beneficial position over the creditors of the corporate debtor, which is undergoing corporate insolvency resolution process, does not and cannot arise. It is stated that the Transaction Auditor’s Report does not bear any definite conclusion in respect of the criteria required to be fulfilled in order to prefer the instant application. It is stated that no independent opinion or determination has been formed by the Resolution Professional in the said application. It is stated that the application and allegations made out are reproduction of what is stated in the Transaction Auditor’s Report without application of mind. It is stated that the Transaction Auditor’s Report contains several disclaimers/ limitations which will appear from the report itself and the same renders the report totally unreliable and even from the report it is ex-facie clear that no definite conclusion has been formed by the Transaction Auditor and that he has proceeded mechanically without application of mind on the basis of erroneous surmises and conjectures. It is stated that even though it is ex-facie clear from the said application that no definite conclusion has been formed by the Transaction Auditor and that the Transaction Auditor’s Report contains several disclaimers/ limitations rendering the report totally unreliable, the ResolutionProfessional has proceeded mechanically without application of mind on the basis of erroneous surmises and conjectures to prefer the said application

 

# 16. We have carefully seen the averments of the application and corresponding reply of the respondents. We have noticed that the allegations made in application do not constitute anything actionable against the respondents. It was the duty of the RP to come to a conclusive determination before filing an application with the Adjudicating Authority. Simply by repeating the extracts or observations made in the forensic auditors report, the RP could not make an independent determination about the nature of transactions as required by Regulation 35A (2) of the CIRP Regulations.

 

# 17. We are not convinced by the way the RP has proceeded against the respondent by way of this application. The allegations and averments made in the application do not constitute any action or prompt this Adjudicating Authority to proceed against these respondents under the sections under which the application has been moved.

 

# 18. We, therefore, do not find any merit in this application, the same is therefore, dismissed.

 

# 19. This Certified copy of the order may be issued to all the concerned parties, if applied for, upon compliance with all requisite formalities.

 

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Nitesh Kumar More, Resolution Professional of SPS Steels Limited v. SPS Steels Limited & Ors. - The application is hit by regulation 35A of the CIRP Regulations for there is no independent opinion or determination of the Applicant towards the transactions in question.

NCLT Kolkata (28.03.2022) in Nitesh Kumar More, Resolution Professional of SPS Steels Limited v. SPS Steels Limited & Ors.  [.I.A. (IB) No. 1200/KB/2019 in CP( IB) No. 1342/KB/2018 ] held that;

• On perusal of the I.A., the Applicant has not made any submission as to the opinion formed or the determination arrived at with respect to the preferential transactions. The Applicant in his application has time and again only relied on the Report filed by the Auditor.

• The payment made to Aftek Traders Private Limited would have been deemed to be preferential if the Corporate Debtor did not make payments to the other creditors and only made payment to Aftek Traders Private Limited,

• We have taken a consistent stand that the RP is duty-bound to comply not only with the timelines under regulation 35A but also that the opinion and determination required to be made in terms of sub-regulations (1) and (2) therefore are important constituents before filing the applications in respect of avoidance transactions. 

• As Adjudicating Authority, we are required to go by the RP’s determination and not on the views of the transaction auditor appointed by the RP.

• The application is hit by regulation 35A of the CIRP Regulations for there is no independent opinion or determination of the Applicant towards the transactions in question.

Excerpts of the order;

# 1. This court convened via video conferencing.

 

# 2. This is an application filed by Nitesh Kumar More (‘Applicant’), the Liquidator of SPS Steels Limited (‘Corporate Debtor’), alleging preferential transaction under the Insolvency and Bankruptcy Code, 2016 (the Code’).

 

Facts

# 3. The Corporate Debtor was admitted into Corporate Insolvency Resolution Process (‘CIRP’) on 29 March, 2019 and Mr. Nitesh Kumar More was appointed as the Interim Resolution Professional (‘IRP’) of the Corporate Debtor. Vide order dated 14 May, 2019 this Adjudicating Authority confirmed the Applicant as the Resolution Professional (‘RP’) of the Corporate Debtor.

 

# 4. As per the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Debtor) Regulation, 2016 (“CIRP Regulations”), the Applicant appointed Rajesh Jalan & Associates, Chartered Accountants to conduct the forensic Audit of the Corporate Debtor to identify the transactions under section 43 of the Code.

 

# 5. Rajesh Jalan & Associates, Chartered Accountants submitted its report dated 15 July 2019 (Transaction Report) to the Applicant on 17 July 2019. The Transaction Report is annexed to the application and has been marked with Annexure B1. Submissions of learned Counsel appearing on behalf of the Liquidator

 

# 6. On the basis of the Transaction Report, the Auditor focuses on certain shortcomings in the transactions entered during the two years preceding the initiation of the CIRP. The Transaction Report also extends to the period of 2018- 2019 as some of the payments were also made from the bank accounts of the Corporate Debtor to related party.

 

# 7. From the Transaction Report, it transpires that during the period of last two years preceding the commencement of the CIRP, the Corporate Debtor has made some preferential payment to some of the Creditors of the Corporate Debtor. It is also established from the Transaction Report that the payment due to Aftek Traders Private Limited was Rs.5.96 Cr payable as per balance sheet, 2017.

 

# 8. The aforesaid transactions made by the Corporate Debtor puts Aftek Traders Private Limited in beneficial position as compared to the other creditors. It also reflects the mala fide intention of the Corporate Debtor.

 

# 9. Some of the transactions made by the Corporate Debtor are not in ordinary course of business as mentioned in section 43(3)(a). The summary of the transactions are as follows:

 

Name of Beneficiary	Date/year of transaction	Amount (In Rs)
Aftek Traders Private Limited	2017-2018	50,00,000/-
Aftek Traders Private Limited	2018-2019	15,00,000/-
	TOTAL	65,00,000/-

 

# 10. The Corporate Debtor was in financial distress at the time these impugned payments were selectively made to the particular creditor, i.e., Aftek Traders Private Limited. Despite the Corporate Debtor being in default of repaying dues owed to various Financial as well as Operational Creditors, the Corporate Debtor made the impugned payments by way of reference to Aftek Traders Private Limited and ignored the outstanding dues of other creditors.

 

# 11. The management of the Respondent 5 i.e., Aftek Traders Private Limited, is same as of the Corporate Debtor and thus the payments made by the Corporate Debtor and its directors i.e., Respondents 2 to 4, put Respondent 5 i.e., Aftek Traders Private Limited in a beneficial situation than it would have been made in accordance with section 53 of the Code. Submissions of learned Counsel on behalf of the Respondent Nos. 2 to 4 .

 

# 12. The Applicant has failed to prove that the payment/transaction made by the Corporate Debtor to the Respondent 5 i.e., Aftek Traders Private Limited are preferential in nature. Neither there is any proof to show that such transactions have put the Respondent 5 i.e., Aftek Traders Private Limited in a beneficial position.

 

# 13. Further, the transactions between the Corporate Debtor and the Respondent 5 i.e., Aftek Traders Private Limited have taken place during the ordinary course of business and financial affairs of the Corporate Debtor. The Applicant has wrongfully and illegally arrayed the respondents 2-5 as a party.

 

# 14. This application is on the basis of the purported forensic audit report dated July 15, 2019. The said Forensic Reports contains false and frivolous allegations and are not based on any fact. The Applicant has failed to apply his mind.

 

# 15. The Corporate Debtor had purchased various trading goods like billet, angle, MS plate, TMT bar etc. from the Respondent 5 i.e., Aftek Traders Private Limited. In respect to such purchase the total dues payable to the Respondent 5 i.e., Aftek Traders Private Limited as on March 31, 2015 was Rs.5,96,36,035/-. Same is reflected in the ledger account of the Respondent 5 i.e., Aftek Traders Private Limited.

 

# 16. The Corporate Debtor was under going through tremendous financial stringencies due to recession in the steel industry and due to which the Corporate Debtor was unable to pay the outstanding dues to the Respondent 5 i.e., Aftek Traders Private Limited.

 

# 17. However, on several demands by the Respondent 5 i.e., Aftek Traders Private Limited, the Corporate Debtor paid a sum of Rs.50,00,000/- and Rs.15,00,000/- on March 26, 2018 and May 22, 2018, respectively.

 

# 18. Hence, the payment made by the Corporate Debtor was made in the usual course of business and in good faith and it cannot be termed as preferential transaction. 

 

# 19. Further, the CIRP commenced on 29 March 2019, the Applicant was the Resolution Professional during CIRP but he did not comply with regulation 35 of the CIRP Regulations. The Resolution Professional failed to form an opinion within 75 days or make a determination within 135 days from the commencement of CIRP. The present application has been filed on 20 September 2019 i.e. after 175 days from the date of commencement of CIRP and not within 135 days from the date of commencement of CIRP.

 

# 20. The said application is barred by laws of limitation. Further, the Applicant has filed this adversarial application against himself by making the Corporate Debtor as Respondent No.1, which can only be represented by the Applicant himself. 

 

Submissions of learned Counsel on behalf of the Respondent No.5.

# 21. The Transactions made between the Respondent 5 i.e., Aftek Traders Private Limited and the Corporate Debtor were out of usual course of business. 

 

# 22. The Corporate Debtor was not making any payment in respect of the said transactions to the Respondent 5 i.e., Aftek Traders Private Limited even after on repeated demands made by the Respondent 5 i.e., Aftek Traders Private Limited.

 

# 23. After receiving letter from the Respondent 5 i.e., Aftek Traders Private Limited the Corporate Debtor admitted its liability and assured that the outstanding dues will be cleared once the business of the Corporate Debtor sees profit.

 

# 24. Since, the business of the Respondent 5 i.e., Aftek Traders Private Limited was in the brink of closure, when the Respondent 5 i.e., Aftek Traders Private Limited had issued legal notice to the Corporate Debtor for the payment of the dues. 

 

# 25. Upon such pressure, the Corporate Debtor paid a sum of Rs.50,00,000/- and Rs.15,00,000/- on Match 26, 2018 and March 22, 2018, respectively, from a total sum of Rs.5,96,36,035/-. Further, the Respondent 5 i.e., Aftek Traders Private Limited had also lodged its proof of claim of Rs.5,31,36,035/- with the Applicant.

 

# 26. The Application filed by the Applicant does not shows any valid cause. Further, it is well settled law that the Corporate Debtor on and from the CIRP commencement date is represented by the IRP/RP. Whereas, this application is adversarial in nature the Applicant has made the Corporate Debtor as Respondent No.1.

 

# 27. The Respondent No.5 also relied on various judgments, as follows; Allahabad Bank v. SPS Steels Rolling Mills Limited, NCLT, Kolkata Bench Order dated February 26, 2020;

• “Paragraph 11 - We further consider it pertinent to observe that the assistance of expert agencies can be taken for determination of preferential, invalid or fraudulent transactions, but, in spite of that, independent opinion of Resolution Professional / Liquidator remains a must, meaning thereby, irrespective of the exercise done by the expert agency, the Resolution Professional should independently form a belief / opinion that such transactions, in fact, existed which require appropriate order from this Authority.

• Paragraph 14 - Now, coming to the facts of the case, it is noted that no material of whatsoever nature has been brought on record which can establish the fact of formation of opinion by the Resolution Professional as regards the Corporate Debtor being subjected to such transactions. Thus, provisions of Section 43 of the IBC, 2016 read with Regulation 35A of IBBI (CIRP) Regulations, 2016 stand non complied and violated. Further, even in the application, this aspect has not been covered and in our considered view, reliefs sought by way of prayers do not amount to formation of opinion. Thus, merely on this basis, the application filed by the Resolution Professional is liable to be rejected”

 

Official Liquidator, High Court, Calcutta v. Padam Kumar Khaitan and Others

• “Paragraph 24 - The auditors' report on the basis whereof the application was filed is the only document in the judge's brief of documents filed by him in the proceedings. The report does not contain any information or materials other than those stated in the points of claim.....

• Paragraph 25 - ....application initiating proceedings under section 543 must contain particulars of specific allegation against each of the respondents who are to be specifically identified and named to the extent of their respective acts of misfeasance or breach of trust....”

 

# 28. The Respondent No. 5 also relied on 

• Anuj Jain, IRP of Jaypee Infratech Limited v. Axis Bank Limited, 

• Bank of Maharashtra v. Visa Power Limited (In Liquidation) NCLT Kolkata Bench,

• Santosh Choraria, RP of Suraj Fabrics Industries Limited v. Bipin Kumar Vohra & Ors, NCLT Kolkata Bench and 

• Samir Agarwal, RP of Bhaskar Shrachi Alloys Limited v. Bharat Goenka & Ors, NCLT Kolkata Bench. 

 

Rejoinder to the reply of the Respondents

# 29. During the hearing of the I.A., the learned Counsel appearing on behalf of the Applicant submitted that the Resolution Professional had formed an opinion on 11 June 2019 i.e. on the 74th days after the commencement of CIRP and had also made a determination as to the preferential transactions on 19 July 2019 and informed the IBBI in Form 6. The Applicant also filed an annexure “Letter A” along with the written notes to substantiate that the Resolution Professional had made a determination and had intimated the IBBI.

 

Orders

# 30. Heard the learned Counsel appearing for the Applicant and the learned Counsel appearing for the Respondents and perused the record.

 

# 31. Firstly, the Respondent No. 1 is the Corporate Debtor and once a Resolution Professional is appointed for the Corporate Debtor, the Corporate Debtor is to be represented by the Resolution Professional or Liquidator as and when necessary. We do not know why the Corporate Debtor has been arrayed as a Respondent in the present I.A. in an application filed by the Applicant who was the erstwhile Resolution Professional, hence the Corporate Debtor is removed from the array of Respondents.

 

# 32. Before we look into the merits of the case, let us consider whether the Applicant complied with regulation 35A of the CIRP Regulations. In the course of hearing the Applicant submitted that he had formed an opinion and had made a determination as well. It was further submitted that the Applicant had also sent an intimation to IBBI that the Applicant had formed a decision. The Applicant filed a letter addressed to the IBBI, but there was nothing to prove whether the same was sent via email or post. If the Applicant had formed an opinion and had made a determination, the same should have been reflected in the application as well and not be given along with the written notes at the time of hearing.

 

# 33. On perusal of the I.A., the Applicant has not made any submission as to the opinion formed or the determination arrived at with respect to the preferential transactions. The Applicant in his application has time and again only relied on the Report filed by the Auditor.

 

# 34. Therefore, the Applicant has clearly not formed an opinion nor has he made a determination as to the transactions made.

 

# 35. Although the present I.A. is hit by regulation 35A of the CIRP Regulations and hence it is not maintainable, certain observations are also pertinent to be noted. On perusal of the report of the Auditor, internal page nos. 7 and 8 contain the list of debtors and creditors of the Corporate Debtor, wherein the amounts due, amounts received and payments made have been given. The Corporate Debtor received payments from its debtors and has also made payments to its creditors. The payment made to Aftek Traders Private Limited would have been deemed to be preferential if the Corporate Debtor did not make payments to the other creditors and only made payment to Aftek Traders Private Limited, the Corporate Debtor has made payment to Bholanath Ingots Private Limited and Sublabh Steels Private Limited along with Aftek Traders Private Limited.

 

# 36. We have taken a consistent stand that the RP is duty-bound to comply not only with the timelines under regulation 35A but also that the opinion and determination required to be made in terms of sub-regulations (1) and (2) therefore are important constituents before filing the applications in respect of avoidance transactions. As Adjudicating Authority, we are required to go by the RP’s determination and not on the views of the transaction auditor appointed by the RP.

 

# 37. The facts and circumstances of the present application do not inspire our confidence that it is maintainable ex facie. The application is hit by regulation 35A of the CIRP Regulations for there is no independent opinion or determination of the Applicant towards the transactions in question.

 

# 38. Under the aforementioned circumstances, we are not inclined towards granting the prayers. Resultantly, we dismiss the I.A. (IB) No. 1200/KB/2019. 

 

# 39. The Registry is directed to send e-mail copies of the order forthwith to all the parties and their Ld. Counsel for information and for taking necessary steps.

 

# 40. A certified copy of this order may be issued, if applied for, upon compliance with all requisite formalities.

 

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