1. The IA was filed by the Applicant seeking the following reliefs: a. Consider and allow the IA No. 1624 of 2020 in terms of Section
66 read with Section 26 of IBC, 2016; b. Direct the Respondents as detailed in this application, to make such contributions to the assets of the Corporate Debtor equivalent to the sums as stated in this Application, in respect of benefits wrongfully availed by from the Corporate Debtor; c. Pass appropriate directions / orders in terms of Section 67 of the Code including for recovery/ restoration of legitimate amounts due to the Corporate Debtor; Contentions of the Applicants:
2. The Corporate Insolvency Resolution Process (CIRP) was initiated against the Corporate Debtor by an order dated 13.11.2019, on a Section 9 Petition filed by the Operational Creditor, wherein Mr. Nandkishor Vishnupant Deshpande, was appointed as an Interim Resolution Professional (IRP).
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3. The Applicant submits that the public announcement in Form A of CIRP in the present matter was issued in 21.11.2019 intimating the commencement of the CIRP process and inviting claims from all the creditors to be filed by 04.12.2019. Pursuant to receipt of claims, the IRP constituted a CoC as per the Code. Thereafter, the 1stCoC meeting was held on 17.12.2019 wherein the IRP was confirmed and appointed as the RP.
4. The Applicant submits that the Corporate Debtor is a Company engaged in the business of importing and then exporting gold after performing manufacturing activity over imported as well as purchase and sale of gold in local market. Generally, no credit is offered to the purchasers of the gold items, since either the amount is received in advance or maximum within a period of 2-3 days. In no case, any major credit period/ facilities are offered to any parties. However, based on the analysis, critical evaluation of data and desktop searches as made by the Applicant, an exception has been observed with regard to certain creditors (Respondent No. 1 being one of them) to whom fraudulent preference has been given while dealing in a high value business transaction which is carried out under ordinary business, thereby resulting into fraudulent/ wrongful trading fortifying presence of mens-rea, and aiming at procuring secret advantage to Respondent Nos. 2 & 3 in affiliation and knowledge of Respondent No. 4.
5. The Applicant further submits that the Corporate Debtor maintains three different ledger accounts for the Respondent No. 1, viz., Worldwide Online Services Pvt. Ltd. (Jewellery), Worldwide Online Services Pvt. Ltd. (Sales) and Worldwide Online Services Pvt. Ltd. (Purchase Ledger). The Applicant analyzed and assessed all the said three running ledger accounts for the period 01.04.2015 to 20.05.2019 and found that all the three accounts predominantly relates to similar entries in the nature of local sales made with
I.A. 1624/2020 C.P. 2556/I&B/MB/2019 regard to gold/ gold items. The table extracted below summarizes the accounting entries entered between the Corporate Debtor and the Respondent No. 1 in the three ledger accounts maintained by the Corporate Debtor for the Respondent No. 1:
6. The Applicant then submits that the above amounts remain outstanding for more than 2 years. These transactions are also substantiated with the invoices of unpaid amounts. All the said invoices raised by the Corporate Debtor upon the Respondent No.
1 are annexed as Annexure 6 Colly in the Application.
7. The Applicant then submits that the Applicant sent several emails dated 12.12.2019, 14.12.2019, 19.12.2019 and 27.02.2020 and letter dated 27.01.2020 to the Respondent No. 1 seeking ledger account of the Corporate Debtor and confirm balances up to insolvency commencement date as appearing in the books of the Respondent No. 1 so as to enable the Applicant to verify/ confirm receivables of the Corporate Debtor. Despite the persistent follow ups to extract information from the Respondent No. 1, the
I.A. 1624/2020 C.P. 2556/I&B/MB/2019 Respondent No. 1 failed to provide any response. The above said transactions fall under the provisions of Section 66 of the Code, arising as a result of fraudulent or wrongful trading with intent to defraud the creditors of the Corporate Debtor.The Applicant further submits that there has been non-cooperation from the promoters/ directors of the Corporate Debtor to provide all the relevant information about the affairs of the Company since the inception of CIRP period.
8. The Applicant stated that from the aforesaid findings, it can be deduced that the Respondent Nos. 2 to 4 herein did not exercise due diligence reasonably while the above mentioned transactions resulted into fraudulent/ wrongful trading which shows willful misconduct and gross negligence with an intent to defraud its creditors. Contentions of the Respondent No. 1:
9. The Respondent No. 1 submits that the Respondent No. 1 is a Company incorporated under the provisions of the Companies Act, 1956 and engaged in the business of bullions and gold jewelry trading. The Respondent No. 1 is a separate and independent entity and does not interact with the internal business operation, dealing and activities of the Corporate Debtor. As a matter of general practice in bullion market, money is advanced to parties against purchase of bullions/ gold which is subject to be adjusted against future gold. All the transactions are trust based on the grounds of goodwill of the parties. And took place in honest business activities. There was no dishonest intention to carry business transaction and no participation with the knowledge of a fraudulent intent purpose. It is then submitted that the business transaction was kind of running trading account, i.e., no outstanding amount was due for long period (for more than 2 years); money was disbursed on time
I.A. 1624/2020 C.P. 2556/I&B/MB/2019 to time and sales/ purchase took place according to requirements. There are no unpaid invoices in the books of the Respondent No. 1 instead Rs. 1,27,560/- receivable from the Corporate Debtor as on the date of commencement of the CIRP. All business transactions are official and placed in general practice of the market. There is no wrongful or fraudulent trading between the Respondent No. 1 and the Corporate Debtor.
10. The Respondent No. 1 further submits that the Respondent No. 1 is neither Corporate Debtor in main Company Petition/ present I.A. nor promoter/ suspended director or part of management of the Corporate Debtor. The Respondent No. 1 never carried out any fraudulent or wrongful activities knowingly or unknowingly of business with a dishonest intent to fraud creditors. In view of the above said facts, Section 66 of the Code is not applicable and the Respondent No. 1 is not liable to be punished under Sections 67,
70 & 71 of the Code. Contentions of the Respondent Nos. 2& 3:
11. The Respondent Nos. 2& 3 submit that there were no fraudulent or wrongful trading between the Respondent No. 1 and the Corporate Debtor. It is baseless and incorrect statement contained by the Applicant that fraudulent preference has been given while dealing in a business transaction which is carried out under ordinary business, thereby resulting into fraudulent/ wrongful trading fortifying presence of mens rea and aiming at procuring secret advantage to the Respondent Nos. 2 & 3 in affiliation and knowledge of the Respondent No. 4.
12. The Respondent Nos. 2& 3 further submits that the Respondents are fully cooperating the Applicant in CIRP of the Corporate Debtor ab initio. The Respondent No. 1 have attended maximum CoC
I.A. 1624/2020 C.P. 2556/I&B/MB/2019 meetings, provided all the available documents and details required by the Applicant on time to time and replied/ responded to each correspondences with the Applicant through email. Although, due to some unavoidable circumstances which were beyond the control of the Respondents, the Respondents could not provide certain details to the Applicant immediately, but the Respondents made all the efforts to provide the same and continuing to provide the remaining details to the Applicant.
13. The Respondent Nos. 2& 3 further submit that the functions of the Corporate Debtor were affected due to seizure of various data and documents during search by the Directorate of Revenue Intelligence, Mumbai. There is no misconduct or negligence with intent to defraud any creditors. All the business transactions till commencement of CIRP were placed in proper manner, not fraudulently or wrongfully. The Respondents neither performed any misconduct in the course of CIRP nor falsified the books of the Corporate Debtor. Hence, Section 66 of the Code is not applicable and the Respondents are not liable to be punished under Sections 67, 70 & 71 of the Code Contentions of the Respondent No. 4:
14. The Respondent No. 4 submits that the Corporate Debtor had engaged Manish Panwar& Co., i.e., the Respondent No. 4s proprietary firm as the statutory auditors of the Corporate Debtor on 30.09.2018 vide Appointment Letter dated 01.10.2018 till the conclusion of 7thAnnual Meeting. Respondent No. 4 did not issue any statutory audit report since he was not given access to the books of accounts of the Corporate Debtor. Respondent No. 4 then submits that he has never held any documents/data of the Corporate Debtor since the access to the books of accounts of the Corporate Debtor was given only at the registered office of the
I.A. 1624/2020 C.P. 2556/I&B/MB/2019 Corporate Debtor.
15. The Respondent No. 4 further submits that it was the lackadaisical attitude of the management and subsequent arrest of directors of the Corporate Debtor which restrained him from conducting the statutory audit of the Company. The Respondent No. 4 was further informed that all the books of accounts and data have been ceased by the DRI. It is further submitted that the Respondent No. 4 had resigned from the position of the statutory auditor because he was surrendering his Certificate of Practice (COP) and wished to pursue higher studies. The Respondent No. 4 submits that he had informed the Applicant that neither audit was done by the auditors nor any statutory audit report was issued since the management had not provided the relevant papers of the Corporate Debtor for conducting the audit.
16. The Respondent No. 4 then submits that the Applicant has baselessly tried to point out the resignation of the Respondent No.
4 as a suspicious and dubious act. However, the Respondent No. 4 had resigned for the purposes of taking admission in a course in the University of Canada and for which he had also received an acceptance letter. Amongst many, this was also one of the reasons why he had also surrendered the COP. The Respondent No. 4 submits that as and when the Applicant has required any information, he has always answered and co-operated with the Applicant in relation to CIRP. Hence, Sections 66, 70 & 71 have no application as against the Respondent No. 4. Findings:
17. The CIRP of the Corporate Debtor was commenced on 13.11.2019 and from the analysis of the available data of the Corporate Debtor, it is found that the amount of Rs. 98.97 crores stood receivable
I.A. 1624/2020 C.P. 2556/I&B/MB/2019 from the Respondent No. 1 as per the tally data, ledger copies shared by the DRI. The ledger accounts as filed by the applicants are extracted below:
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18. The Respondent No. 1, Respondent No. 2 and Respondent No. 3 vide their replies submitted an unaudited amended tally data whereby the entire outstanding receivables of Rs. 98.97 crores stood reversed and therefore there was no sum payable by Respondent No. 1 to the Corporate Debtor. The copy of the ledger provided by the Respondent No. 1, Respondent No. 2 and Respondent No. 3 captured the following: a. Unilateral Purchase entries were passed in a debtor/customer account amounting to approx. Rs. 54.37crores; b. Unilateral Sales entries (4 in nos.) were deleted from the ledger aggregating to approx. Rs. 35.41 crores. It is
I.A. 1624/2020 C.P. 2556/I&B/MB/2019 important to note that these entries were seen in the records as seized by DRI; and c. The remaining balance stood nullified by passing unilateral journal entries of approx. Rs. 14.31crores. Thereby, the entire balance of Rs. 98.97 crores which was receivable by Respondent No. 1 was wiped out and on the other hand, the Respondent No. 1 claimed that Rs. 1.27 lacs are payable by the Corporate Debtor to the Respondent No. 1. The ledger statement as filed by Respondent No.2 & 3 are extracted below;
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19. It is interesting to note that the replies filed by the Respondent No.
2 and Respondent No. 3 in IA 1212 of 2020 seeking cooperation from the erst-while directors under section 19(2) of the Code also annexed the copies of the unaudited balance sheet for the period from 1st April 2018 to 31st March, 2019 and 1st April, 2019 to 13thNovember, 2019. These unaudited balance sheet, evidenced that an outstanding balance of Rs.57.72croreswas receivable from Respondent No. 1. In order to escape the wrath of provisions of Section 66 r/w 69, 70, 71 and 72 of the Code, the Respondent Nos.
2 and 3 create new book entries to clear the balances which otherwise were remain payable by Respondent No. 1 to Corporate Debtor.
20. The unaudited balance sheet shows certain purchase entries in the customer ledger accounts, there was no explanation regarding the invoices description of goods and purchase orders being no reference to purchase orders. The ledger account only goes to show that goods to that worth ofRs.54.37croreswere purchased from the Respondent No. 1. There is no physical inventory to corroborate such purchase entries. This is a clear plain vanilla case of apparent falsification of the books, ledgers and accounts of Corporate Debtor. Further no record is produced to show payment of GST towards the said sales.
21. It is relevant to refer section 66 of the Code and section 66 is produced as below; Section 66- Fraudulent trading or wrongful trading (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
I.A. 1624/2020 C.P. 2556/I&B/MB/2019 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 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. (3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10A. In view of the present transaction carried on by the erstwhile directors Respondent No. 2 and Respondent No. 3 it can be said that these transactions were carried on with the intention to defraud the creditors of the Corporate Debtor and the parties were well aware of the fact that no goods were purchased by the Corporate Debtor and simple entries were created in the books of accounts to clear the liability of any
I.A. 1624/2020 C.P. 2556/I&B/MB/2019 fraudulent transaction by and between Respondent No. 1, Respondent No. 2 and Respondent No. 3.
22. At the outset the provisions of the Code does not require a pre- existence of means-rea and the Resolution Professional is warranted to file an application for avoidance of transaction once he shall form an opinion whether the Corporate Debtor has been subjected to any transaction covered under section 43, 45, 50 or 66. Reference is made to Regulation 35A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: 35A. Preferential and other transactions. (1) On or before the seventy-fifth day of the insolvency commencement date, the resolution professional shall form an opinion whether the corporate debtor has been subjected to any transaction covered under sections 43, 45, 50 or 66. (2) Where the resolution professional is of the opinion that the corporate debtor has been subjected to any transactions covered under sections 43, 45, 50 or 66, he shall make a determination on or before the one hundred and fifteenth day of the insolvency commencement date, under intimation to the Board. (3) Where the resolution professional makes a determination under sub-regulation (2), he shall apply to the Adjudicating Authority for appropriate relief on or before the one hundred and thirty-fifth day of the insolvency commencement date. Hence the contention of Respondent that there is no meeting of mind or means-rea is not a pre-requisite for filing and pursuing an application under section 66 of the Code. In fact the Regulation 35A of IBBI (CIRP) Regulations, 2016 uses the words shall form an opinion which means that the Resolution Professional is mandated to form an opinion and is not subjected to any onerous requirement of proving means-rea.
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23. Section 66 (1) imposes a liability on any persons who were knowingly parties to the carrying on of business with a dishonest intent to defraud creditors, to make contributions to the assets of the corporate debtor as per the order of the Adjudicating Authority.
24. The use of phrase any persons in section 66(1) suggest that outsiders can also be liable for fraudulent trading, as long as they had a dishonest intention of fraudulently carrying on such trade. The provision is not only restricted to insiders like employees, directors or partners. It is wide enough to include fraud on behalf of third parties like other corporate persons and creditors. In this case covers the conduct of Respondent No 1.
25. The words used in section 66(1) i.e. ...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 , shows that Adjudicating Authority has the power to demand contribution to the assets of the corporate debtor, from the defrauding party. In this case Respondent No 1 party would be responsible, without any limitation of liability, for the losses cause due to their fraudulent trading.
26. It is also important to note that unlike provisions of section 43 and 45, section 66 does not have a look back period. The primary reason behind not having a look-back period in the wisdom of the law maker is to ensure that no person who has acted dishonestly against the interests of stakeholders and creditors of the Corporate Debtor, should not be allowed to get away by using the defence of lapse of time.
27. Section 66(2) deals with a scenario where the directors take action at the instant onset of any financial distress, with sufficient due
I.A. 1624/2020 C.P. 2556/I&B/MB/2019 diligence. Hence, directors can be punished under this section even if they did not have a dishonest intention, but acted negligently and recklessly, hence exposing the company to further risk due to such actions.
28. Section 66 (2) provides for a broad spectrum of actions a director could possibility take to mitigate losses, the Adjudicating Authority would ascertain whether the director has acted as a reasonable competent director would, based on the special skills he is required to possess.
29. It is important to note that the directors cannot plead ignorance or lack of knowledge under Section 66 (2). The directors have a twofold duty to ensure that the interests of the stakeholders are secured and to ensure that the company does not incur any further debts during the twilight period. Directors must also make an active effort in the rehabilitation and revival of the company.
30. Upon perusal of the above records, there is a clear demonstration of Respondent No. 2 and Respondent No. 3 in the capacity of erstwhile directors connived with Respondent No. 1 to create such documents of ledger accounts knowing fully well that if these entries were not created they would squarely covered under the rigour of section 66 of the Code.
31. The professional appearing for the applicant further relied upon the judgement of the Honble Supreme Court reported in the case of Official Liquidator, Supreme Bank Ltd. v/s. P A. Tendolkar [1973] 1 SCC 602 wherein the Apex court has held: (6) It is a question of fact, to be determined upon the evidence in each case, whether a Director, alleged to be liable for misfeasance, had acted reasonably as well as honestly and with due diligence, so that he could not be held liable for conniving
I.A. 1624/2020 C.P. 2556/I&B/MB/2019 at fraud and misappropriation which takes place. A Director may be shown to be so placed and to have been so closely and so long associated personally with the management of the Company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of the business of a Company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the Company even superficially. If he does so he could be held liable for dereliction of duties undertaken by him and compelled to make good the losses incurred by the Company due to his neglect even if he is not shown to be guilty of participating in the commission of fraud. It is enough if his negligence is of such a character as to enable frauds to be committed and losses thereby incurred by the Company. [386E-H]
32. He further relied upon the judgement of the Hon'ble NCLAT in the case of Vijay Pal Garg & Ors vs Pooja Bahry (Liquidator of Gee Ispat Private Limited) [Company Appeal (AT) (Insolvency)No.949of2019] wherein the Hon'ble NCLAT was dealing with identical facts of an Application filed by RP under section 66 and it was found that the records and accounts of the Corporate Debtor have been falsified and eventually proceeded to trigger an investigation under section
213 of the Companies Act 2013. Hon'ble NCLAT held as under (relevant operative part of the Order):
24. In the instant case, it comes to be known that the Applicant/Resolution Professional came across various instances and materials to exhibit that the business of Corporate Debtor was carried on with in intent to defraud its creditors and for fraudulent purposes by the erstwhile management of the 'Corporate Debtor'. Apart from that, the Applicant/Respondent had grounds to believe that CIRP of the
I.A. 1624/2020 C.P. 2556/I&B/MB/2019 Corporate Debtor was initiated fraudulently and/or with malicious intent for a purpose other than for Resolution of Insolvency or Liquidation of Corporate Debtor. Before the Adjudicating Authority the Applicant/Resolution Professional in the application had averred that directions (in suspension) of the Corporate Debtor had not deliberately disclosed the affairs of the 'Corporate Debtor' from time to time to the Applicant / Resolution Professional and indulged in falsification and determination of Books and Records of the Corporate Debtor and made willful and material omissions relating to its affairs and further defrauded its creditors... In reality, the Applicant/Resolution Professional filed the application before the Adjudicating Authority in terms of Sections 60(5), 66, 67, 70, 71, 72, 73 and 235A of the I&B Code and sought the undermentioned reliefs which run as under..
25. The Resolution Professional/Applicant found discrepancies in the Accounts of Corporate Debtor i.e. (i) non-existence of Debtors and that the recent Balance sheet of the Corporate Debtor reflected Debtors of Rs.191crores (Approx.) as trade receivables etc. In fact the Resolution Professional/Applicant after taking charge, grew suspicious of the genuineness/veracity of dates and receivables pursuant to the non-delivery of letters to the debtors. The Resolution Professional / Applicant later came to know that most of the addresses of the Debtors as shown in the Tally either had not existed or even if they had existed, there was no such Companies/Firms found in the Addresses described.
26. Moreover, inspite of sending representatives to numerous debtors, 90% of the addressees had not existed or the firms were not in existence at the given addresses, in the tally. Based on the Financial Audited Balance sheet of the year 2012-13, the discrepancies were pointed out and it was evident that there was falsification of the Accounts of the Corporate Debtor. Besides this, although the outstanding debts in the Books was Rs.200 crores and that the Corporate Debtor being in trouble with a Debt of Rs.500 crores, to pay the same to the Financial Creditors. There was no record to show that the steps taken by the Directors relating to the
I.A. 1624/2020 C.P. 2556/I&B/MB/2019 recovery of the outstanding sum, payable to it. Conclusion:
33. Upon perusal of the unaudited balance sheets for the year 1st April 2018 to 31st March, 2019 and 1st April, 2019 to 13thNovember, 2019, as produced in IA 1212/2020 filed by the Resolution Professional and copies of Unaudited Balance sheets for the same year, as produced/filed in the present IA, it can be said that, both the unaudited balance sheets relates to the same year, but contains different data, it is evident that there has been a clear falsification/ fabrication of accounts of the Corporate Debtor. These unaudited balance sheet, evidenced that an outstanding balance of Rs.57.72croreswas receivable from Respondent No. 1. In order to escape the wrath of provisions of Section 66 r/w 69, 70, 71 and 72 of the Code, the Respondent Nos. 2 and 3 created new book entries and hence the tally data shows that the entire outstanding receivable of Rs. 98.97 Crores stood reversed.
34. The mere purchase entries in the ledger accounts without description of invoices and purchase orders does not substantiate the claim of purchase made by and between Respondent No. 1 and Respondent No. 2 and 3 herein. Further no record is produced to show payment of GST towards the said sales. Hence it is concluded that the above transactions are fraudulent in nature and there has been no sale of gold by Respondent No.2 & 3 to Respondent No.1 and therefore Respondent No.1 is liable to refund the monies outstanding in the books of Accounts of the Corporate Debtor.
35. This is the serious offence committed by the Respondent No. 1, Respondent No. 2 and Respondent No. 3 and the Respondent No. 1 being beneficiary of falsification of documents.
36. This Tribunal doth orders as follows:
a) The Respondent No.1 is directed to refund Rs. 98,96,82,438/-
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b) The IA is allowed and disposed off with the above direction. Sd/- Sd/- Chandra Bhan Singh Suchitra Kanuparthi Member(Technical) Member(Judicial)