2022 (4) TMI 374 - AT - Insolvency and Bankruptcy

Fraudulent transactions - Transaction covered under Section 43 45 49 and 66 is mandatory to be filed within the period of 135th Day of the Insolvency Commencement Date - time period prescribed under Regulation 35A of the CIRP Regulations 2016 - mandatory or directory? - defrauding the Creditor under section 49 - fraudulent trading or wrongful trading within meaning of Section 66 - fraud as contemplated by Section 49 and 66 of the Code. Whether an Application by the Resolution Professional relating to a Transaction covered under Section 43 45 49 and 66 is mandatory to be filed within the period of 135th Day of the Insolvency Commencement Date and in event the Application is filed beyond such period the same is liable to be rejected due to non-compliance of Regulation 35A of CIRP Regulations 2016? - Whether time period prescribed under Regulation 35A of the CIRP Regulations 2016 is mandatory or directory? - HELD THAT - Regulation 35A of the CIRP Regulations imposes a duty on the Resolution Professional to take measure within the timeline as prescribed. In performance of such duty the public in general has no control including the Corporate Debtor. In event it is held that any action taken by Resolution Professional beyond the time prescribed in Regulation 35A of the CIRP Regulations is prohibited it shall cause serious general inconvenience or injustice to the Corporate Debtor. One of the objective of the Code is to maximise the assets of the Corporate Debtor. In event the actions taken by the Resolution Professional after the timeline prescribed in Regulation 35A of the CIRP Regulations are to be annulled the undervalued and fraudulent transactions will go out of the reach of Resolution Process reach of the Court and shall cause great inconvenience and injustice to Corporate Debtor - thus the timeline prescribed in Regulation 35A of the CIRP Regulations is only directory and any action taken by the Resolution Professional beyond the time prescribed under Regulation 35A of the CIRP Regulations cannot be held to be non-est or void only on the ground that it is beyond the period prescribed under Regulation 35A of the CIRP Regulations. There may be genuine and valid reasons for Resolution Professional not to file application for avoiding the transactions within time prescribed which are question relating to each case and has to be examined on case-to-case basis and if there are reasons due to which Resolution Professional could not file the Application within time the same has to be examined on merit. There was no cooperation by the Suspended Directors documents and assets were not handed over to the RP RP had to move an Application under Section 19(2) of the Code. The Order was passed on 09th December 2019 by the Adjudicating Authority directing the suspended Directors to extend cooperation and it was only thereafter on 15th February 2020 the lease deed was shared by Respondent No. 1 with the Corporate Debtor. The Transaction Audit Report was finalised on 14th August 2020 and thereafter the Application was filed. The timeline prescribed in Regulation 35A of CIRP Regulations is directory and not mandatory. Whether the time period prescribed under Section 46 for avoiding undervalued transactions are also to be applied for judging of fraudulent transaction? - HELD THAT - In so far as the Lease Agreement was concerned that was sought to be questioned under Section 49 and 66 of the Code and whereas the preferential transactions were attacked were under Section 43 of the Code. Thus the Application contained the allegations which were falling both under Section 43 45 and Section 49 66 and in so far as the allegations referable to Section 49 66 the timeline prescribed under Section 46 is not attracted. The Civil Proceedings as referred by Respondent Nos. 1 and 3 does not in any manner cause any impediment in proceeding to decide the Application on merits by the Adjudicating Authority. It is further relevant to notice that even in Appeal before us Respondents who were issued notice and given time to file Reply have chosen not to file any Reply. In the Insolvency Resolution Process Adjudicating Authority has been empowered to pass appropriate order in the Application which are brought before it as per provisions in the Code when the RP brought into the notice of the Adjudicating Authority by filing the Application I.A. No. 742 of 2020 it was incumbent on the Adjudicating Authority to consider the Application on merits and take appropriate decision to benefit the Corporate Debtor. Adjudicating Authority committed error in rejecting the Application - Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Compliance with Regulation 35A of the CIRP Regulations, 2016.
2. Mandatory or directory nature of Regulation 35A.
3. Applicability of the time period under Section 46 of the Code to transactions under Sections 49 and 66.
4. Adequacy of pleadings of fraud in the application.
5. Error in rejecting the application by the Adjudicating Authority.

Issue-wise Detailed Analysis:

1. Compliance with Regulation 35A of the CIRP Regulations, 2016:
The Resolution Professional (RP) filed an application (I.A. No. 742/2020) beyond the 135-day period prescribed under Regulation 35A of the CIRP Regulations. The Adjudicating Authority rejected the application on the grounds of non-compliance with Regulation 35A and Section 46 of the Code. The RP argued that Regulation 35A is directory, not mandatory, and that the application should not be dismissed solely due to the timeline.

2. Mandatory or Directory Nature of Regulation 35A:
The Tribunal held that the timeline in Regulation 35A is directory, not mandatory. It emphasized that the use of "shall" in Regulation 35A does not necessarily make it mandatory. The Tribunal cited the Supreme Court’s judgment in 'Surendra Trading Company vs. Juggilal Kamlapat Jute Mills Company Limited and Ors.' which held that procedural timelines in the Code are directory. The Tribunal stated that holding the timeline as mandatory would cause serious inconvenience and injustice to the Corporate Debtor, as undervalued and fraudulent transactions would escape scrutiny.

3. Applicability of the Time Period under Section 46 of the Code to Transactions under Sections 49 and 66:
The Tribunal clarified that the timeline under Section 46, which applies to undervalued transactions, does not extend to transactions defrauding creditors (Section 49) or fraudulent trading (Section 66). The Tribunal noted that Section 49 and Section 66 do not prescribe a specific time limit for filing applications. Therefore, the Adjudicating Authority erred in applying the Section 46 timeline to the RP's application under Sections 49 and 66.

4. Adequacy of Pleadings of Fraud in the Application:
The Tribunal examined the application and found substantial pleadings indicating fraudulent transactions under Sections 49 and 66. The RP alleged that the lease transaction was carried out to defraud creditors and was executed without the consent of the creditor bank. The Tribunal noted that the Adjudicating Authority failed to consider the lack of response from the respondents, which should have led to an adverse inference against them.

5. Error in Rejecting the Application by the Adjudicating Authority:
The Tribunal concluded that the Adjudicating Authority committed an error in rejecting the application. It emphasized that the respondents did not file any reply to the allegations, and the RP had made substantial pleadings of fraud. The Tribunal also noted that the pending civil suit (T.S. No. 97/2017) did not affect the RP's application under the Code, as the suit did not challenge the lease deed and was inter se between the lessor and lessee.

Conclusion:
The Tribunal allowed the appeal, set aside the Adjudicating Authority's order, and revived the application before the Adjudicating Authority for a decision on merits. The Tribunal emphasized that the Adjudicating Authority should consider the application in accordance with the law to benefit the Corporate Debtor.