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TMI Blog2021 (1) TMI 141X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Creditors in terms of Section 49 of IBC, 2016; iv. To declare that the transactions as reflected in the Transaction Audit Report are Transactions wherein fraudulent and/or wrongful trading has been done, in terms of Section 66 of IBC. v. To pass appropriate orders in terms of Section 66 of IBC, specifically directing the Respondents to make such contributions to the assets of the Corporate Debtor as this Hon'ble Tribunal may deem fit; vi. To pass appropriate orders under Section 67 of IBC; vii. To pass appropriate orders under Section 44, 48, 49 & 73 of Insolvency & Bankruptcy Code against the Respondents; 2. The averments in the Application filed by the Applicant/Resolution Professional are briefly stated hereunder: i. It is averred Respondent Nos. 1 to 4 are the Directors (powers suspended) of the Corporate Debtor, who were managing and controlling the affairs of the Corporate Debtor at the relevant time during which the preferential and undervalued transactions were carried out by the Respondents 1 to 4 with an intention to defraud the creditors of the Corporate Debtor. The Respondents 1 to 4 are jointly and severally liable for all the transactions as impugne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount (Rs. in crores) 1. 43 of IBC, 2016 Preferential Transactions F.2 Payment towards Unsecured Loan 0.10 2. 49 of IBC, 2016 Transaction Defrauding F.3 Write-off of Security Deposits 3.78 Creditors F.4 Write-off of: * Advance to Creditors * VAT recoverable (Asset) 3.75 F.5 Write-off of retention money 0.80 3. 66 of IBC, 2016 Fraudulent Transactions F.6 Party's receivable balance charged to P&L 0.35 F.7 Write-off of cash balance 0.10 Total Rs. 8.88 crores viii. It is averred the above Transaction Audit Report points out that the transactions have been carried out by the Respondents 1 to 4 in the Corporate Debtor Company during the relevant time, which are preferential and/or undervalued in nature and have been carried out with an intention to defraud the creditors. a) Payment towards Unsecured Loan: It is averred it has been noticed from the ledger of Terra Padmaja loan account' that an amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Creditors. e) Party's receivable balance charged to Profit & Loss Account: It is averred outstanding receivable balance of Rs. 0.35 crores have been adjusted against interest expenses by debiting interest account and crediting the ledger of Agastya Tradelinks. It is averred that an amount of Rs. 4.99 crores was paid to Agastya Tradelinks on 27.05.2015 through letter of credit and Rs. 4.64 crores was received back on 30.05.2015 from Agastya Tradelinks. It is submitted that no purchases were made from Agastya Tradelinks even though payments were made against LC and thereafter the outstanding receivable balance of Rs. 0.35 crores from Agastya Tradelinks was charged to interest expense whereby no justification or supporting document has been provided by the management. Hence, the transaction has been classified under Section 66 as Fraudulent Trading/Wrongful Trading. f) Write-off of Cash Balance: It is averred that cash amounting to Rs. 0.10 crores has been written-off on the ground that there were cash thefts at three sites viz. Indore Project Office, Feeder Separation 3-Lot-12 and "Feeder Separation 3-Lot-19'. The transactions have been made with an intention of fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infrastructure and Services Private Limited since inception i.e. from 10.12.2004 and all were terminated from the management pursuant to the Liquidation Order dated 14.06.2019 passed by the Hon'ble Tribunal. b) It is averred all the allegations/submissions/averments made in the instant application filed under Sections 43, 44, 45, 48, 49, 66, 67 and 69 of the IBC, 2016 read with Section 25(2)(j) of IBC are denied in totality and is legally untenable as against the Respondents 1-4. c) Before giving para-wise replies to the allegations/submissions, the Respondents 1 to 4 made the following submissions on the averments made by the Applicant: 1. No case can be made out against the Respondents 1 to 4 in absence of any specific averments against the Respondents 1 to 4. No amount can be claimed as recoverable from the Respondents 1 to 4, namely - i. The Applicant in the instant application categorically seeks appropriate directions to the Respondents 1 to 4/erstwhile directors of the Corporate Debtor to make contributions to the assets of the Corporate Debtor in terms of Section 66 of IBC and Section 43 of IBC. ii. The instant application has failed to make any specific averm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ightly. 4. The transactions allegedly impugned in the present application does not fall within the ambit of section 43 of IBC. i. It is averred that in terms of Section 43 of IBC an opinion is a jurisdictional condition precedent to filing of an application under Section 43, and if there is no opinion formed and expressed, the application will be without jurisdiction and would be liable to be rejected outrightly without going into the merits of the case. In the instant case, no opinion of the Applicant is on record and the Applicant has failed to place on record any opinion for preferring an application under Section 43 of IBC. Thus, the instant application as preferred by the Applicant without forming any opinion is liable to be dismissed outrightly. ii. The term opinion is defined by the Hon'ble High Court of Delhi in its Judgment dated 3.08.2000 in the matter of VLS Finance Ltd. vs. Commissioner of Income Tax, while relying upon the decision of the Hon'ble Supreme Court of India. iii. The Applicant has failed to place on record any documents evidencing formation of an opinion and determination as regards the alleged transactions. Accordingly, the instant applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court of India in the matter of Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co. vide Judgement dated on 25.04.2020. 3. The contents of para 4(i) to (vii) are denied except for what is a matter of record. 4. The contents of para 4(viii) (a) to (f) are denied in entirety. It is submitted that the Applicant in the instant case has alleged various transactions to be preferential transaction(s)/defrauding creditors/fraudulent and wrongful trading, which occurred prior to the commencement of IBC. It is submitted that the Applicant in no case can make any allegation qua any transaction which were entered to prior the date when IBC came into force. It is submitted that the IBC cannot apply to any acts committed prior to its commencement as in no manner it can be interpreted that such provisions existed even prior to the commencement of IBC coming into force. It is submitted that in the absence of the exact date and evidence qua the alleged transaction being carried for the benefit of a creditor on account of an antecedent debt by the Corporate Debtor, no relief can be sought from the Answering Respondents. The detailed response is submitted as follows: i. The contents of para 4(v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abour etc. for execution of the contracted works. The contract value normally ranges between Rs. 10 crores to Rs. 100 crores. There are contracts valued between Rs. 180 crores and Rs. 230 crores also. Each contract is situated at different locations and the Corporate Debtor was dealing with about 1000 employees of both trained or untrained. It is averred most of the sub-contractors i.e. small or big operates through an advance payment and though the work contracted is executed some of them did not submit their bills for the advances availed resulting in the amounts stand unadjusted in the books of account. Similarly, most of the suppliers also supply only against advance payment. Corporate Debtor remitted payments against the proforma invoices. After supply of the material, the supplier used to furnish a final invoice for accounting. In some cases, material was supplied and the contractors failed to furnish the final invoices, which resulted in closure of accounts. The detailed reports about the various companies' accounts furnished by the Transaction Auditor are shown at page Nos. 55 to 97 of the counter booklet. VAT Recoverable Written off - It is averred as per Works Contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of the following: a) Bihar Urban Infrastructure Development Corporation Ltd. had awarded a contract value of Rs. 70.18 crores to the Corporate Debtor in the year 2011 for designing, providing, laying, testing & commissioning of water supply distribution system, construction of RCC, Pump House & Staff quarters on turnkey basis with operation and maintenance of complete system for 5 years in Danapur town to the Corporate Debtor. As per the terms of the Agreement, the Bihar Urban Infrastructure Development Corporation Ltd. had deducted Retention Money from every Running Account Bill towards Security Deposit. During the course of the business, a dispute arose between the parties, in terms of which the Corporate Debtor initiated Arbitration Proceedings bearing Arbitration No. 128/2014 before the Bihar PWCD Arbitration Tribunal, Patna, claiming an amount of Rs. 9.47 crores including the Retention Money. During the pendency of the Arbitration Proceedings, the parties entered into settlement and filed a compromise petition before the Arbitration Tribunal and Corporate Debtor entitled to pay Rs. 1.74 crores. The fact can be corroborated from the Arbitrators Order dated 10.10.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in entirety. It is denied that cash amounting to Rs. 10.00 lakhs has been written-off claiming that there were cash thefts at three sites. It is also denied that the write-off pertains to three sites namely "Indore Project Office", Feeder Separation 3 lot 12 and Feeder separation 3 lot 19". It is also averred that the said written off of cash balance was done in the aforesaid projects are described at page Nos. 112 to 114. 7. It is averred that majorly the aforesaid alleged transactions relate to the written off, of various government dues/deposits. All these amounts are for a very old period (more than 5 to 7 years old) and thus not recoverable. These write offs were done as required under the relevant Income Tax/Companies Act provisions and on the advise of the auditors. It is averred that even otherwise the said entries can be reversed as on date by the Applicant herein, who is acting as Liquidator in the case of the Corporate Debtor and the said amounts/deposits can be recovered by the Applicant from the appropriate Government Authorities. Accordingly, the instant application is liable to be rejected. 8. The contents of para 4(ix) to (x) are denied except for what is a mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase under Section 66 of IBC against the Respondents. vii. The contents of para 11(g) & 11(h) of the Reply are denied being wrong and baseless. It is wrong to say that mere vague and general allegations are made out against the Respondents. viii. The contents of para III(c)- (d) of the Reply are denied being false and baseless. It is wrong to say that the Applicant is required to identify a person whose interest has been affected because of the transactions entered by the Respondents with intent to defraud the creditors. It is wrong to say that the Applicant has failed to establish the criteria prescribed under the IBC and hence, not entitled to any relief under the IBC. ix. The contents of para IV(a) of the Reply are denied being false and baseless. It is understood that the instant application has been preferred only after the fact that the Applicant is of the opinion that the transactions carried out by the Respondents fall under Section 43 of the IBC. x. The contents of para IV(b) of the Reply are denied being false and baseless. It is reiterated that it is understood that the instant Application has been preferred only after the fact that the Applicant is of the opini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off of retention money is an attempt to keep the assets of the Corporate Debtor beyond the reach of creditors of Corporate Debtor and has been done with intent to defraud the creditors of the Corporate Debtor. xix. The contents of para 9 of the Reply are denied being wrong and baseless. The impugned transactions fall under transactions defrauding creditors in terms of Section 49 of the IBC, 2016. 5. We have heard the Liquidator as well as the learned counsel for the respondents, who are the Directors (suspended Board). The relief prayed for by the Liquidator against the respondents is to declare the transactions which are reflected in the Transaction Audit Report as preferential transactions in terms of section 43 of the I&B Code and also to pass appropriate orders in terms of section 44 of the I&B Code with a specific direction to the related parties to pay to the corporate debtor such sums in respect of benefits received by them and further to declare all the transactions in the Transaction Audit Report are the transactions aimed at defrauding the creditors in terms of section 49 of the I&B Code, and further to pass necessary orders under sections 44, 48, 49, 66, 67 and 73 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inancial year 2016-17 and the same was repaid. The contention of the Liquidator is that this is an unsecured loan, which was given preference over secured loans. Therefore, this transaction is in the nature of preferential transaction and this transaction is to be declared as preferential transaction. The respondents have given details regarding this transaction. The case of the respondents is that this money was borrowed from Smt. Yerra Padmaja in order to meet urgent needs of the company, viz. to pay the fee to the Arbitrators on 22.07.2016 and for other urgent payments. This amount was credited into Corporation Bank account on the very same day. The respondents have given details in their reply at pages 22 to 24. The details furnished by the respondents were already stated in the Counter, which are discussed supra. Therefore, there is no need to reiterate the explanation given by the respondents. The amount was borrowed in connection with payment to the Arbitrators, who are dealing with an issue in the matter of Vishwa-BVSR JV Vs. Ministry of External Affairs, wherein the claim involved was Rs. 258.23 crores in three projects/packages. Ledger copies of three Arbitrators were als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on taken by the Liquidators that these are the transactions intended to defraud the creditors. The company was expected to write off these deposits in the circumstances stated by the respondents. We do not find any fraud involved in writing off the deposits in relation to various projects from time to time. 14. The respondents have given detailed explanation with regard to Security Deposit in respect of various projects. The explanation given by the respondents that projects were complete, therefore, the Security Deposits were invariably to be written off. The respondents also gave detailed explanation as to why the corporate debtor has written off the VAT Deposits and further reasons are given for writing off Electricity Deposits, Road Restoration Deposits and Rent Deposits. We do not find any ground to consider these transactions involving writing off the deposits as fraudulent transactions intended to defeat the interest of the creditors. 15. The Liquidator has also challenged the transactions involving Rs. 0.35 crores and Rs. 0.10 crores together Rs. 0.45 crores as fraudulent transaction liable to be annulled under section 66 of the I&B Code. The contention of the learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of Rs. 10 lacs on the ground that there were cash thefts at three sites. The respondents gave detailed explanation as to why a sum of Rs. 10 lacs was written off which was pointed out by the Transaction Auditor as one of the fraudulent transactions. The respondents would contend that an amount of Rs. 6,83,361/- was written off by the company in the account of Indore Project Office as on 31.12.2017. The contention of the respondents is that this Indore Project Office of the corporate debtor was mainly supervising other three electrical sites of the corporate debtor situated at Jabhua, Agar and Shajapur in Madhya Pradesh. The work at the above three sites was abruptly abandoned by the contractors and the subcontractors were approaching the corporate debtor at Indore Project Office and demanding payments. The respondents further stated that the staff at the Indore Project office, without informing the Head Office situated at Hyderabad, closed the office and left the office without accounting a sum of Rs. 6,83,361/-. So is the case at Shajapur electrical sites. The employee involved in not handing over the money was the Project Manager. However, the Project Manager offered to adjus ..... 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