TMI Blog2022 (12) TMI 498X X X X Extracts X X X X X X X X Extracts X X X X ..... on the Business of the Corporate Debtor in a dishonest and fraudulent manner, with a view to Defraud the Creditors and because of the Fraudulent Transactions in the subject matter, in issue,, the Appellants / Respondents are responsible in a Joint and Several Manner, to pay a sum of Rs.2,94,77,269/- only with an interest at 12% per annum, in respect of the Resolution Professional s Account of the Corporate Debtor, of course, within Six Weeks, from the date of passing of this Judgment. The conclusion arrived at by the Adjudicating Authority, (National Company Law Tribunal, Kochi Bench, Kerala), holding that the Appellants / Respondents are required to make good the Loss, caused to the Creditors of the Corporate Debtor, because of the fact that the Transactions, mentioned in the Forensic Auditor s Report, as detailed in this Judgment are without any simmering doubt, partake the character of Fraudulent Transaction and, as such, the Appellants / Respondents, are personally liable to pay for Knowingly and Dishonestly, committing this malevolent acts / misdeeds, are free from any Legal Flaw. Appeal dismissed. - Company Appeal (AT)(CH)(Ins) No.409/2022 & IA No.1001/2022 - - - D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal agreements, General Power of Attorney, and other documents were not provided during the process of audit. b) Suspected diversion of funds accounted as advance paid for land purchase. An amount of Rs. 1,73,45,000 is outstanding as land purchase advance in the audited financial statements as on 31st March 2021. There is no evidence available in the office to prove that the payments have been made for such a purpose. Rs. 1,00,000 each have been paid continuously from 31st January 2009 to 31st March 2009, which is an unusual method of payment in a normal land sale. Moreover, all these payments have been made by cash. There is a suspected diversion of fund by accounting as advance for purchase of land. There were no land properties made for this advance paid. c) Share Purchase Agreement with M/s. Sri Ramani Resorts and Hotels Pvt. Ltd to sell 100% shares of the Company. Based on the observations mentioned above, the Share Purchase Agreement executed by the Corporate Debtor is void ab initio and the intention of KN Narayanan Namboodiripad, the suspended Managing Director, and Mr. Venugopal T M, The COO of CD, for entering into such an agreement is Suspec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within Two Weeks from the date of Receipt of the Order . 4. According to the Learned Counsel for the Appellants , the Adjudicating Authority , (National Company Law Tribunal, Kochi Bench, Kerala) had failed to appreciate the Statutory Provisions and Scheme of the I B Code, 2016 and further, had not considered the Facts on Record and had passed the impugned order , without any application of mind . It is represented on behalf of the Appellants that the Adjudicating Authority , (National Company Law Tribunal, Kochi Bench, Kerala) had failed to appreciate that the Directions may only be sought under Section 66 (1) of the I B Code, 2016, if any, business of the Corporate Debtor has been carried on with an intend to default the Creditors of the Corporate Debtor or for any Fraudulent Purpose and Not Transactions , generally could be avoided, as per Section 49 or other Provisions of Part IV of the I B Code, 2016. 5. The stand of the Appellants is that the Adjudicating Authority , (National Company Law Tribunal, Kochi Bench, Kerala) had failed to distinguish between Section 66 (1) of the I B Code, 2016 for Fraudulent Trading and Section 66 (2) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issues involved and the reasons in support of the findings on all the issues arising in the case and urged by the learned counsel for the parties in support of its conclusion. It is really unfortunate that the Division Bench failed to keep in mind these principles while disposing of the writ petition. Such order, in our view, has undoubtedly caused prejudice to the parties because it deprived them to know the reasons as to why one party has won and other has lost. We can never countenance the manner in which such order was passed by the High Court which has compelled us to remand the matter to the High Court for deciding the writ petition afresh on merits. 8. The Learned Counsel for the Appellants points out the Decision of the National Company Law Tribunal, Chennai Bench in Ashish Rathi v. Rajiv Rathi and Others, 2022 SCC Online NCLT 21, wherein the Adjudicating Authority , (National Company Law Tribunal, Chennai Bench), had discussed about the following: - 10.2 A careful perusal of Section 66 of IBC, 2016 would manifest the fact that it deals with two transaction; Section 66(1) of IBC, 2016 deals with 'Fraudulent Trading' and Section 66(2) of IBC, 2016 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to make such contribution (if any) to the company's assets as the court thinks proper. (2) This subsection applies in relation to a person if (a) the company has gone into insolvent liquidation, (b) at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, and (c) that person was a director of the company at that time; but the court shall not make a declaration under this section in any case where the time mentioned in paragraph (b) above was before 28th April 1986. (3) The court shall not make a declaration under this section with respect to any person if it is satisfied that after the condition specified in subsection (2)(b) was first satisfied in relation to him that person took every step with a view to minimising the potential loss to the company's creditors as (on the assumption that he had knowledge of the matter mentioned in subsection (2)) he ought to have taken. (4) For the purposes of subsections (2) and (3), the facts which a director of a company ought to know or ascertain, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) till such time the period as mentioned in Section 10A of IBC, 2016 is in force. Interestingly, the UK Insolvency Act, 1986 has also suspended Section 214 which deals with Wrongful Trading for the period from 01.03.2020 till 30.09.2020. The object behind inserting sub-section (3) in Section 66 of BC,2016 seems to be that the Directors and Partners of the Company may continue their business or trading during the Covid - 19 pandemic without having the risk of being prosecuted under wrongful trading. However, it may be noted that the same benefit of suspension is not granted to 'Fraudulent Trading' defined under Section 66(1) of IBC, 2016 and also under Section 213 of UK Insolvency Act, 1986. 10.9. For a transaction to qualify under sub - section (2) of Section of IBC, 2016 the Resolution Professional has to substantiate before this Tribunal that the Director or the Partner of the Corporate Debtor is aware the company is insolvent and continues to trade and increases the debt of the Company. Further, it is to be noted that on examining Section 66(2) of IBC, 2016 the element of 'Fraud', 'dishonest intention' and 'defrauding the creditor' is conspi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 of 2019; 29.1. However, we are impelled to make one comment as regards the application made by RP. It is noticed that in the present case, the RP moved one composite application purportedly under Sections 43, 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In our view, in the scheme of the Code, the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions. As noticed, the question of intent is not involved in Section 43 and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time. However, whether a transaction is undervalued requires a different enquiry as per Sections 45 and46 of the Code and significantly, such application can also be made by the creditor under Section 47 of the Code. The consequences of under valuation are contained in Sections 48 and 49. Per Section 49, if the undervalued transaction is referable to sub-section (2) of Section 45, the Adjudicating Authority may look at the intent to examine i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have not taken diligent care to minimize the potential loss to the Creditors. 9. The Learned Counsel for the Appellants refers to the Judgment of the Hon ble Supreme Court in Anuj Jain v. Axis Bank Ltd. and Ors., (2020) 8 SCC 401, wherein at Paragraphs 29.1 to 29.3, it is observed as under: - 29.1. However, we are impelled to make one comment as regards the application made by IRP. It is noticed that in the present case, the IRP moved one composite application purportedly under Sections 43, 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In our view, in the scheme of the Code, the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions. As noticed, the question of intent is not involved in Section 43 and by virtue of legal fiction, upon existence of the given ingredients, a transaction is Anuj Jain Interim Resolution ... vs Axis Bank Limited on 26 February, 2020 deemed to be of giving preference at a relevant time. However, whether a transaction is undervalued requires a different enqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the impugned order , passed by the Adjudicating Authority , (National Company Law Tribunal, Kochi Bench, Kerala) in IA(IBC)/196/KOB/2021 in IBA/13/KOB/2020 is nothing but a Non-Speaking Order , and also an unreasonable one , in negation of the principles of Natural Justice . 11. The Learned Counsel for the Appellants points out that the Transactions , which were consummated Nine to Sixteen Years , before the Insolvency Commencement Date , should not have been considered by the Adjudicating Authority (National Company Law Tribunal, Kochi Bench, Kerala), at all. 12. The Learned Counsel for the Appellants takes an emphatic plea that the Provisions of Wrongful Trading , as per Section 66 (2) of the I B Code, 2016 are inapplicable to the facts of the present Case . 13. The Learned Counsel for the Appellants raises an Argument that the finding of Mens Rea intention to Defraud the Creditors of the Corporate Debtor or any knowledge of the Transactions , is to be found against each person, upon whom liability is ought to be fastened under Section 66 of the I B Code, 2016. 14. The Learned Counsel for the Appellants seeks aid of the Decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 18% interest from 05.06.2018 till the date of Realisation in Full . 38. Barring the aforesaid Reliefs / Directions being sought for, by the Appellant / Applicant in IA(IBC)/489(CHE)/2021 in IBA/1099/2019, there are no Convincing Tangible / Documentary Materials to fortify the Plea of the Appellant / Applicant that the Business of the Corporate Debtor was carried out by the Respondents with a Dishonest Intention and, especially, to Defraud the Creditors . To put it precisely, the averments projected by the Appellant / Applicant in IA(IBC)/489(CHE)/2021 in IBA/1099/2019 do not come within the Four Parameters , of the ingredients of Section 66 of the Insolvency and Bankruptcy Code, 2016). Viewed in that perspective, the Impugned Order dated 01.07.2022 in IA(IBC)/489(CHE)/2021 in IBA/1099/2019 passed by the Adjudicating Authority (National Company Law Tribunal, Division Bench II) in dismissing the Application , without Costs, is free from any Legal error . Consequently, the Appeal fails. Discussions : 15. Before the Adjudicating Authority , (National Company Law Tribunal, Kochi Bench, Kerala), the 1st Respondent / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to IA(IBC)/196/KOB/2021 in IBA/13/KOB/2020 had averred that there was only one allegation , after 2012 i.e., A Share Purchase Agreement entered into with Basel Products India Private Limited , on 03.09.2018 and, in fact, all the purported transactions decided the Limitation of Lookback Period (Limitation), as contemplated, under Section 66 read with Sections 43, 45, 48 and 50 of the I B Code, 2016, and as such, barred by Limitation . 20. It is the stand of the 1st Appellant / 1st Respondent that the Lookback Period , being Two Years , in respect of Related Period Transactions (under Sections 43, 45 and 49 of the I B Code, 2016) and Extortionate Credit Transactions under Section 50 of the I B Code, 2016, and One Year , in case of any person other than the Related Party under Sections 43,45 and 49 of the I B Code, 2016. The categorical plea of the 1st Appellant / 1st Respondent before the Adjudicating Authority (National Company Law Tribunal, Kochi Bench, Kerala) was that given to the extent of Equity Financing in India, of recoveries from such Transactions will become the property of the Trustees and will be distributed , as described within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / 1st Respondent in its Reply is that the allegation of Fraudulent and Avoidable Transactions , for each liabilities are ought to be fastened under Section 66 of the I B Code, 2016 is an untenable and impermissible one, under the I B Code, and hence prays for dismissal of IA(IBC)/196/KOB/2021 in IBA/13/KOB/2020. 25. At the outset, this Tribunal , pertinently points out that IA(IBC)/196/KOB/2021 in IBA/13/KOB/2020 was filed by the 1st Respondent / Petitioner / Resolution Professional , before the Adjudicating Authority , (National Company Law Tribunal, Kochi Bench, Kerala) under Section 66 of the I B Code, 2016, resting upon the Report filed by the Forensic Auditor , appointed by the Resolution Professional , in fact, the Liquidator had made a determination that 1) Bogus Lands Deal; 2) Advance Paid toward Purchase of Lands ; 3) Sale Purchase Agreement (entered into, to sell the Shares of the Company with Sri Ramani Resorts and Hotels Private Limited ); 4) Sale Purchase Agreement (entered into, to sell the Shares of the Company with Basel Products India Private Limited ) are Fraudulent Transactions , attracting Section 66 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st Respondent / the Resolution Professional in his Status Report , before this Tribunal , points out that the Corporate Debtor had availed a Loan from the Federal Bank Limited since 30.05.2022 and mortgaged the Land including 3.63893 acres of Land at Agasteeswaram Village, Kanyakumari District, owned by the Corporate Debtor and, in fact, the Federal Bank Limited had assigned the said Debt in favour of Phoenix ARC Private Limited on 14.07.2017. As a matter of fact, has totally admitted claim of Phoenix ARC Private Limited is Rs.31,16,92,846/-. 30. It comes to be known that there should subsistence of mortgage , the 1st Respondent (in IA(IBC)/196/KOB/2021 in IBA/13/KOB/2020) had entered into an Agreement to sell the above property to Mr. Vethaselvaraj on 25.10.2005 for Rs.30,74,654/-, which was renewed on 11.09.2009, as per the Sale Agreement , the entire consideration was paid to the Corporate Debtor . But as per the Records only Rs.20,00,000/- was accounted in the name of the Corporate Debtor . There is no evidence of Receipt of Balance of Rs.10,74,654/- from Mr. Vethaselvaraj to the Company . Also, that a sum of Rs.5 Lakh was credited to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cuted a Memorandum of Understanding to sell 100% share of the Company to the Third Party and without paying any money to the Creditors , siphoned off Rs.66.70 Lakh from the Company . Hence, the Appellants / Respondents are liable to compensate the Corporate Debtor for Rs.66,70,200/-, being the Amount , siphoned off and the Interest at the rate of 24% per annum for Rs.1,00,00,000/-, being the Advance received from the date of Receipt i.e., 21.11.2012, till the date of Payment . 35. According to the 1st Respondent / Resolution Professional , when the said Share Purchase Agreement was in existence, the Corporate Debtor through the 1st Appellant / 1st Respondent had entered into a Share Purchase Agreement with Basal Products India Private Limited for the sale of 100% shares of the Corporate Debtor , for a Total Consideration of Rs.31,00,00,000/- and the Corporate Debtor had received an Advance of Rs.1,00,00,000/-, against the said Share Agreement on 03.09.2018 through a Bank Transfer . The Corporate Debtor had paid a sum of Rs.10,00,000/- as Commission to one Mr. Baby Mathew and Rs.43,87,415/- were withdrawn by the Directors . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determination of Solvency , must be undertaken at the time, the liability was incurred, there was no reasonable prospect of repayment , at all. 40. Also, this Tribunal , worth recalls and recollects the Decision of the Hon ble High Court of Kerala, in K. Nagendra Prabhu v Popular Bank Ltd., reported in AIR 1970 Ker at Page 120, wherein it is observed that, if on the Assessment of all Facts and Circumstances , the Fraudulent Intent or Fraudulent Purpose is made out, liability must follow. 41. More importantly, words (party to the carrying on of a Business) are quite wide, enough to include, within its ambit , a person , other than the Management , Employees and Consultant of the Company . Suffice, it for this Tribunal , to make a significant mention, that the Adjudicating Authority , ( Tribunal ) is to be subjectively satisfied that the Directors , took all reasonable steps , to minimise the Company s Loss . 42. No wonder, a Company / Other Entity , which is involved in or assists, and derived Benefits from the Offending Business or Benefits in an Offending Manner , and does so knowingly, and hence, Dishonesty can be ascertained and held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , while in fact, a sale agreement of the said property was in force, and in addition, another sale agreement was also signed afterward for the sale of the same mortgaged property with the same buyer. Mr. Vethaselvaraj, the buyer has also been deceived by the suspended Managing Director of the corporate debtor by collecting full consideration of the sale without getting consent from the Federal bank with whom the assets were mortgaged, while Mr. K.N. Narayanan Namboodiripad had offered to sell the property free from all encumbrances as per the sale agreement signed. Original agreements, General Power of Attorney, and other documents were not provided during the process of audit. b) Suspected diversion of funds accounted as advance paid for land purchase. An amount of Rs. 1,73,45,000 is outstanding as land purchase advance in the audited financial statements as on 31st March 2021. There is no evidence available in the office to prove that the payments have been made for such a purpose. Rs. 1,00,000 each have been paid continuously from 31st January 2009 to 31st March 2009, which is an unusual method of payment in a normal land sale. Moreover, all these payments hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in a dishonest and fraudulent manner , with a view to Defraud the Creditors and because of the Fraudulent Transactions in the subject matter, in issue,, the Appellants / Respondents are responsible in a Joint and Several Manner , to pay a sum of Rs.2,94,77,269/- only with an interest at 12% per annum, in respect of the Resolution Professional s Account of the Corporate Debtor , of course, within Six Weeks , from the date of passing of this Judgment . Viewed in that perspective, the conclusion arrived at by the Adjudicating Authority , (National Company Law Tribunal, Kochi Bench, Kerala) in IA(IBC)/196/KOB/2021 in IBA/13/KOB/2020 dated 02.06.2022, holding that the Appellants / Respondents are required to make good the Loss , caused to the Creditors of the Corporate Debtor , because of the fact that the Transactions , mentioned in the Forensic Auditor s Report , as detailed in this Judgment are without any simmering doubt , partake the character of Fraudulent Transaction and, as such, the Appellants / Respondents , are personally liable to pay for Knowingly and Dishonestly , committing this malevolent acts / misdeeds , are free fro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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