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TMI Blog2024 (1) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi Bench, Court-II. The subject matter, the background and the facts of the case are by and large similar and both the Impugned Orders as well as the Appeals are interconnected. Hence, we shall deal both these appeals jointly in subsequent discussion and a common judgement shall be pronounced. COMPANY APPEAL (AT) (Insolvency) No. 1070 of 2021 (Arising out of the Order dated 12.11.2021 passed by the National Company Law Tribunal, New Delhi (Court-II) in IB-984 (ND)/2019) 2. This Appeal has been filed against the Impugned Order dated 12.11.2021 passed by the National Company Law Tribunal, New Delhi Bench, Court-II (the 'Adjudicating Authority') in IB- 984 (ND)/2019 in IA/102/2021, whereby, the Adjudicating Authority allowed the application preferred under Section 66 of the Insolvency & Bankruptcy Code, 2016' (in short 'Code') by the Respondent and directed the Appellants to make total contribution of Rs. 29,75,73,550/- to the assets of Corporate Debtor. The Respondent was also directed to institute a criminal prosecution against the Appellants under relevant provisions of the law. The Adjudicating Authority further requested the IBBI to make necessary amendments in Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 10th Meeting of the CoC held on 18.11.2020, pursuant to changes suggested by the Respondent and the CoC, the Appellant submitted the revised Resolution Plan on 18.11.2020, which was approved by the CoC. 10. It is the case of the Appellants that in the meantime, the Respondent also got forensic audit of Corporate Debtor conducted in accordance with Section 25 (2)(d) of the Code and Regulation 35 A of the IBBI Regulation, 2016 and accordingly M/s VMRS & Association, Chartered Accountants were appointed to conduct forensic audit of the Corporate Debtor, who gave the Forensic Audit Report on 22.09.2020. It is the case of the Appellants that they submitted their detailed response on 20.11.2020 to the Respondent vis-à-vis finding of Forensic Audit Report, bringing out fallacies and inaccuracies in the Forensic Audit Report. 11. The Appellants are aggrieved by the fact that the Respondent has failed to apply her mind while considering the Forensic Audit Report and has ignored the replies and clarification of the Appellants and further did not form an opinion, the Appellants also alleged that the Respondent did not consider the Statutory Audit Report which did not point out an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Process for Corporate Persons) Regulations, 2016 (hereinafter referred to as "IBBI Regulations, 2016") in terms of Section 12 of the Code. 18. The Appellants also assailed the Adjudicating Authority who failed to adhere to the timelines as stipulated in the Code & Regulations and without application of mind, allowed the Application of the Respondent under Section 66 of the Code, ignoring the fact that the Corporate Debtor is a MSME and the intent of the Code is for the revival of the Corporate Debtor and not for liquidation of the same. 19. It is the case of the Appellants that application under Section 66 of the Code is not permissible, since there has been delay of 502 days since the was due in initiation of the CIRP was done on 25.07.2021 and cited the judgment of Delhi High Court passed in WP (C) No. 8705 of 2019 titled as M/s Venus Recruiters Pvt. Ltd. vs. Union of India & Ors., wherein the High Court adjudicated that if the timelines of the Code are not followed, the purpose of the Code will be defeated and therefore it is the case of the Appellant that as such the application under Section 66 should not have been allowed. 20. The Appellants cited case of Committee of Cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written submissions of the Appellants. 24. It has been alleged by the Respondent that the Appellant is habitual in misleading the stakeholders as well as this Appellate Tribunal and the direction Mr. Sunil Tangri has been giving false address of his residence in all the affidavits to this CA (AT) (Ins.) No. 1121 of 2023 and pleading in the connected Appeal bearing CA (AT) (Ins.) No. 1070 of 2021 which was listed before this Appellate Tribunal on 01.09.2023. In response to this, the Appellants stated that the this happened due to inadvertent clerical error while drafting the affidavit and there was no intention of the Appellant to mislead this Appellate Tribunal. 25. The Appellants alleged that onus is on Resolution Professional/ the Respondent to prove the financial transactions as fraudulent transactions without any reasonable doubts which has not happened in the present case. It has also been stated that the Respondent has acted negligently by not incorporating corrected tally data and explanations furnished by the Appellants. It is further case of the Appellants that the Respondent did not make out any opinion and blindly relied on the Forensic Audit. 26. The Appellants also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made by the counsel of the Appellant as well as the Respondent, the Adjudicating Authority granted liberty to the Respondent to move an appropriate application in accordance with law. 30. The Appellant stated that on 02.08.2023, IA 5756 along with other applications were again taken up for hearing, whereby the Adjudicating Authority dismissed IA 5756 in light of the ineligibility of the Appellant to be a resolution applicant as per the provisions of Section 29A of the Code and further ordered the liquidation of the Corporate Debtor and appointed the Respondent as the Liquidator of the Corporate Debtor. 31. It is the case of the Appellant that the Adjudicating Authority was wrong in holding him to be ineligible under Section 29(A) (g) of the Code as at the time of submission of Resolution Plan by him, no finding on Section 66 Application of the Respondent was available and it is much after submission of his Resolution Plan, the Adjudicating Authority passed the Impugned Order in Company Appeal (AT) (Insolvency) No. 1070 of 2021 on 12.11.2021. The Appellant argued that the intent of the Code is clear argued that the intent of the Code is clear that the Resolution Applicant should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T) No. 147 of 2018 in the matter of Value Fab Solutions Pvt. Ltd. vs. ROC [(2018) SCC OnLine NCLAT 280] dated 22.05.2018, where it has been held that the new grounds for the first time in the Appeal cannot be allowed. It is the case of Respondent that on this ground alone, the Appeal deserves to be dismissed. 35. The Respondent assailed the conduct of the Appellants, who after commencement of CIRP, decided not to co-operate with the Respondent and did not furnish requested information inspite of several e-mails and personal requested by the Respondent persuading. It has been submitted that due to non-submission of relevant records, data, information and non- cooperation by the Appellants, the Respondent/ Resolution Professional was not able to perform her duties efficiently especially in preparation of Information Memorandum (in short 'IM'), issuance of Expression of Interest (in short 'EOI') etc. 36. The Respondent pointed out that she sent letters by speed post to the Corporate Debtor as well as the Appellants as Suspended Directors of the Corporate Debtor, at the address available at Ministry of Corporate Affairs website, however, all such letters were returned with re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial transactions of the Corporate Debtor and their related parties. The Forensic Audit Report was submitted on 22.09.2020 for the financial year 2016-17, 2017-18 & 2018-19 and for the period from 01.04.2019 to 02.09.2019. 39. The Respondents submitted that based on Forensic Audit Report, which was an expert opinion, the Respondent/Resolution Professional formed an independent and unbiased opinion and made determination of fraudulent transactions and filed an application on 08.12.2020 under Section 66 of the Code before the Adjudicating Authority vide I.A. No. 102 of 2021, which was allowed by the Adjudicating Authority. 40. The Respondent strongly refuted the allegation of the Appellants that she has not performed her duties diligently and blindly relied upon the Forensic Audit Report. It is the case of the Respondent that even the Statutory Auditors have given adverse remarks in their independent Auditors Report of the Corporate Debtor for the financial year 2016-17, 2017-18 & 2018-19, which clearly demonstrate that the records of the Corporate Debtor were entirely unreliable and therefore only way to understand the true and fair picture of the Corporate Debtor was through an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty otherwise the liquidation of the Corporate Debtors would have happened much earlier. Thus, the Adjudicating Authority was not turning blind eye and was trying to revive the Company. 43. The Respondent strongly supported the decision of the Adjudicating Authority on ineligibility of the Appellants to submit the Resolution Plan in terms of Section 29A of the Code. It is the case of the Respondent that it became evident from the records and on the basis of Forensic Auditor Report that there has been an embezzlement of funds and thereafter the appropriate judgement was passed by the Adjudicating Authority. The Respondent refuted all the averments of the Appellant and reiterated background of the case. As per the Respondent, she filed the application for avoidance of fraudulent transactions on 08.12.2020 bearing no. I.A. 102/2021 and the Adjudicating Authority passed order dated 12.11.2021, wherein the Adjudicating Authority determined the fraudulent transactions of Rs. 29,75,73,550/- and an order to erstwhile directors/ Appellant to make contribution of Rs. 29,75,73,550/- to the assets of the Corporate Debtor within 2 months of the date of the order. It is the case of the Respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her all efforts, she has no choice but to file an application No. CA 1531 of 2019 under Section 19(2) of the Code against the Appellants and Statutory Auditors of the Corporate Debtors. 47. It is the case of the Respondent that based on Forensic Audit Report, she filed I.A. No. 102 of 2021 under Section 66 of the Code before the Adjudicating Authority but the Appellants wilfully chose not to contest or deny any allegations and rather took lame technical plea of limitation and the Adjudicating Authority after going in all details allowed the I.A. No. 102 of 2021. 48. It is the case of the Respondent that the Forensic Auditors submitted that their report was based on findings of Forensic Audit Report who were specifically appointed to finding affairs of the Corporate Debtor review independent auditors and only thereafter the Respondent/Resolution Professional identified few transactions falling within the purview of Section 43,45, 49 and 66 of the Code and also duly informed to the IBBI vide e-mail dated 10.12.2020 as required under regulation 35 A of IBBI (IRPCP). Regulation, 2016. It has been submitted that after due diligence and detailed deliberations on the identified transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds are under several heads, we will endeavor to examine the relevant and significant points of alleged frauds, in an item-wise-item approach. (i) On the first findings of Forensic Audit Report, the Respondent pointed out that there has been diversion of stock of Rs. 5,48,50,824/- due to excessive consumption of material compared to previous years. The Appellants submitted that he has given detailed reasoning regarding this issue which, inter-alia, clarification that the raw material accumulated over the previous years were destroyed due to non-receipt of any fresh orders, change in design or specification, quality issues, shelf life expired, non-usable, etc. The Appellants stated that the Respondent did not consider all these reasons for depletion of stock and failed to form an independent and fair opinion on these aspects and took easy course of relying blindly on Forensic Audit Report. The Appellants further stated that this mis-apprehension of Forensic Audit Report was due to fact that proper records were not available by the Corporate Debtors which does not mean that there was illegal diversion of stock for fraudulent purposes. The Appellants stated that the Statutory Audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts, which were due to errors in tally data. The Appellants further submitted that these transaction were conducted at arm's length and there cannot be considered as fraudulent. Per-contra, the Respondent pointed out that with regard to Fund Misappropriation worth Rs 24,02,726- under related party transaction; the Forensic Audit Reports finding No. 2 clearly demonstrate that M/S Arthah Trading Company owned by Mr. Aditya Tangri (Ex-Director of Corporate Debtor) and son of the Appellants i.e., Mr. Sunil Tangri & Ms. Ramani Tangri (Erstwhile Directors of Corporate Debtor) and his registered office showing under tally record is 163,2nd Floor, Kailash Hill, New Delhi which is a common address of Corporate Debtor i.e. (Webtech Packagings India Private Limited) and M/s Arthah Trading Company. This proprietorship firm is a related party . This Appellate Tribunal notes that the alleged transaction are prima-facie of the related parties as noted above and also note that the Registered Address of both the Corporate Debtor and related parties is same, hence the conclusion of the Respondent based on Forensic Audit Reports is acceptable. (iii) As regarding allegation of non-reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits, accounts of Corporate Debtor itself are not maintained due to so called financial crunch of the Corporate Debtor, then how such huge amount of Rs. 1,89,14,000/- have been paid as remuneration to wife and sons, who allegedly did not contribute to day to day conduct of the Corporate Debtor. We are in agreement with the averments of the Respondent as this issue. (v) The Respondent based on Forensic Audit Report has also alleged that the Corporate Debtor has excessively charged other fund as excessive. expenses worth Rs. 5,91,60,261/- which was found as excessive based on trend analysis and such other expenses were found to be abnormal and doubtful behaviour which includes charge of expenses like computer expenses of Rs. 96.32 Lakhs, discounts rebate Rs. 4.32 Crores, other expenses of Rs. 21.35 Lakhs, bad debts of Rs. 38.86 Lakhs etc. It is the case of the Appellants that these entries related to beyond look back period and in any case such transactions happened in normal business course and the assumptions of Respondent is not correct. On face of these facts including activity level of the Corporate Debtor and profitability of the Corporate Debtor, it is just not clear h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sunil Tangri loan account amounting to Rs. 1,24,99,000/-, Sunil Tangri Imprest account amounting to Rs. 57,18,641/- and Ramani Tangri account is recoverable amounting to Rs. 54,54,000/-. The Respondent pointed out that with regard to allegation of diversion of funds in the name of directors and related party, as evident from Forensic Audit Report that the material amount of adjustments were deliberately made in the accounts of Corporate Debtor to misappropriate the funds of Corporate Debtor made between director of the Corporate Debtor and their family member and to accommodate such entries just to withdraw the money and the said account is also red flag account. It is further reiterated that the report/observation is based on tally data submitted by the Appellants, thus no question arises for fresh consideration of updated tally data. Shorn of unnecessary discussing in the teeth of clear finding, we are not in position to appreciate and accept such huge diversion of funds by the Appellants and related parties, which seems for their personal benefits and clearly to defraud creditors and other stakeholders of the Corporate Debtor. (ix) The Respondent based on Forensic Auditors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yer Mr. Neeraj Gupta, Proprietor of Modern Trading & Mfg Co. It appears that the sale between Corporate Debtor and buyer is over and above Rs. 2.25 Crore and the Corporate Debtor under their books shown total transfer of assets worth Rs. 1.75 Crore in place of actual sales consideration worth Rs. 2.25 Corers by the buyer, it clearly appears that Corporate Debtor diverted the Rs. 50 Lakhs which is evident from the records and said sum diverted into cash mode by the directors of Corporate Debtor and hence recoverable. It is further pertinent to mention here that the Applicant/ RP has also filed an application under Section 45 of the Code, 2016 for declaring the above said undervalued transaction of the sale of property being C.A. No. 327/2019. However, while adjudication the said application, the Ld Lower Authority has observed/conclusion which is herein for the sake of ready perusal. "34. So far as the question of recovery differential amount of Rs. 50,00, 000.00/- is concerned, as per the Forensic Auditor's Report, the amount was diverted that shall be taken into consideration under section 66 of IBC, filed by RP being I.A no. 102/2021 and not under section 45 of the IBC. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is the contention of the Appellants that the Statutory Auditor did not find any fraudulent transactions contrary to the Forensic Audit Report submitted by M/s VMRS & Associates, Chartered Accountants and therefore Forensic Audit Report was not correct. In this regard, we observe that the role of Forensic Audit becomes relevant only when such situation occurs about alleged preferential, undervalued, fraudulent and extortionate type of transaction takes place and on most occasions the process of Forensic Audit is required to be undertaken after the annual financial statement of the Corporate Debtor are duly compiled and audited. In view of this, the contention of the Appellant is not convincing. Moreover, we also take note of the submissions of the Respondent that in the Statutory Auditors did not provide suitable cooperation to the Respondent as Resolution Professional and further the Statutory Auditors themselves gave qualified Audit Report. In view of this, we are unable to accept the contention of the Appellant that in absence of pointing out fraudulent transactions by the Statutory Auditors, the alleged fraudulent transactions should not have been taken into consideration b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he IBC, as referred in Para 26 of the Order." As can be seen from the Section 29A(g) of IBC 2016, a person shall not be eligible to submit a resolution plan if such person or any other person acting jointly or in concert with a person has been a promoter or in the management of control of a Corporate Debtor in which the preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by this Adjudicating Authority under this code. The sub-Clause (g) of Section 29A reads thus: (g) "has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the Adjudicating Authority under this Code: Provided that this clause shall not apply if a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place prior to the acquisition of the corporate debtor by the resolution applicant pursuant to a resolution plan approved under thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime of submission of the resolution plan has an account,] or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949) [or the guidelines of a financial sector regulator issued under any other law for the time being in force,] and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor: Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non performing asset accounts before submission of resolution plan: (g) has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the Adjudicating Authority under this Code: [Provided that this c ..... 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