Indian Overseas Bank & Anr. vs Ramesh Chandra Swain & Ors.

Short term source of finance were used to purchase fixed assets.

Bank account with commercial bank other than Appellant lender banks was opened after the loan account was classified as NPA and the funds were routed through new bank account.

The gross margin for financial year 2012-13 and 2013-14 were more than 50% and was reduced to margin of -50% in the year 2014 whereas no such variation in margin was observed in the Aluminium Extraction Industry.

Books of accounts were maintained in accounting software different from audited financial statements and stock statement submitted to the bank.

The losses were underreported in the financial and stock statement sent to the banks and were different from the accounting software.

Entire stock of Rs. 4,30,43,884/- was written off from the books of account during financial year 2016-17 with the note that stock were unsalable even though metal product like aluminium do not fall under such category.

Counsel for Respondent Nos. 1 to 4 further stated that stock in the Financial Statement of 2014-15 has been shown at Rs. 4,30,43,884/- and the Auditors have not carried out physical verification during 2015-16 and as such reported the same figure.

Counsel for Respondent Nos. 1 to 4 emphasised that Respondent have taken the possession of unit on 08.07.2015 under Section 13(4) of SARFAESI Act 2002 and on 10.07.2015 Respondent No. 3 has submitted stock statement to Appellant No. 1 to the tune of Rs. 68,67,871/- which was not disputed by the Appellant till initiation of CIRP.

Counsel for Respondent Nos. 1 to 4 clarified that most of the stocks are chemicals which have limited life span and accordingly the value of stock as on 31.03.2017 was shown as nil.

Counsel for Respondent Nos. 1 to 4 stated that the Adjudicating Authority has considered all these facts and came to logical conclusions that Respondent No. 5 could not establish the difference in stock value of Rs. 3,64,00,356/- has been utilised other than for ordinary course of business.

It is noted that Respondent No. 5 had filed I.A. No. 25/CB/2021 with a prayer to declare some transactions as fraudulent under Section 66 as well as directions to the Respondent Nos. 1 to 4 herein to reimburse money and prayer was made to attach bank accounts of Respondent Nos. 1 to 4. Since, this was done which was directly beneficial to the Appellants the (Financial Creditors) there was no need of the Appellants (Financial Creditors) to be party in the said I.A. No. 25/CB/2021. Since, the ‘impugned order’ has dismissed I.A. No. 25/CB/2021 and the same is squarely and directly hitting financial interest of the Appellant who have land Rs. 28.868 crores (approx.) therefore they are aggrieved persons.

This Appellate Tribunal takes into account provisions of Section 61(1) of the I & B Code, 2016 which reads as under :

This Appellate Tribunal find merit in the contention of the Financial Creditor i.e. Appellant herein are indeed aggrieved by the ‘impugned order’ of the Adjudicating Authority as such they are entitled to prefer the present appeal before this Appellate Tribunal and in view of this, we hold that the present appeal is maintainable.

A. Depletion of Stock without any justification

B-1. Diversion of funds in form of utilisation of short-term working capital fund for long-term purpose in violation of the terms of sanction of credit facilities.

And

B-2. Opening of new bank account in IDBI after the account of the Corporate Debtor was declared as NPA.

➢ It has been seen from the record made available and averments that in the Financial Statement for the period ending 31.03.2015 as well as 31.03.2016, the value of inventory was shown as Rs. 4,30,43,884/-however, in the Financial Statement for the period ending 31.03.2017, all of a sudden inventory was shown as ‘NIL’. This implies that inventory should have been either used for production purpose or should have been disposed off including sale or remained unexplained.

➢ Appellants have brought out that this amount was written of by Respondent Nos. 1 to 4 fraudulently which tantamount to diversion of funds in violation of terms of sanction and RBI guidelines.

➢ It is a case of Respondent that after physical possession has been taken by the Appellants, the stock was not physically verified and the inventory which mainly consisted of chemicals, cartoons, polythene, etc., had limited life span and destroyed over a period of time. They also pointed out that the Respondent No. 3 submitted the stock statement with Appellant No. 1 of Rs. 68,67,871/- as stock statement dated 10.07.2015.

➢ This Appellate Tribunal has also gone through the ‘Transaction Audit Report’ conducted by the Independent Chartered Accountants as well as ‘explanation on depletion of stock subsequent to account becoming NPA without corresponding income thereto’ given by Respondent No. 3 to the Respondent No.5 during the CIRP proceedings.

➢ From the stock statement which the Corporate Debtor is stated to be have furnished to Appellant No. 1, it is noted that the same has been received by the Appellant No. 1 with note ‘Receipt Without Prejudice’. This signifies that the alleged statement has not been examined or accepted by Appellant No. 1 and as such the contention of the Respondent Nos. 1 to 4 on explanation that inventory was only Rs. 68,67,871/- and not Rs. 4,30,43,884 as per Financial Statement cannot be accepted on the face of it.

➢ The ‘Transaction Audit Report’ furnished by the Chartered Accountants has done detailed analysis of the pattern/movement of the closing stock right from Financial Year 2011-12 to 2016-17 along with analysis of net profit which is reproduced herein below :-

➢ From above mentioned ‘Transaction Audit Report’ it is therefore clear that Rs. 4,30,43,884/- was written of from stock being unsalable, obsolete and not for sale even at scrap value during Financial Year 2016-17. Since, the Corporate Debtor was in business of production of aluminium items and products like alloys, ingots, billets etc., it is surprising to note that the entire inventory/ stock was written of during financial year of 2016-17 without suitable notes to the Accounts. In the ‘impugned order’ it has been recorded ‘in absence of physical verification of the stock the e-auction as has been made as on 31.03.2015 has been shown as unchanged as on 31.03.2016” and shown as NIL as of 31.03.2017 as most of the stock has crossed their expiry date’.

➢ On the pointed query by this Appellate Tribunal to Respondent Nos. 1 to 4 on above discrepancy, no convincing and direct answer could be furnished regarding details of item written of, proof of the procurement or utilisation during production process or details of writing of such inventories. In Written Submissions by the Respondent Nos. 1 to 4 as well as averments made, the Respondents relied upon the facts that the Appellants could not establish the fact that difference in stock has been sold or disposed or otherwise utilised other than ordinary course of business. Incidentally, this Appellate Tribunal has also noted from ‘Written Note of Argument by Respondent’ before the Adjudicating Authority dated 21.09.2021 where it has been mentioned that ‘The variation in the figures in Financial Audit Report can be categorized as mistake, lack of accounting knowledge, carelessness etc. but shall not be evidenced the stock has been disposed of’ . The contention of the Respondents cannot be accepted in view of detailed explanation in the ‘Transaction Audit Report’.

➢ This Appellate Tribunal has also seen Auditor’s Report conducted by RDA & Associates for the Financial Year ending 31.03.2015 and the relevant portion regarding inventory is reproduce as under

o The Auditor’s Report while mentioning the fact that management has been doing physical verification of inventory from time to time and has also recorded that the huge stock were found as shortage during physical verification and as per information and explanation given by the Management to the Auditors certain stock was stolen against which no FIR was logged.

o On a pointed query by this Appellate Tribunal to the Respondent No.1 to 4 as to what items were stolen, value thereof, reason for theft, reason for non-filing FIR etc., the Respondents could not give any explanation. It is strange that the stock is stolen from the premises which is pointed out in Auditor’s Report and management has chosen not to file even FIR and is clueless about its details. Prima-facie such stand of the management i.e. Respondent No.1 to 4 herein is beyond reasonable comprehension and has to be factored into accordingly.

o From the Balance Sheet as on 31.03.2017 it is noted that inventory was shown as Rs. 4,30,43,884/- as on 31.03.2016 whereas the value for the same as on 31.03.2017 has been shown as ‘NIL’. Surprisingly, no ‘NOTES’ were furnished against this item of ‘Inventory’ especially writing off of Rs. 4.30 crores (approx..) as against the Balance Sheet as on 31.03.2015 where a suitable note No. 10 was given against the same item of inventory. Such financial reporting without any explanation is beyond logical justification on the part of Respondents No.1 to 4.

➢ Based on above qualitative and quantitative detailed analysis this Appellate Tribunal is of the view that the Adjudicating Authority erred on this point in the ‘impugned order’.

➢ Both above are interconnected matters and are being dealt accordingly in combined manner..

➢ It is a case of Appellants that during “Financial Year 2013-14, there was an increase in long-term sources which had come to a deposit amount of INR 25,91,913/- whereas long-term funds amounting to INR 5,16,30,824/- were also transferred in short-term funds of INR 10,18,97,202/- whereas the short-term use was for Rs. 76,74,465/-. The increase in short-term fund resulted mainly because of the fact that the short-term funds in the form of working capital taken as loan from the banks over part of the CoC was utilised for long-term purpose which included investment in form of plant and machinery. This utilisation of short-term working capital fund for long-term purpose was not in conformity with the terms of the sanction and was diversion of funds as per Clause 2.2.1 of the Master Circular dated 01.07.2015”.

➢ As regards, opening of new bank account after declaration of account of Corporate Debtor as NPA, it is seen that Respondent Nos. 1 to 4 have opened bank account in IDBI on 29.01.2015 and fund amounting to Rs.72.81 lakhs (approx..) were transferred to the new bank account without consent of the Appellants. We have also perused RBI Master Circular on ‘wilful defaulter’ dated 01.07.2015 which is applicable in this case as lender being banker (Appellant herein) and unit (Respondent Nos. 1 to 4) includes individual, juristic person whether incorporated or not. Similarly, the definition of ‘wilful default’ includes units which has defaulted in meeting payments/ obligations to the lenders even when it has got capacity to honour to settle said obligation. Similarly, Clause 2.2 of the RBI Circular defines Diversion of Funds and siphoning off money reads as under:-

➢ The Appellant has also brought out that no documentary evidence that money has been used from newly opening of bank account in favour of persons who were genuine creditors, could be furnished by the Respondent Nos. 1 to 4.

➢ The Respondent Nos. 1 to 4 justified their actions of opening new account alleging that the Appellants did not give any cooperation to operate account as a result of which they could not pay to small creditors and hence they were forced to open new account.

➢ It is the case of Respondent Nos. 1 to 4 that this is a standard business practice that small creditor do not operate through bank account and deal in cash for ease of business and therefore Respondent Nos. 1 to 4 made all the payment in cash to small creditors with good intention and not to defraud the Appellants.

➢ This Appellate Tribunal has again gone through the ‘Transaction Audit Report’ to examine this aspect which mention following in report:

➢ Admittedly, after declaration of account of Corporate Debtor as NPA, the Corporate Debtor is not entitled to open new bank account without consent of the Financial Creditor i.e the Appellants herein. In the present case, no such consent was obtained and therefore the action of opening new account is in violation of Clause 2.2 of RBI Master Circular dated 01.07.2015 on wilful defaulter.

➢ This Appellate Tribunal is also not inclined to accept the logic of the Respondent No.1 to 4 that small creditors are not in habit of doing transaction through bank and therefore the Corporate Debtor used to withdraw the cash to make the payment to small creditors. From the nature of the business as well as the suppliers which includes items like chemicals, this looks quite improbable and therefore arguments of the Respondent Nos. 1 to 4 are not convincing.

➢ Similarly, use of short-term funds for creation of long-term assets is also not in accordance with RBI Master Circular dated 01.07.2015 the same has also been adversely commented by the Independent Chartered Accountant in their ‘Transaction Audit Report’.