M/S Reliance Commercial Finance Ltd. vs M/S Maximum Synthetics Pvt. Ltd.

Per: Shri Deep Chandra Joshi, Judicial Member

This present Application bearing IA No. 390/JPR/2019 has been filed by Mr. Satyendra Prasad Khorania, Resolution Professional (‘Applicant’/ ‘Resolution Professional’) of M/s Maximum Synthetics Pvt. Ltd. (‘Corporate Debtor’) under Section 66 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’/ ‘Code’) for declaring the transactions as mentioned in the Application as Fraudulent Transaction and for directions to the Respondents to reverse the Transactions as mentioned therein.

This Adjudicating Authority vide order dated 17.05.2019 had admitted the application filed by Reliance Commercial Finance Limited (‘Financial Creditor’) under Section 7 of Code for initiation of Corporate Insolvency Resolution Process (‘CIRP’) of the Corporate Debtor and as a consequence thereof, appointed Mr. Rajiv Sharma, as Interim Resolution Professional (‘IRP’). Later on, vide order dated 12.07.2019, Mr. Satyendra Prasad Khorania was appointed as the RP (‘RP’) as approved by the CoC. Consequently, an order for Liquidation was passed by this Authority on 09.02.2021 and Mr. Satyendra Prasad Khorania was appointed as the Liquidator.

The present application has been filed by the Resolution Professional on the set of facts mentioned in the Application. The Resolution Professional appointed ( M/s ) H Mittal & Co. to conduct Transaction Audit of the Financial Statement and books of the account of the Corporate Debtor to identify the transactions under Section 43, 45, 49, 50 and 66 of the Code. The RP on various occasions requested the Suspended directors to provide complete books of accounts, however, owing to the non-cooperation the Transaction Audit was limited to the records available i.e. tally data for the financial year 2017-18 and audited financial Statement as on 31.03.2017.

The Respondents have failed to either appear before this court or extend their co-operation as required by the Applicant for Liquidation of the Corporate Debtor in consonance with the provisions of the law. Due to non-cooperation in proceedings initiated under Section 95 of IBC against the Respondents also, Bailable Warrants were issued against the Respondents multiple times but the Respondents chose to appear in other proceedings through their counsel, hence, it was observed that the Respondents are wilfully absconding from the present proceedings. Therefore, ex-parte proceedings were initiated against the Respondents.

To inspect the various transactions under the aforesaid sections, the Resolution Professional wrote a letter to the VAT & GST Dept. and obtained the copies of the returns filed by the Corporate Debtor before the commencement of the CIRP. The following documents have been reviewed by the Auditor:

The Transaction Auditor has identified the following transactions under Section 66 of IBC:

It is mentioned that as on 01.04.2016, the balance of the Debtor i.e. Basil Powertek Pvt. Ltd stood at Rs. 99,41,263/- (Rupees Ninety-Nine Lakhs Forty-One Thousand Two Hundred and Sixty Three Only). Further, during the financial year 2016-17, the Corporate Debtor paid a sum of Rs. 95,25,000/- (Rupees Ninety-Five Lakhs Twenty-Five Thousand Only) and received a sum of Rs. 6,50,000/- (Rupees Six Lakhs Fifty Thousand Only) from the Debtor. Hence, to close the account of the Debtor, the Corporate Debtor had passed an entry for purchase of Finished Fabrics of Rs. 1,88,16,263/- (Rupees One Crores Eighty-Eight Lakhs Sixteen Thousand Two Hundred and Sixty Three Only) on 31.03.2017 whereas the NIC

Sd/-

Sd/-Code along with the MOU/AOA of Debtor shows the object of the company is manufacturing and dealing in electronic components.

There was one more account containing the same name in the books, having transactions in continuance to the debtor account. On 31.03.2017, there was purchase of Rs. 34,76,553/- (Rupees Thirty-Four Lakhs Seventy-Six Thousand Five Hundred and Fifty-Three Only) and sales of Rs. 35,61,600/- (Rupees Thirty-Five Thousand Sixty-One Lakhs Six Hundred Only) after 31.03.2017, which shows that the entries have been undertaken to close the account of Debtor.

As per the returns available with the Transaction Auditor, the purchase shown in VAT return is only Rs. 28,07,733/- (Rupees Twenty-Eight Lakhs Seven Thousand Seven Hundred and Thirty-Three Only). The Corporate Debtor had passed the entry in Journal Voucher but not in purchase voucher. Hence, it shows that the entries have been passed to increase the sale figure of the Corporate Debtor to attain Cash Credit Limit from the Bank.

On 01.04.2015, the Debtor namely, Prajesh Syntax had a balance of Rs. 6,76,42,571/- (Rupees Six Crores Seventy-Six Lakhs Forty-Two Thousand Five Hundred and Seventy-One Only) in the books of the Corporate Debtor. During the Financial Year 2016-17,

Sd/-

Sd/-the Corporate Debtor has passed the following 4 entries of Finished Fabric sale return which is reiterated below:

It has been contended that there is no address of the Debtor herein in the books of accounts of the Corporate Debtor and when the Transaction Auditor tried to search its name online, no details were found. The aforesaid entries have been done in the books of accounts to show more inventory than the actual.

Further, as per VAT returns, there is only sale return of Rs. 4,93,630/- (Rupees Four Lakhs Ninety Three Thousand Six Hundred and Thirty Only) during the period 01.10.2016 to 31.12.2016. Hence, the sales returns as tabulated above were not actually incurred but only passed to increase the stock of Corporate Debtor and write-off old Debtors, which enhances the drawing power of the Corporate Debtor by fabricating books of accounts.

It is submitted that the Debtor i.e. Maxima Textiles is a related party and is mentioned as one of the Debtors in the books of the Corporate Debtor. Maxima Textiles is proprietorship concern of Mr. Shiv Ratan Chandak, who was the erstwhile director of Corporate Debtor. It is mentioned that during the year 2016-17, there was sale and purchase of Rs. 2,44,69,092/- (Rupees Two Crores Forty-Four Lakhs Sixty-Nine Thousand and Ninety-Two Only) from the Corporate Debtor on 05.01.2017 and 03.02.2017 respectively.

On year end i.e. 31.03.2017, an adjustment entry has been passed for the amount of Rs. 99,99,999/- (Rupees Ninety-Nine Lakhs Ninety-Nine Thousand Nine Hundred and Ninety-Nine Only) settling the amount with BRC Fashion Pvt. Ltd. which is the related party of Corporate Debtor as Taruna Chandak W/o Shiv Ratan Chandak is a Director in the said company. The entries were done to increase the amount of Debtor in the month of January 2017 and secondly, to increase in amount of stock in month of February 2017.

The Transaction Auditor examined the stock value in the books of accounts of the Corporate Debtor was Rs. 32,02,91,326/- (Rupees Thirty-Two Crores Two Lakhs Ninety-One Thousand Three Hundred and Twenty-Six Only) as on 31.03.2017 as per audited financial statements. The stock calculation after 31.03.2017 is tabulated below:

While doing the above calculation the applicant have not taken any profit margin.

However, during the visit to the factory, the valuation of the stock available in the factory premises is in some lacs only. It was also found that huge number of sales invoices of M/s BRC Fashions Pvt. Ltd., M/s Maxima Textiles and M/s Suiting World was lying in the factory premises of the Corporate Debtor. This clearly showed that the Corporate Debtor had sold the stock of the company in different companies including the above-mentioned companies incorporated with an ulterior motive for the purpose of siphoning the amount of sale of stock of Corporate Debtor.

The Corporate Debtor has shown sales of Rs. 14,07,67,725/- (Rupees Fourteen Lakhs Seven Thousand Sixty-Seven Thousand Seven Hundred and Twenty-Five Only) to the account opened in the name of “other debtors” in the month of Oct 2016 and Nov 2016 and adjusted the same in ledger by passing sales return entry, which are as follows:

We have heard the submissions made by the learned counsel for the Applicant. There was no appearance on behalf of the Respondents despite repeated service, hence, vide Order dated 19.10.2023, ex-parte proceedings were initiated against the Respondents.

Before delving into the facts of the matter at hand, we refer to Section 66 of the Code which reads as below:

Bare perusal of Section 66(1) of the Code outlines that in order to attract Section 66 of the Code, the following ingredients must be fulfilled:

The Director/Partner participated in conducting the business of the Corporate Debtor;

The business transactions led to defraud the creditors of the Company or any other fraudulent purposes;

The Director/Partner had knowledge that the transactions it was participating in, were intended to defraud the Creditors of the Company or were in some other way fraudulent.

Hence, the scope of Section 66(1) contemplates that the business of the Corporate Debtor has been carried on with the intent to defraud its creditors or for any fraudulent purpose. The clause (2) of Section 66 of the Code mandates that when directors knew that there was no reasonable prospect of avoiding the initiation of the CIRP, they did not exercise due diligence in minimizing the loss. Section 66(2) deals with a scenario where the directors take action at the instant onset of any financial distress, without sufficient due diligence. Section 66(1) deals with fraudulent trading where there is mandatory requirement of knowledge and presence of dishonest intention whereas Section 66(2) deals with wrongful trading as it includes the element negligence. For a transaction to qualify under sub-section (2) of Section 66 of the Code, it has to be substantiated that the Director/Partner of the Corporate Debtor is aware is insolvent and continues to trade negligently.

The core difference between Section 66 and other avoidance transactions is that the fraudulent intention to defraud the creditors has to be proved by the person asserting such allegation. Moreover, it is settled law that while alleging fraud, the burden of proof is on the party alleging the same. It has been laid down by the Supreme Court in the case of Union of India v. Chaturbhai M Patel & Co that fraud must be established beyond reasonable doubt and the mere suspicion, however may be the circumstances, however strange the coincidences, and however grave the doubt, suspicion alone can never take the place of proof. It is therefore stated that the burden of proof lies on the person who alleges it and the same does not shift on the Respondents until the burden cast on the person alleging the same has been discharged.

Further the Hon’ble NCLAT in the case of Regen Powertech Pvt. Ltd. Vs. M/s Wind Construction Private Limited Company Appeal (AT)(CH)(Ins) No.349/2022 dated 23.09.2022 has thrown light upon the aspect of fraud under Section 66 of the Code. For reference, the observations made by the Hon’ble NCLAT are as reiterated below for reference:

In the matter of Tridhaatu Kirti Developers LLP vs. Mr. Arihant Nenawati & ors. Company Appeal (At)(Insolvency) No.95/2021 dated 02.01.2023, the Hon’ble NCLAT had observed that, “It is also well settled law that the establishment of fraudulent conduct does not require the same standard of proof as in criminal trial. It is not necessary that each instance of fund being siphoned needs to be established from inception to the end and even one conduct of director of CD can depict an act of fraud.”

The Hon’ble NCLAT in the matter of Shri Baiju Trading and Investment Private Limited vs. Mr. Arihant Nenawati (Liquidator for Royal Refinery Private Limited) & Ors., Company Appeal (AT) (Ins.) No. 699 of 2021 dated 29.03.2023 has held the following with respect to the provision of Section 66 of the Code:

In the case at hand, the Transactional Auditor has identified the following as related parties of the Corporate Debtor while relying on the MCA Website and Books:

The Application filed under Section 66 of the Code, on the basis of Transaction Auditor's report, has identified the following transactions under Section 66 of the Code:

First, we deal with the transaction carried out by the Corporate Debtor with M/s Basil Powertek Private Limited. It has been contended that the balance of the Debtor stood at Rs. 99,41,263/- (Rupees Ninety-Nine Lakhs Forty-One Thousand Two Hundred and Sixty-Three Only) and subsequently during the financial year 2016-17, the Corporate Debtor paid a sum of Rs. 95 Lakhs and received a sum of Rs. 6.50 Lakhs, hence, the Corporate Debtor passed an entry for purchase of Finished Fabrics of Rs. 1,88,16,263/- (Rupees One Crore Eighty-Eight Lakhs Sixteen Thousand Two Hundred and Sixty-Three Only) on 31.03.2017. Moreover, when the Articles of the Debtor were examined by the Applicant, it was found out that as per MCA and MOA/AOA of the Debtor that the Company was registered for manufacturing of other electronic components. Further the VAT Returns only showed return worth Rs. 28,07,733/- (Rupees Twenty-Eight Lakhs Seven Thousand Seven Hundred and Thirty-Three Only). The Applicant has time and again alleged that the transactions were undertaken to write off the Debtor so as to enhance the drawing power of the Corporate Debtor. Therefore, the entry of Rs. 1,88,16,263/- (Rupees One Crore Eighty-Eight Lakhs Sixteen Thousand Two Hundred and Sixty-Three Only) as indicated from the Ledger, is nothing but wrongful trading on part of the Respondents under Section 66 of the Code.

With respect to the transaction carried out with Prajesh Syntax, it is noted that as per the Ledger, the Debtor had a balance of Rs. 6,76,42,571/- (Rupees Six Crores Seventy-Six Lakhs Forty-Two Thousand Five Hundred and Seventy-One Only) but during the financial year 2016-2017, the Corporate Debtor passed four entries of Finished Fabric Sale Return to close the account. However, this particular Debtor is nowhere to be found and the Respondents have wilfully absconded from the proceedings in the present matter. Further, the Finished Fabric Sale Return has not been recorded in the VAT Returns as well. The action of the Respondents does not exhibit due diligence in conducting the business in conducting the affairs of the Corporate Debtor. Therefore, the same shall be termed as Wrongful Trading under Section 66(2) of the Code.

The cross entries carried out with Maxima Textiles, Other Debtors and Parvathi Collections cannot be categorised under Section 66 of the Code as the same is evident from the Leger that it was done during the course of business transactions. The transactions made in ordinary course of business in absence of any contrary evidence, to show that they were made to defraud the creditors or for any fraudulent purposes, on mere allegation made by the RP, shall not come within the meaning of Fraudulent Trading or Wrongful Trading under Section 66 of the Code.

Further, the Application alleges difference in stock as per the books of accounts and as per the actual stock available in the factory premises. It has been contended that while visiting the factory premises, it was found that the valuation of stock available in the factory premises is in some lakhs only but the value of the same is not given. No specific number has been provided to actually determine the value of stock which is not present. There is a difference of Rs. 60,40,69,983/- (Rupees Sixty Crores Forty Lakhs Sixty-Nine Thousand Nine Hundred and Eighty-Three Only) from the stock available as per the Returns recorded in VAT Form 7A and as per the tally data available with the Transaction Auditor alleging mismatch and defrauding the Creditors but there is no indication towards the stock which was present in the premises of the Corporate Debtor during the visit by the Transaction Auditor. It is relevant to mention that since the Applicant is alleging that difference in stock shall be termed as fraudulent transaction, it has to give the details disclosing how the present Respondents have committed fraud in respect to the missing stocks. In absence of conclusive finding regarding the individual personal role of the Directors in variance in stock, this difference in the stock cannot be termed as a Fraudulent Transaction under Section 66 of the Code.

The Hon’ble NCLAT in Mr. Tenny Jose & Ors. Vs. Mr. Prathap Pillai, Resolution Professional of M/s Tenny Jose Limited, Company Appeal (AT) (CH)(INS.) No. 95/2023 dated 04.08.2023 held that if a fraudulent intent or fraudulent purpose is made out, the liability must follow. An action can also lie, when there is a fraudulent purpose, upon the customers of the company. The burden of proof, is the same as in a Civil case, where serious allegations of misconduct, such as fraud are in issue. In an isolated fraud case, an individual tort action (‘civil wrong’), will lie.

In the factual matrix presented in the matter at hand, we have categorised the following transactions under Section 66 of the Code:

As regards Section 66(2)(b) of the IBC, 2016, on an application made by a Resolution Professional, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if such director or partner did not exercise due diligence in minimizing the potential loss to the creditors of the Corporate Debtor. Therefore, in view of the foregoing, we direct Respondents No.1 and 2 to contribute a sum of Rs. 8,64,58,780/- ( Rupees Eight Crores Sixty-Four Lakhs Fifty-Eight Thousand Seven Hundred and Eighty Only) to the assets of the Corporate Debtor.

Hence, in view of the foregoing, the Application filed under Section 66 of the Code numbered as IA No. 390/JPR/2019 is hereby dismissed against the Respondents.