M/s Sri Vinayaka Paper and Boards Limited vs Union Bank of India & Ors.

PER: BENCH

This application is filed under section 66 R/w 60 (5)(c) of Insolvency and Bankruptcy Code, 2016 of the Insolvency and Bankruptcy Code, 2016 (herein after referred to as “CODE”) R/w Rule 11 of The National Company Law Tribunal Rules, 2016 by the Liquidator appointed for M/s Sri Vinayaka Paper and Boards Limited herein after referred to as Corporate Debtor, seeking directions against the erstwhile management/Directors of suspended board for making fraudulent transactions, misusing the company’s funds and indulging in wrongful trading.

It is averred that on November 26, 2018, the Corporate Debtor was placed into liquidation, with the applicant appointed as the liquidator. That the Corporate Debtor was engaged in manufacturing and marketing various types of paper products. Seeking to modernize and expand its plant capacity, the Corporate Debtor approached a lenders consortium for funding. Operations in the new paper plant began in January 2015. However, due to substandard paper quality, the plant eventually ceased operations. That for constructing the new paper plant, the Corporate Debtor contracted M/s Manish Industries Private Limited and M/s Latha Industries. Additionally, for the captive power plant, they contracted M/s I Square Engineers Private Limited.

It is averred that subject to the term loan taken by the corporate debtor one of the members of Consortium bank State Bank of India on 24^th September, 2018 appointed Raju and Prasad Charted Accountants to conduct forensic audit of the corporate debtor with a purpose to examine the books of accounts and to verify the money trail, end use of the funds disbursed by the banks for the period beginning from April, 2010 to March 2018.

It is averred that after reviewing the said Forensic Audit report it is observed by the liquidator that the Corporate Debtor had written off Rs. 42.25 crores as bad debt, including Rs. 28.55 crores receivable from parties in which the management/shareholders had an interest. At the time of the write-off, these parties had Rs. 16.92 crores in outstanding unsecured loans. Additionally, Rs. 46.36 crores of sundry debtor balances were adjusted with sundry creditors, indicating a fictitious sale of Rs. 85.97 crores. Furthermore, Rs. 13.37 crores were credited to a non-TRA account at State Bank of India, indicating fund diversion/misappropriation. The consortium banks declared the Corporate Debtor's account as fraudulent due to the directors depositing forged land documents and an altered/forged insurance policy. For the said act a complaint was filed with the Central Bureau of Investigation (CBI) on October 15, 2018.

It is averred that the Respondents allegedly awarded contracts to Manish Industries Private Limited and Latha Industries, parties with insufficient infrastructure, experience, and competence in handling EPC contracts. They falsified books, diverted funds, used loan proceeds for purposes other than originally intended, misrepresented facts to obtain term loans without eligibility, and engaged in round-tripping funds to fabricate promoter contributions during expansion. These actions were intended to defraud the Corporate Debtor's creditors. Stating the above it was prayed to pass any order necessary to ensure justice regarding transactions that defraud creditors and involve fraudulent or wrongful trading.

That the Respondents emphatically deny all contentions, averments, and false allegations and the Applicant must provide strict proof of all allegations raised. It is averred that the Application lacks merit, misconstrues the scope of Section 66 of the Code as the Applicant, acting with malafide intentions to tarnish the Respondents' reputation, has made baseless allegations. The applicant has concealed material facts and making false accusations. He further violates the doctrine "he who seeks equity must do equity," as they are not prepared to act equitably. Upon careful scrutiny of the documents after being made parties to the application, the Respondents have discovered that the Applicant has concealed true facts.

It is averred that post initiation of CIRP, newspaper publications invited claims. Two registered valuers, Mr. G.S. Mittal and Mr. P. Kanaka Rao, valued the Corporate Debtor’s assets at Rs. 98.60 crores and Rs. 94.81 crores, respectively. In the 10^th CoC meeting on May 19, 2018, the Resolution Plan by Ananya Rai Paper and Allied Products Private Limited (ARPAPPL) was approved. However, ARPAPPL failed to make timely payments and sought an extension via IA No. 468 of 2018, which was dismissed by the Hon'ble Tribunal due to insufficient funds. Subsequently, the Applicant filed IA No. 496 of 2018 for an order of liquidation against the Corporate Debtor, which was admitted on November 26, 2018. On July 31, 2021, an e-auction resulted in successful bids from Mr. Akash Agarwal, Blueberry Techno Services, and Aktis Infra (OPC) Private Limited, represented by Tadimalla Raja Kishore, for a reserve price of Rs. 40 crores. It was noted that Mr. Tadimalla Raja Kishore, a director of ARPAPPL, had previously defaulted during the CIRP process, suggesting he intentionally delayed payments to buy the company later at a lower price.

It is averred that the Applicant failed to conduct proper background checks on the successful bidders, resulting in the company being sold for less than half the initial price of Rs. 85 crores. This oversight reflects not just a lack of diligence but a clear dereliction of statutory responsibilities under the Code. No action was taken against the defaulting resolution applicant, who was allowed to re-enter the bidding process and acquire the company at a significantly reduced price.

It is averred that the allegation that Rs. 42.45 crores of debtors were written off as bad debt is denied and requires strict proof. The amount was written off because the debtors were unable to pay for the goods received from the Corporate Debtor. The Applicant while claiming the said has failed to provide proper evidence or specify the exact period of these allegations. It is further averred that the report provided by the Applicant fails to adequately demonstrate how certain transactions have been termed fraudulent.

It is averred that Respondent No. 5, was associated with corporate debtor as an Additional Director from 18.02.2009 to 30.09.2009, and as a Director from 30.09.2009 to 28.09.2015. He was not a director or authorized signatory when the non-TRA account with State Bank of India was opened and was not involved in the company's daily affairs or aware of the bank transactions. It is further averred that the Applicant's claim that Rs. 13.37 crores credited to the State Bank of India account constitutes fund misappropriation lacks proper evidence of the funds' end use or source. Mere credit or debit transactions do not prove misappropriation. That he was not properly notified of any Board or General meetings nor informed about the company's operations, his signature was forged on many documents without his knowledge. As he resigned on 28.09.2015, and was unaware of the transactions from 30.10.2015 to 29.11.2016, which the Applicant mentioned as fraudulent activities.

It is averred that Respondent No. 6 was a director of the Corporate Debtor from 22.10.2010 to 28.09.2015 and was a minority shareholder of SVPBL without involvement in day-to-day operations. This is confirmed by Mr. Srujan Garapati's letter dated 08.02.2019. She was not a director or authorized signatory when the Non-TRA account was opened. Additionally, Respondent No. 6 was made a subscriber and promoter of Manish Industries Private Limited (MIPL) without her knowledge, and her signature was forged at the time of MIPL’s incorporation; she did not pay any subscription amount and was never involved with MIPL's activities. The allegation that a contract was awarded to a party she was interested in is false. The first contract with Manish Industries was signed on 30.08.2010 and the first proforma invoices were dated 18.04.2010. Respondent No. 6 became a director of SVPBL on 22.12.2010, after the contract was signed. Furthermore, MIPL was incorporated on 05.01.2011 after the contract date. Thus, she was not a promoter of MIPL when the contract was signed and was not an interested party in these transactions with either SVPBL or MIPL.

It is averred that Respondent No. 8 was a director of the Corporate Debtor from 24.08.2015 to 25.02.2016, and was not involved in day-to-day operations or aware of the company's transactions. Notably, Union Bank of India sent renewal documents after Respondent No. 8 had resigned, and his signature was forged on these documents. He was no longer associated with the company, making the Applicant's allegations against him false and baseless.

While stating the above-mentioned facts it is averred that the Applicant has presented a fabricated story, and all allegations against the Respondents are false and vexatious. None of the three Respondents were involved in the company’s daily operations or aware of its business decisions. They have resigned before the bad debts situation arose and are being unnecessarily implicated in this application.

While reiterating the averments in the counter it is submitted that the Resolution Professional/Liquidator has failed to adhere to the timelines outlined in Regulation 35A of the CIRP Regulation, specifically regarding the filing of an Application under Section 66. According to the regulation, the Applicant must form an opinion on preferential, undervalued, extortionate, and other fraudulent transactions (PUFE transactions) within 75 days, determine such transactions within 115 days, and file an application with the Adjudicating Authority within 130 days from the insolvency commencement date. However, the present application was filed on 01.02.2021, significantly surpassing the prescribed deadline of 01.05.2020 by approximately 273 days. This delay of more than double the prescribed timeline, without any application for condonation of delay, renders the application legally invalid as it exceeds the period of limitation. Stating the above fact reliance was placed on the decision of the Hon'ble Supreme Court in the case of Basawaraj and Another versus Special Land Acquisition Officer (2013) 14 SCC 81 while rejecting an application for condonation of delay for lack of sufficient cause has concluded in Paragraph 15.

It is averred that the Code stipulates that the Adjudicating Authority can order individuals knowingly involved in fraudulent business to contribute to the assets of the corporate debtor. It's important to note that all transactions were conducted within the normal course of the Corporate Debtor's business, without any malicious intent. Respondents 5, 6, and 8 were never part of these transactions and thus do not fall under Section 66. Additionally, as the answering respondents involved as third parties in alleged transactions, the recovery of dues from them is a civil matter, not covered by Section 66 of the IBC. Considering Supreme Court precedent and the provisions of Section 66, the present application is not tenable under Section 66 of the Code. This argument draws upon the case law of Gluckrich Capital Pvt. Ltd. vs The State of West Bengal & others.

The order for liquidation was issued on 26.11.2018, with the applicant appointed as Liquidator. However, M/s. Raju & Prasad, Chartered Accountants were engaged for Forensic Audit by State Bank of India on 24.09.2018, covering the period from 01.04.2010 to 31.03.2018. This audit aimed to scrutinize fund diversions, track cash flows, and identify any irregularities like insider trading. Importantly, the Liquidator did not conduct any due diligence nor appointed a forensic audit team themselves. Moreover, the bank initiated the audit before the liquidation order, suggesting it was for their records rather than CIRP or liquidation proceedings. The Liquidator claims fraudulent transactions from 2012-2015 but had access to information only from 2015-16. This inconsistency reveals a lack of due diligence and reliance solely on the bank's audit report. Consequently, the application lacks merit as the Liquidator failed to identify specific fraudulent transactions as mandated by CIRP regulations.

In the light of the contest put forth by both the parties the following point emerges for our consideration:

Point: Whether, the corporate debtor has carried on its business with intent to defraud the creditors of the corporate debtor or for any fraudulent purpose, if so, corporate debtor or its directors be directed to make such contribution to the assets of the corporate debtor as this Tribunal deem it fit?

We have heard the Learned counsels from both the sides, perused the written statements and other documents filed before the Tribunal.

Point: Whether, the corporate debtor has carried on its business with intent to defraud the creditors of the corporate debtor or for any fraudulent purpose, if so, corporate debtor or its directors be directed to make such contribution to the assets of the corporate debtor as this Tribunal deems it fit?

Learned counsel for liquidator submitted that this application is filed on the basis of Forensic Audit report dated 23.12.2018 done by Raju & Prasad Chartered Accountants, covering the period from 01.04.2010 to 31.03.2018. The Learned counsel further submitted that the Corporate Debtor had written off Rs. 42.25 Crores as bad debt, including Rs. 28.55 Crores receivable from the persons/companies in which the management/shareholders had an interest. Learned counsel further submitted that consortium banks have declared the corporate debtor as fraud account due to the reason that directors deposited forged land documents and insurance policy with the bankers. The learned counsel further submitted that keeping in view the remarks made in forensic audit report, these transactions should be treated as fraudulent transactions and sought order from this Tribunal for recovery of the amount from suspended management.

Per contra, the Learned counsel for Respondent no. 5, 6 & 8 submitted that these allegations are false and no proof has been provided by the applicant pertaining to these allegations. Learned counsel further submitted that, on the contrary, the applicant in collusion with one Mr. Tadimalla Raja Kishore, a director of ARPAPPL/Successful resolution applicant, has sold the company in liquidation for reserve price of Rs. 40 Crores whereas in the CIRP process the company was sold to the same group at a price of Rs. 85 Crores. Learned counsel further submitted that Mr. Tadimalla Raja Kishore was representing Successful resolution applicant as well as Successful acquiror in liquidation process. Thus, the applicant has allowed the acquiror to acquire the company at a significantly reduced price without making any due diligence about the successful acquiror in liquidation process.

Learned counsel further submitted that the said amount was not written off with an intention of fraud, but it was written off because the debtors were unable to pay for the goods received from the corporate debtor. Learned counsel also submitted that applicant has failed to provide any proper evidence to demonstrate how these transactions can be termed fraudulent. The learned counsel further submitted that mere credit or debit transactions in the account, other than the TRA account , cannot be termed as fraudulent activities. Learned counsel finally contended that in view of the failure of the applicant to provide any evidence or proof, these transactions cannot be treated as fraudulent transactions merely on the basis of forensic audit report.

The Learned counsel for respondents 5,6 and 8 further submitted that none of these directors were involved in the company’s day to day affairs and further Respondent no. 5 & 6 ceased to be directors as on 29.09.2015 and respondent no. 8 ceased to be directors as on 26.02.2016.

Learned counsel further contented that liquidator has failed to adhere to the timeline outlined in Regulation 35A of the CIRP Regulations and has filed this application with a delay of 273 days without seeking any condonation of delay. The Learned counsel submitted that Hon’ble Supreme Court of India in the case of Basawaraj and Another versus Special Land Acquisition Officer (2013) 14 SCC 81, rejected the application for condonation for delay for lack of sufficient cause and contended that same ruling will apply in this case also as no reason for delay has been explained by the applicant. Even the applicant, has not sought any condonation of delay from adjudicating authority. The learned counsel pleaded that merely on this ground, the application is liable to be rejected.

We find from the records that application is filed with a delay of more than 9 months and liquidator/ applicant has not bothered himself, to even seek condonation of delay in filing the application or at least explain the reasons of delay. We find merit in the submission of respondent that this application can be rejected merely on this ground without going into the merits.

But, while going into the merits of the case, we find that this application is merely filed for the sake of filing and no efforts have been made by the applicant to prove his case. We find that the liquidator/ applicant did not conduct any due diligence and has not even given the slightest details/evidence that how these transactions can be classified as fraudulent transactions. We are utterly surprised to see that prayer is sought merely on the basis of a statement, that because these transactions are classified as fraudulent transaction in forensic audit report, they be treated as fraudulent transactions. Surprisingly, even page number and paragraph number of the Forensic Audit Report which describe these transactions as fraudulent transactions are not provided in the application.

We have pursued the Forensic Audit Report, which is a very bulky report running in 519 pages and find that the Forensic Auditor on Page no. 90 of the Report has explicitly made it clear that their Forensic Audit Report is solely based on the information received from the lenders/Resolution Professional as they could not meet the company’s representatives/shareholders to discuss audit observations.

Keeping in view the above facts, we hold that applicant/liquidator has utterly failed to prove its point of classifying the transactions as fraudulent transactions. Therefore, we decide that this application filed under section 66 and 60(5)(c) for fraudulent transactions of the suspended director is liable to be rejected on merit and also not maintainable on account of delay. Hence, the point is accordingly decided.

In the above backdrop this application deserves to be dismissed. Hence, dismissed without costs.

PER: BENCH

This application is filed under section 66 R/w 60 (5)(c) of Insolvency and Bankruptcy Code, 2016 of the Insolvency and Bankruptcy Code, 2016 (herein after referred to as “CODE”) R/w Rule 11 of The National Company Law Tribunal Rules, 2016 by the Liquidator appointed for M/s Sri Vinayaka Paper and Boards Limited herein after referred to as Corporate Debtor, seeking the following relief;

It is averred that on November 26, 2018, the Corporate Debtor was placed into liquidation, with the applicant appointed as the liquidator. That the Corporate Debtor was engaged in manufacturing and marketing various types of paper products. Seeking to modernize and expand its plant capacity, the Corporate Debtor approached a lenders consortium for funding. Operations in the new paper plant began in January 2015. However, due to substandard paper quality, the plant eventually ceased operations. That for constructing the new paper plant, the Corporate Debtor contracted M/s Manish Industries Private Limited and M/s Latha Industries. Additionally, for the captive power plant, they contracted M/s I Square Engineers Private Limited.

It is averred that subject to the term loan taken by the corporate debtor one of the members of Consortium bank State Bank of India on 24^th September, 2018 appointed Raju and Prasad Charted Accountants to conduct forensic audit of the corporate debtor with a purpose to examine the books of accounts and to verify the money trail, end use of the funds disbursed by the banks for the period beginning from April, 2010 to March 2018.

It is averred that the corporate debtor, for the purpose of constructing a new paper plant, entered into an EPC contract with M/s Manish Industries Private Limited (MIPL) and M/s Latha Industries. Upon reviewing the documents related to M/s Manish Industries Private Limited, it was observed that MIPL was incorporated on 05.01.2011, and acquired the business of Manish Industries, a proprietorship involved in the manufacturing of pulp and paper mill machinery. However, it was noted that the corporate debtor entered into an agreement with MIPL on 30-09-2010, for the purchase of machinery worth Rs. 39.14 crores. Additionally, a service agreement worth Rs. 4.90 crores was signed on 12-01-2012, along with a revised purchase agreement, dated 30-09-2010, valued at Rs. 41.37 crores. MIPL later issued a revised purchase order in 2014 for Rs. 45.05 crores. Furthermore, it was observed that one of the shareholders of the corporate debtor, Ms. Kiranmai, who also served as a director from 22-12-2010 to 28-09-2015, is one of the promoters of MIPL. This indicates that the contract was awarded to an interested party.

From the Profit & Loss accounts of MIPL, it is noted that the cost of operations is very low, with total revenue from FY 2011-12 to FY 2016-17 amounting to only Rs. 4.99 crores. However, MIPL received an advance of Rs. 52.78 crores from the corporate debtor and had no manufacturing activities at its factory, indicating inadequate infrastructure and manpower to execute the EPC contract. MIPL issued an invoice (MI01) on 06.02.2012, for Rs. 9.19 crores to the corporate debtor, but this amount was not recognized as revenue in MIPL's accounts. The P&L account for FY 2011-12 shows zero revenue and expenses, suggesting non-supply of machinery and a fictitious invoice. Despite a Certificate of Completion (COD) being achieved on 13.01.2015, MIPL's books still show an advance of Rs. 60.37 crores from the corporate debtor from 31.03.2015, to 31.03.2017. The audited balance sheets of MIPL, including Latha Industries (post-merger), show outstanding advances of Rs. 60.37 crores as of 31.03.2015, and Rs. 60.75 crores as of 31.03.2016, and 31.03.2017, indicating no supply of machinery or services to that extent. Therefore, it is submitted that MIPL acted merely as an intermediary for placing orders and drawing loans on behalf of the corporate debtor. Payments were made to the original suppliers and service providers, leading to inflated capital expenditure for the paper plant and diversion of funds. There was no supply of machinery worth Rs. 60.75 crores, which remains listed as an advance from the corporate debtor in MIPL's books (inclusive of Latha Industries post-merger) from 31-03-2015 to 31-03-2017.

It is averred It is asserted that regarding the EPC contract with Latha Industries (LI), the corporate debtor entered into an agreement on August 30, 2010, to purchase machinery worth Rs. 31.81 crores, which was revised on 12.01.2012, to Rs. 47.37 crores, and again in 2014 to Rs. 52.48 crores. The proprietor of LI, Y. Nirmalatha, is a director of MIPL and holds 34% of its shares. Both MIPL and LI operate from the same premises. A joint inspection report by the consortium lenders on 30.01.2017, revealed that the Managing Director of MIPL reported LI as their own firm, which subsequently merged with MIPL. However, LI continues to file GST tax returns, as confirmed by the GST portal, indicating misrepresentation of facts to the lenders.

It is averred that the Respondents 1 to 4, being related parties to the corporate debtor, colluded with other respondents to enter into EPC contracts without adequate infrastructure, experience, or competence. They raised a fictitious invoice (MI-01) on 06.02.2012, for Rs. 9.19 crores, indicating non-supply of machinery. Additionally, they showed a Rs. 60.75 crore advance from the corporate debtor in MIPL's books (including LI post-merger) from 31.03.2015, to 31.03.2017, even after achieving COD in 2015. These actions were intended to defraud creditors, causing significant irreparable loss to the corporate debtor. Consequently, they are liable to contribute the said amounts to the corporate debtor's assets.

It is averred that without causing any prejudice to the rights of the answering respondents, the present application is devoid of merits and neither maintainable in law nor on facts. That the liquidator after scrutinizing available documents and based on the finding of the audit report came to an erroneous conclusion that the answering respondents in collusion with other respondents have entered into EPC contracts without having adequate infrastructure, experience and raised fictious invoices without supplying the machinery while received Rs. 60.75 crores as advance from the corporate debtor in addition to the amounts amounting to Rs.9.19 crores.

It is averred that as the ingredients indicated of Fraud defined under section 17 of Indian contract act, 1872 and other laws and the Code does not contain any definition of Fraud. That neither under section 66 of the Code nor Section 17 of Indian contract act, 1872 identify that the transactions that are fraudulent making the present application is vexatious and not maintainable.

It is averred that the Liquidator is aware that, following a complaint from the financial creditors, the Banking Security and Fraud Cell of the Central Bureau of Investigation (CBI) in Bangalore registered an FIR. That subject to the complaint a case was filed before the Learned XXI ACMM-cum-Special Sessions Judge, Special JFCM for CBI cases, Hyderabad and the same is pending. In the said matter it is claimed that Respondents 1 to 4 only supplied the machinery as contracted and alleged that other EPC contracts were fabricated by the suspended board of directors of the corporate debtor, who forged their signatures to obtain credit facilities. It is further averred that in the charge sheet filed it is arrayed that approximately Rs. 53.22 Crores was deposited in the A/c of Respondent no. 1 and 4 and later the same has been transferred to various companies and firms at the instructions of Debaratha Kanta and Shri K.Venku Reddy. The said allegation of CBI is under judicial scrutiny and till such time these Respondents shall not be treated as guilty.

Based on the above averments, reliance was placed on Article 20(3) and 21 of the Constitution of India, asserting that since the case has not yet reached the trial stage, the respondents are protected by law. It is further averred that the respondents have to right to silence during investigation as per section 161(2) of the Code of Criminal procedure, 1973.

It is averred that the Forensic Auditor’s report did not record the statements of the respondents. The report claimed that, based on the available records of the corporate debtor, the respondents received Rs. 60.75 crores as an advance for the delivery of machinery, but no machinery was supplied. However, the CBI investigation found that only Rs. 14,35,31,920 was used for supplying machinery, the remaining amount, Rs. 84,15,800, was transferred back to the corporate debtor's account, and Rs. 52,38,43,055 was transferred to various companies and firms. Therefore, the Forensic Auditor's opinion and the Applicant's stance differ from the findings of the CBI investigation submitted to the competent Criminal Court. It is further averred that the applicant must prove his case beyond all reasonable doubt by presenting cogent evidence and necessary facts on record, as the proceedings of the Adjudicating Authority are summary in nature. Additionally, in numerous judgments, the Hon'ble Supreme Court has stated that determining fraud arising from contractual disputes and defrauding creditors is both a civil and criminal offense, which must be adjudicated by a competent civil or criminal court.

That the Respondents emphatically deny all contentions, averments, and false allegations and the Applicant must provide strict proof of all allegations raised. It is averred that the Application lacks merit, misconstrues the scope of Section 66 of the Code as the Applicant, acting with malafide intentions to tarnish the Respondents' reputation, has made baseless allegations. The applicant has concealed material facts and making false accusations. He further violates the doctrine "he who seeks equity must do equity," as they are not prepared to act equitably. Upon careful scrutiny of the documents after being made parties to the application, the Respondents have discovered that the Applicant has concealed true facts.

It is averred that post initiation of CIRP, newspaper publications invited claims. Two registered valuers, Mr. G.S. Mittal and Mr. P. Kanaka Rao, valued the Corporate Debtor’s assets at Rs. 98.60 crores and Rs. 94.81 crores, respectively. In the 10^th CoC meeting on May 19, 2018, the Resolution Plan by Ananya Rai Paper and Allied Products Private Limited (ARPAPPL) was approved. However, ARPAPPL failed to make timely payments and sought an extension via IA No. 468 of 2018, which was dismissed by the Hon'ble Tribunal due to insufficient funds. Subsequently, the Applicant filed IA No. 496 of 2018 for an order of liquidation against the Corporate Debtor, which was admitted on 26.11.2018. On 31.07.2021, an e-auction resulted in successful bids from Mr. Akash Agarwal, Blueberry Techno Services, and Aktis Infra (OPC) Private Limited, represented by Tadimalla Raja Kishore, for a reserve price of Rs. 40 crores. It was noted that Mr. Tadimalla Raja Kishore, a director of ARPAPPL, had previously defaulted during the CIRP process, suggesting he intentionally delayed payments to buy the company later at a lower price.

It is averred that the Applicant failed to conduct proper background checks on the successful bidders, resulting in the company being sold for less than half the initial price of Rs. 85 crores. This oversight reflects not just a lack of diligence but a clear dereliction of statutory responsibilities under the Code. No action was taken against the defaulting resolution applicant, who was allowed to re-enter the bidding process and acquire the company at a significantly reduced price.

It is averred that the allegation that Rs. 42.45 crores of debtors were written off as bad debt is denied and requires strict proof. The amount was written off because the debtors were unable to pay for the goods received from the Corporate Debtor. The Applicant while claiming the said has failed to provide proper evidence or specify the exact period of these allegations. It is further averred that the report provided by the Applicant fails to adequately demonstrate how certain transactions have been termed fraudulent.

It is averred that Respondent No. 9, was associated with corporate debtor as an Additional Director from 18.02.2009 to 30.09.2009, and as a Director from 30.09.2009 to 28.09.2015. He was not a director or authorized signatory when the non-TRA account with State Bank of India was opened and was not involved in the company's daily affairs or aware of the bank transactions. It is further averred that the Applicant's claim that Rs. 13.37 crores credited to the State Bank of India account constitutes fund misappropriation lacks proper evidence of the funds' end use or source. Mere credit or debit transactions do not prove misappropriation. That he was not properly notified of any Board or General meetings nor informed about the company's operations, his signature was forged on many documents without his knowledge. As he resigned on 28.09.2015, and was unaware of the transactions from 30.10.2015 to 29.11.2016, which the Applicant mentioned as fraudulent activities.

It is averred that Respondent No. 10 was a director of the Corporate Debtor from 22.10.2010 to 28.09.2015 and was a minority shareholder of SVPBL without involvement in day-to-day operations. This is confirmed by Mr. Srujan Garapati's letter dated 08.02.2019. She was not a director or authorized signatory when the Non-TRA account was opened. Additionally, Respondent No. 10 was made a subscriber and promoter of Manish Industries Private Limited (MIPL) without her knowledge, and her signature was forged at the time of MIPL’s incorporation; she did not pay any subscription amount and was never involved with MIPL's activities. The allegation that a contract was awarded to a party she was interested in is false. The first contract with Manish Industries was signed on 30.08.2010 and the first proforma invoices were dated 18.04.2010. Respondent No. 10 became a director of SVPBL on 22.12.2010, after the contract was signed. Furthermore, MIPL was incorporated on 05.01.2011 after the contract date. Thus, she was not a promoter of MIPL when the contract was signed and was not an interested party in these transactions with either SVPBL or MIPL.

It is averred that Respondent No. 12 was a director of the Corporate Debtor from 24.08.2015 to 25.02.2016, and was not involved in day-to-day operations or aware of the company's transactions. Notably, Union Bank of India sent renewal documents after Respondent No. 12 had resigned, and his signature was forged on these documents. He was no longer associated with the company, making the Applicant's allegations against him false and baseless.

While stating the above-mentioned facts it is averred that the Applicant has presented a fabricated story, and all allegations against the Respondents are false and vexatious. None of the three Respondents were involved in the company’s daily operations or aware of its business decisions. They have resigned before the bad debts situation arose and are being unnecessarily implicated in this application.

While reiterating the averments in the counter it is submitted that the Resolution Professional/Liquidator has failed to adhere to the timelines outlined in Regulation 35A of the CIRP Regulation, specifically regarding the filing of an Application under Section 66. According to the regulation, the Applicant must form an opinion on preferential, undervalued, extortionate, and other fraudulent transactions (PUFE transactions) within 75 days, determine such transactions within 115 days, and file an application with the Adjudicating Authority within 130 days from the insolvency commencement date. However, the present application was filed on 01.02.2021, significantly surpassing the prescribed deadline of 01.05.2020 by approximately 273 days. This delay of more than double the prescribed timeline, without any application for condonation of delay, renders the application legally invalid as it exceeds the period of limitation. Stating the above fact reliance was placed on the decision of the Hon'ble Supreme Court in the case of Basawaraj and Another versus Special Land Acquisition Officer (2013) 14 SCC 81 while rejecting an application for condonation of delay for lack of sufficient cause has concluded in Paragraph 15.

It is averred that the Code stipulates that the Adjudicating Authority can order individuals knowingly involved in fraudulent business to contribute to the assets of the corporate debtor. It's important to note that all transactions were conducted within the normal course of the Corporate Debtor's business, without any malicious intent. Respondents 5, 6, and 8 were never part of these transactions and thus do not fall under Section 66. Additionally, as the answering respondents involved as third parties in alleged transactions, the recovery of dues from them is a civil matter, not covered by Section 66 of the IBC. Considering Supreme Court precedent and the provisions of Section 66, the present application is not tenable under Section 66 of the Code. This argument draws upon the case law of Gluckrich Capital Pvt. Ltd. vs The State of West Bengal & others.

The order for liquidation was issued on 26.11.2018, with the applicant appointed as Liquidator. However, M/s. Raju & Prasad, Chartered Accountants were engaged for Forensic Audit by State Bank of India on 24.09.2018, covering the period from 01.04.2010 to 31.03.2018. This audit aimed to scrutinize fund diversions, track cash flows, and identify any irregularities like insider trading. Importantly, the Liquidator did not conduct any due diligence nor appointed a forensic audit team themselves. Moreover, the bank initiated the audit before the liquidation order, suggesting it was for their records rather than CIRP or liquidation proceedings. The Liquidator claims fraudulent transactions from 2012-2015 but had access to information only from 2015-16. This inconsistency reveals a lack of due diligence and reliance solely on the bank's audit report. Consequently, the application lacks merit as the Liquidator failed to identify specific fraudulent transactions as mandated by CIRP regulations.

Therefore, in the light of the contest putforth by both the parties the following point emerges for our consideration

Point: Whether, the corporate debtor has carried on its business with intent to defraud the creditors of the corporate debtor or for any fraudulent purpose, if so, corporate debtor or its directors be directed to make such contribution to the assets of the corporate debtor as this Tribunal deem it fit?

We have heard the Learned counsels from both the sides, perused the written statements and other documents filed before the Tribunal.

Point: Whether, the corporate debtor has carried on its business with intent to defraud the creditors of the corporate debtor or for any fraudulent purpose, if so, corporate debtor or its directors be directed to make such contribution to the assets of the corporate debtor as this Tribunal deems it fit?

The Learned Counsel for the Liquidator submits that the corporate debtor entered into an EPC contract with respondent no. 1 (M/s Manish Industries Private Limited) and Respondent no. 4 (M/s Latha Industries). The Learned counsel further submitted that Respondent no. 1 received an amount of Rs. 52.78 crores from the corporate debtor as an advance to execute the EPC contract. Learned Counsel further submitted that the audited balance sheet dated 31.03.2015 of MIPL (Respondent no. 1) post-merger of Respondent no. 4 in it shows an outstanding balance of Rs. 60.37 crores for which no supply of machinery or services has been done by the respondent no.1 to the corporate debtor for that amount.

The learned counsel contended that Respondent no. 1 to 4 being related parties to the corporate debtor, colluded with other respondents i.e. ex-directors and raised frivolous invoice thus causing significant irreparable loss to the corporate debtor.

The Learned counsel for Respondent no. 1 to 4 submitted that liquidator is aware that for the same cause, case is pending in CBI court and the facts before CBI court and in the application differ with each other. The Learned counsel for Respondent no. 1 to 4 further submitted that on the basis of a complaint from the financial creditor, the Banking Security and Fraud Cell of the Central Bureau of Investigation (CBI) in Bangalore registered an FIR and consequently case was filed before the Learned XXI ACMM-cum-Special Sessions Judge, Special JFCM for CBI cases, Hyderabad. The learned counsel further submitted that in the charge sheet filed by CBI, it is arrayed that approximately Rs. 53.22 Crores was deposited in the A/c of Respondent no. 1 and 4 and later the same has been transferred to various companies and firms on the instructions of Debaratha Kanta and Shri K. Venku Reddy.

Learned counsel further submits that, as the answering respondents no 1 to 4 are involved as third parties in alleged transactions, the recovery of dues from them is a civil matter, not covered by Section 66 of the IBC. Learned counsel placed its reliance on Supreme Court precedent in the case law of Gluckrich Capital Pvt. Ltd. vs The State of West Bengal & others.

The learned counsel further submitted that the Forensic Auditor’s report did not record the statements of the respondents. The report claimed that, based on the available records of the corporate debtor, the respondents received Rs. 60.75 crores as an advance for the delivery of machinery, but no machinery was supplied. However, the CBI investigation found that only Rs. 14,35,31,920 was used for supplying machinery, the remaining amount, Rs. 84,15,800, was transferred back to the corporate debtor's account, and Rs. 52,38,43,055 was transferred to various companies and firms. Therefore, the Forensic Auditor's opinion and the applicant's stance differ from the findings of the CBI investigation submitted to the competent Criminal Court.

The learned counsel for the respondent no. 9, 10 & 12 submitted that that these allegations are false and no proof has been provided by the applicant pertaining to these allegations. Learned counsel further submitted that on the contrary the applicant in collusion with Mr. Tadimalla Raja Kishore a director of ARPAPPL/Successful resolution applicant has sold the company in liquidation for reserve price of Rs. 40 Crores whereas in the CIRP process the company was sold to the same group at a price of Rs. 85 Crores.

Learned counsel further submitted that Mr. Tadimalla Raja Kishore was representing Successful resolution applicant as well as Successful acquiror in liquidation process. Thus, the applicant has allowed the acquiror to acquire the company at a significantly reduced price without making any due diligence about the successful acquiror in liquidation process. Learned counsel further submitted that the said amount was not written off with a motive of fraud but because the debtors were unable to pay the amount for goods received from the corporate debtor. Learned counsel further submitted that applicant has failed to provide any proper evidence to demonstrate how these transactions can be termed fraudulent. The learned counsel submitted that mere credit or debit transactions in the account other than the TRA account cannot be termed as fraudulent activities.

The Learned counsel for R9, R10 and R12 further submitted that none of these three directors were involved in the company’s day to day affairs and Respondent no. 9 & 10 ceased to be directors as on 29.09.2015 and respondent no. 12 ceased to be directors as on 26.02.2016.

Learned counsel further contented that liquidator has failed to adhere to the timeline outlined in Regulation 35A of the CIRP Regulations and has filed this application with a delay of 273 days without seeking any condonation of delay. The Learned counsel submitted that Hon’ble Supreme Court of India in the case of Basawaraj and Another versus Special Land Acquisition Officer (2013) 14 SCC 81, rejected the application for condonation for delay for lack of sufficient cause and contended that same ruling will apply in this case also as no reason for delay has been explained by the applicant. Even the applicant, has not sought any condonation of delay from adjudicating authority. The learned counsel pleaded that merely on this ground, the application is liable to be rejected.

We find from the record and the submissions made by the respondent that the CBI investigation is already pending in respect of these transactions. We also observe that these transactions involve serious and complicated issues and cannot be decided in summary proceedings in this Tribunal. Further R1 to R4 are third parties and by placing reliance on Supreme Court precedent in the case law of Gluckrich Capital Pvt. Ltd. vs The State of West Bengal & others, they cannot be covered under Section 66 of IBC, 2016.

We also find from the records that application is filed with a delay of more than 9 months and liquidator/ applicant has not bothered himself, to even seek condonation of delay in filing the application or at least explain the reasons of delay. We find merit in the submission of respondent that this application can be rejected merely on this ground without going into the merits.

Keeping in view the above facts, we hold that applicant/liquidator has utterly failed to prove its point of classifying the transactions as fraudulent transactions. Therefore, we decide that this application filed under section 66 and 60(5)(c) for fraudulent transactions against the respondents is liable to be rejected on merit and also not maintainable on account of delay. Hence, the point is accordingly decided.

In the above backdrop this application deserves to be dismissed. Hence, dismissed with no costs.

PER: BENCH

This application is filed under section 66 R/w 60 (5)(c) of Insolvency and Bankruptcy Code, 2016 of the Insolvency and Bankruptcy Code, 2016 (herein after referred to as “CODE”) R/w Rule 11 of The National Company Law Tribunal Rules, 2016 by the Liquidator appointed for M/s Sri Vinayaka Paper and Boards Limited herein after referred to as Corporate Debtor, seeking the following relief;

It is averred that on November 26, 2018, the Corporate Debtor was placed into liquidation, with the applicant appointed as the liquidator. That the Corporate Debtor was engaged in manufacturing and marketing various types of paper products. Seeking to modernize and expand its plant capacity, the Corporate Debtor approached a lenders consortium for funding. Operations in the new paper plant began in January 2015. However, due to substandard paper quality, the plant eventually ceased operations. That for constructing the new paper plant, the Corporate Debtor contracted M/s Manish Industries Private Limited and M/s Latha Industries. Additionally, for the captive power plant, they contracted M/s I Square Engineers Private Limited.

It is averred that subject to the term loan taken by the corporate debtor one of the members of Consortium bank State Bank of India on 24^th September, 2018 appointed Raju and Prasad Charted Accountants to conduct forensic audit of the corporate debtor with a purpose to examine the books of accounts and to verify the money trail, end use of the funds disbursed by the banks for the period beginning from April, 2010 to March 2018.

It is averred that, after reviewing the forensic audit report, it was observed that the corporate debtor entered into an Engineering, Procurement and Construction Agreement (EPC) contract with M/s I Square Engineers (Energy) Private Limited (ISEPL) for the supply and erection of a power plant in August 2016. The total payment made by the corporate debtor to ISEPL was Rs. 56.79 crores. According to the audited balance sheets as of 31.03.2017, the total expenditure incurred by the corporate debtor was Rs. 59.72 crores, shown as capital works in progress. Although the full contracted amount was paid to ISEPL, substantial components of the package have not been supplied, and critical deliverables such as erection, testing, and commissioning remain incomplete. According to the D&B report, materials worth approximately Rs. 5.10 crores have yet to be supplied to the site. Furthermore, as per ISEPL's books of accounts, the total revenue recognized from FY 2010-11 to FY 2016-17 is Rs. 32.20 crores. Payments made but not recorded as revenue or advance amount to Rs. 24.24 crores. Thus, ISEPL has not supplied machinery worth Rs. 24.24 crores, indicating that the corporate debtor has diverted funds of the same amount through ISEP.

It is averred that the alleged acts of the Respondents 1 to 3 which are done with active collision of the other Respondents are intentionally done to defraud the creditors which caused huge irreparable loss to the Corporate Debtor therefore liable to contribute the said amounts to the assets of the Corporate Debtor.

It is averred that Respondent no. 1 is a private limited company incorporated on 21.09.2010, Respondent no. 2 and 3 are one of the directors of Respondent no.1. That the respondents deny all the allegations as false and the same are inflicted without any grounds and are baseless.

It is averred that is liable to be dismissed as the applicant has approached the tribunal with unclean hands and by concealing material facts of the transactions between the applicant and respondent no. 1. Further the applicant is in violation of Doctrine “he who seeks equity must do equity” in relation to the maxim the following case is referred i.e., Kishore Samrite vs. State of U.P. and ors MANU/SC/0892/2012 in which the Hon'ble the Supreme Court of India, held that

It is averred that the allegation that the corporate debtor disbursed Rs. 56.79 crores to Respondent No. 1 under the EPC contract are denied. That Respondent No. 1 only received Rs. 35.9415 crores from UBI and Rs. 1.3135 crores from other banks under the contract. Furthermore, Respondent No. 1 has a current account in ICICI Bank, operated by Respondents No. 2 and 3. Upon reviewing the account statements, it is evident that only Rs. 5 lakhs was received via a cheque from Indian Bank issued by the corporate debtor on 14.08.2012.

It is averred that the corporate debtor approached Respondent No. 1 and executed an MoU on 11.11.2010 to avail of their services. Respondent No. 1's scope of work was limited to the electromechanical portion, where being a manufacturer was not necessary, but the ability to engineer and integrate various components of the power block was essential. The EPC contract was executed at minimal profit, with the first payment released on 18.01.2011. The corporate debtor advised Respondent No. 1 to place orders for the supply and erection of various power plant equipment parts to sub-contractors identified by the corporate debtor. The project's cash flow and refunds from these sub-contractors were directed and managed solely by the corporate debtor. Additionally, the corporate debtor decided to place a direct order and requested the return of Rs. 3.56 crores, which Respondent No. 1 promptly returned.

It is averred that the D&B report of the applicant came as a shock to the respondents, as the conclusions were made without contacting them for any explanation or input. This occurred despite the project activities running smoothly until late 2012 and reaching advanced stages. The project activities halted in March 2013 and resumed in July 2014. Subsequently, the corporate debtor stopped responding, leading to the respondent being served a notice by the Commercial Tax Department for not filing Form C and having to pay the difference between CST and VAT. Due to project non-compliance and amounts owed by the corporate debtor, Respondent No. 1 suffered significant losses. It is further averred that he said situation was brought to the notice of the applicant by the Respondent No. 1 by filing its claims in Form B, which were accepted and partially admitted by the applicant.

While reiterating the averment in the counter it is submitted that the claim of the applicant that an amount of Rs. 24.24 crores were disbursed by the corporate debtor is not supported by any document.

While denying the submission, it is asserted that on February 8, 2019, the forensic auditors sent a letter to the respondents seeking comprehensive explanations and supporting evidence. The respondents replied via a letter dated February 15, 2019, stating that the requested information pertained to seven financial years, from 2010 to 2017, and that the directors who served during that period had already resigned. They requested 15 days to extract the relevant information, but no such information was subsequently submitted.

It is submitted that Respondent No. 1's turnover over these seven years was solely from the corporate debtor. According to the APVAT registration portal, ISEPL is engaged in the business activities of wholesale and retail, not manufacturing. Furthermore, it is claimed that the Corporate Debtor's letter of offer does not advise placing orders with subcontractors. These letters clearly show that Respondent No. 1, without having adequate infrastructure and manufacturing capacities, entered into an EPC contract with the Corporate Debtor. The replies from Respondents 1 to 3 reveal that they colluded with the other respondents, misleading the financial creditors by falsely claiming that a 10 MW captive power project was under construction. This deception led the financial creditors to disburse loan facilities to the respondents and their four subcontractors, who then diverted these funds through fictitious accounts. This act constitutes defrauding the creditors as per Section 66 of the IBC..

That the Respondents emphatically deny all contentions, averments, and false allegations and the Applicant must provide strict proof of all allegations raised. It is averred that the Application lacks merit, misconstrues the scope of Section 66 of the Code as the Applicant, acting with malafide intentions to tarnish the Respondents' reputation, has made baseless allegations. The applicant has concealed material facts and making false accusations. He further violates the doctrine "he who seeks equity must do equity," as they are not prepared to act equitably. Upon careful scrutiny of the documents after being made parties to the application, the Respondents have discovered that the Applicant has concealed true facts.

It is averred that post initiation of CIRP, newspaper publications invited claims. Two registered valuers, Mr. G.S. Mittal and Mr. P. Kanaka Rao, valued the Corporate Debtor’s assets at Rs. 98.60 crores and Rs. 94.81 crores, respectively. In the 10^th CoC meeting on May 19, 2018, the Resolution Plan by Ananya Rai Paper and Allied Products Private Limited (ARPAPPL) was approved. However, ARPAPPL failed to make timely payments and sought an extension via IA No. 468 of 2018, which was dismissed by the Hon'ble Tribunal due to insufficient funds. Subsequently, the Applicant filed IA No. 496 of 2018 for an order of liquidation against the Corporate Debtor, which was admitted on 26.11.2018. On 31.07.2021, an e-auction resulted in successful bids from Mr. Akash Agarwal, Blueberry Techno Services, and Aktis Infra (OPC) Private Limited, represented by Tadimalla Raja Kishore, for a reserve price of Rs. 40 crores. It was noted that Mr. Tadimalla Raja Kishore, a director of ARPAPPL, had previously defaulted during the CIRP process, suggesting he intentionally delayed payments to buy the company later at a lower price.

It is averred that the Applicant failed to conduct proper background checks on the successful bidders, resulting in the company being sold for less than half the initial price of Rs. 85 crores. This oversight reflects not just a lack of diligence but a clear dereliction of statutory responsibilities under the Code. No action was taken against the defaulting resolution applicant, who was allowed to re-enter the bidding process and acquire the company at a significantly reduced price.

It is averred that the allegation that Rs. 42.45 crores of debtors were written off as bad debt is denied and requires strict proof. The amount was written off because the debtors were unable to pay for the goods received from the Corporate Debtor. The Applicant while claiming the said has failed to provide proper evidence or specify the exact period of these allegations. It is further averred that the report provided by the Applicant fails to adequately demonstrate how certain transactions have been termed fraudulent.

It is averred that Respondent No. 8, was associated with corporate debtor as an Additional Director from 18.02.2009 to 30.09.2009, and as a Director from 30.09.2009 to 28.09.2015. He was not a director or authorized signatory when the non-TRA account with State Bank of India was opened and was not involved in the company's daily affairs or aware of the bank transactions. It is further averred that the Applicant's claim that Rs. 13.37 crores credited to the State Bank of India account constitutes fund misappropriation lacks proper evidence of the funds' end use or source. Mere credit or debit transactions do not prove misappropriation. That he was not properly notified of any Board or General meetings nor informed about the company's operations, his signature was forged on many documents without his knowledge. As he resigned on 28.09.2015, and was unaware of the transactions from 30.10.2015 to 29.11.2016, which the Applicant mentioned as fraudulent activities.

It is averred that Respondent No. 9 was a director of the Corporate Debtor from 22.10.2010 to 28.09.2015 and was a minority shareholder of SVPBL without involvement in day-to-day operations. This is confirmed by Mr. Srujan Garapati's letter dated 08.02.2019. She was not a director or authorized signatory when the Non-TRA account was opened. Additionally, Respondent No. 9 was made a subscriber and promoter of Manish Industries Private Limited (MIPL) without her knowledge, and her signature was forged at the time of MIPL’s incorporation; she did not pay any subscription amount and was never involved with MIPL's activities. The allegation that a contract was awarded to a party she was interested in is false. The first contract with Manish Industries was signed on 30.08.2010 and the first proforma invoices were dated 18.04.2010. Respondent No. 9 became a director of SVPBL on 22.12.2010, after the contract was signed. Furthermore, MIPL was incorporated on 05.01.2011 after the contract date. Thus, she was not a promoter of MIPL when the contract was signed and was not an interested party in these transactions with either SVPBL or MIPL.

It is averred that Respondent No. 11 was a director of the Corporate Debtor from 24.08.2015 to 25.02.2016, and was not involved in day-to-day operations or aware of the company's transactions. Notably, Union Bank of India sent renewal documents after Respondent No. 11 had resigned, and his signature was forged on these documents. He was no longer associated with the company, making the Applicant's allegations against him false and baseless.

While stating the above-mentioned facts it is averred that the Applicant has presented a fabricated story, and all allegations against the Respondents are false and vexatious. None of the three Respondents were involved in the company’s daily operations or aware of its business decisions. They have resigned before the bad debts situation arose and are being unnecessarily implicated in this application.

While reiterating the averments in the counter it is submitted that the Resolution Professional/Liquidator has failed to adhere to the timelines outlined in Regulation 35A of the CIRP Regulation, specifically regarding the filing of an Application under Section 66. According to the regulation, the Applicant must form an opinion on preferential, undervalued, extortionate, and other fraudulent transactions (PUFE transactions) within 75 days, determine such transactions within 115 days, and file an application with the Adjudicating Authority within 130 days from the insolvency commencement date. However, the present application was filed on 01.02.2021, significantly surpassing the prescribed deadline of 01.05.2020 by approximately 273 days. This delay of more than double the prescribed timeline, without any application for condonation of delay, renders the application legally invalid as it exceeds the period of limitation. Stating the above fact reliance was placed on the decision of the Hon'ble Supreme Court in the case of Basawaraj and Another versus Special Land Acquisition Officer (2013) 14 SCC 81 while rejecting an application for condonation of delay for lack of sufficient cause has concluded in Paragraph 15.

It is averred that the Code stipulates that the Adjudicating Authority can order individuals knowingly involved in fraudulent business to contribute to the assets of the corporate debtor. It's important to note that all transactions were conducted within the normal course of the Corporate Debtor's business, without any malicious intent. Respondents 5, 6, and 8 were never part of these transactions and thus do not fall under Section 66. Additionally, as the answering respondents involved as third parties in alleged transactions, the recovery of dues from them is a civil matter, not covered by Section 66 of the IBC. Considering Supreme Court precedent and the provisions of Section 66, the present application is not tenable under Section 66 of the Code. This argument draws upon the case law of Gluckrich Capital Pvt. Ltd. vs The State of West Bengal & others.

The order for liquidation was issued on 26.11.2018, with the applicant appointed as Liquidator. However, M/s. Raju & Prasad, Chartered Accountants were engaged for Forensic Audit by State Bank of India on 24.09.2018, covering the period from 01.04.2010 to 31.03.2018. This audit aimed to scrutinize fund diversions, track cash flows, and identify any irregularities like insider trading. Importantly, the Liquidator did not conduct any due diligence nor appointed a forensic audit team themselves. Moreover, the bank initiated the audit before the liquidation order, suggesting it was for their records rather than CIRP or liquidation proceedings. The Liquidator claims fraudulent transactions from 2012-2015 but had access to information only from 2015-16. This inconsistency reveals a lack of due diligence and reliance solely on the bank's audit report. Consequently, the application lacks merit as the Liquidator failed to identify specific fraudulent transactions as mandated by CIRP regulations.

Therefore, in the light of the contest put forth by both the parties the following point emerges for our consideration Point: Whether, the corporate debtor has carried on its business with intent to defraud the creditors of the corporate debtor or for any fraudulent purpose, if so, corporate debtor or its directors be directed to make such contribution to the assets of the corporate debtor as this Tribunal deem it fit?

We have heard the Learned counsels from both the sides, perused the written statements and other documents filed before the Tribunal.

Point: Whether, the corporate debtor has carried on its business with intent to defraud the creditors of the corporate debtor or for any fraudulent purpose, if so, corporate debtor or its directors be directed to make such contribution to the assets of the corporate debtor as this Tribunal deems it fit?

The learned counsel for the applicant submitted that corporate debtor entered into EPC contract with M/s I Square Engineers (Energy) Private Limited (Respondent no. 1) for the supply and erection of a power plant in August 2016. The learned counsel further submitted that corporate debtor made full payment of Rs. 56.796 crores to the respondent no. 1 but some components of the package were not supplied and some critical deliverables such as erection, testing, and commissioning also remained incomplete. It is further submitted that according to the Forensic Audit Report materials worth approximately Rs. 5.01 crores are yet to be supplied by the respondent no. 1

The learned counsel further submitted that an amount of Rs. 25.24 crores was paid as advance amount to the respondent no.1, and despite the said payment no machinery was supplied by R1 to corporate debtor.

The Learned counsel for the respondent no. 1 to 3 denied the allegations that the corporate debtor disbursed an amount of Rs. 56.79 crores to the respondent as it has received only Rs. 37.25 crores in total from the corporate debtor. The Learned counsel further submitted that the Forensic Audit team has made its conclusions without contacting the respondent and neither has sought any explanation or inputs from the respondent.

Per contra, the learned counsel for the respondent no. 8, 9 & 11 submitted that these allegations are false and no proof has been provided by the applicant pertaining to these allegations. Learned counsel further submitted that, on the contrary, the applicant in collusion with one Mr. Tadimalla Raja Kishore, a director of ARPAPPL/Successful resolution applicant, has sold the company in liquidation for reserve price of Rs. 40 Crores whereas in the CIRP process the company was sold to the same group at a price of Rs. 85 Crores. Learned counsel further submitted that Mr. Tadimalla Raja Kishore was representing Successful resolution applicant as well as Successful acquiror in liquidation process. Thus, the applicant has allowed the acquiror to acquire the company at a significantly reduced price without making any due diligence about the successful acquiror in liquidation process.

Learned counsel further submitted that the said amount was not written off with an intention of fraud, but it was written off because the debtors were unable to pay for the goods received from the corporate debtor. Learned counsel also submitted that applicant has failed to provide any proper evidence to demonstrate how these transactions can be termed fraudulent. The learned counsel further submitted that mere credit or debit transactions in the account, other than the TRA account, cannot be termed as fraudulent activities. Learned counsel finally contended that in view of the failure of the applicant to provide any evidence or proof, these transactions cannot be treated as fraudulent transactions merely on the basis of forensic audit report.

The Learned counsel for R8, R9 and R11 further submitted that none of the directors out of these 3 directors were involved in the company’s day to day affairs and Respondent no. 8 & 9 ceased to be directors as on 29.09.2015 and respondent no. 11 ceased to be director as on 26.02.2016.

Learned counsel further contented that liquidator has failed to adhere to the timeline outlined in Regulation 35A of the CIRP Regulations and has filed this application with a delay of 273 days without seeking any condonation of delay. The Learned counsel submitted that Hon’ble Supreme Court of India in the case of Basawaraj and Another versus Special Land Acquisition Officer (2013) 14 SCC 81, rejected the application for condonation for delay for lack of sufficient cause and contended that same ruling will apply in this case also as no reason for delay has been explained by the applicant. Even the applicant, has not sought any condonation of delay from adjudicating authority. The learned counsel pleaded that merely on this ground, the application is liable to be rejected.

We find from the records that application is filed with a delay of more than 9 months and liquidator/ applicant has not bothered himself, to even seek condonation of delay in filing the application or at least explain the reasons of delay. We find merit in the submission of respondent that this application can be rejected merely on this ground without going into the merits.

But, while going into the merits of the case, we find that this application is merely filed for the sake of filing and no efforts have been made by the applicant to prove his case. We find that the liquidator/ applicant did not conduct any due diligence and has not even given the slightest details/evidence that how these transactions can be classified as fraudulent transactions. We are utterly surprised to see that prayer is sought merely on the basis of a statement, that because these transactions are classified as fraudulent transaction in forensic audit report, they be treated as fraudulent transactions. Surprisingly, even page number and paragraph number of the Forensic Audit Report which describe these transactions as fraudulent transactions are not provided in the application.

We also find that respondents no 1 to 3 are involved as third parties in alleged transactions and recovery of dues from them is a civil matter, not covered by Section 66 of the IBC as decided by Hon’ble Supreme Court in the case law of Gluckrich Capital Pvt. Ltd. vs The State of West Bengal & others.

We have pursued the Forensic Audit Report, which is a very bulky report running in 519 pages and find that the Forensic Auditor on Page no. 90 of the Report has explicitly made it clear that their Forensic Audit Report is solely based on the information received from the lenders/Resolution Professional as they could not meet the company’s representatives/shareholders to discuss audit observations.

Keeping in view the above facts, we hold that applicant/liquidator has utterly failed to prove its point of classifying the transactions as fraudulent transactions. Therefore, we decide that this application filed under section 66 and 60(5)(c) for fraudulent transactions against the respondents is liable to be rejected on merit and also not maintainable on account of delay. Hence, the point is accordingly decided.

In the above backdrop this application deserves to be dismissed. Hence, dismissed with no costs.