Northern ARC Capital Limited vs Five Core Electronics Ltd.

PER: SH. ASHOK KUMAR BHARDWAJ, MEMBER (J)

As can be gathered from the contents of the application the Corporate Debtor was engaged in the manufacturing of Public Address System (PAS) and as per the “Investor presentation of November 2018”, on the NSE website the Corporate Debtor had a product line comprising of over 1,100 products that it manufactured and exported, comprising a whole range of PAS, such as Speaker, Amplifiers, Microphone Systems and Stands, Mixing Console, Horns, Megaphone, Electrical Accessories etc. In accordance with Regulation 33 of SEBI [Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI (LODR) Regulations, 2015”], the Corporate Debtor had last filed the Standalone and Consolidated Quarterly Unaudited Financial Results of the Corporate Debtor for the quarter ended 31^st December, 2018, along with the Limited Review Report for the quarter issued by the Corporate Debtor’s Statutory Auditor i.e., M/s GSK & Associates LLP, Charted Accountants (FRN:013838N) to the NSE vide letter dated 12.02.2019. Thereafter, it was noted by the IRP that the Annual Audited Financial Statements for the financial year ended on 31^st March, 2019 (i.e. FY 2018-19) were not filed by the Corporate Debtor with the NSE.

According to Applicant, upon searching the NSE website, he could find that a letter dated 27.04.2019 was filed with the NSE by one Mr. Aditya Agarwal, Independent Director (DIN-08042253) of the Corporate Debtor, with a copy also addressed to the Ministry of Corporate Affairs (MCA), recording the outcome of the Board Meeting held on 27.04.2019 informing the decision taken therein to file a complaint letter with MCA regarding the unethical behaviour of the Management/Promoters of the Corporate Debtor, namely Mr. Amarjit Singh Kalra, Promoter & Ex-Managing Director (MD), Mrs. Surinder Kaur Kalra (also a Promoter) and Mrs. Jagjit Kaur Kalra, both former Non-executive Director (related to the Promoter & EX-MD) of the Corporate Debtor under Schedule 1V of the Companies Act, 2013. The aforementioned complaint made by Mr. Aditya Agarwal, independent Director was against the aforementioned Promoter and Ex-MD and the two former Non-executive Directors. The averment made by the Applicant regarding the status of the complaint is that the same is under examination.

The letter dated 27.04.2019 filed with the NSE also contained the copies of resignation letters of former Company Secretary (CS), Mr. Saurabh Kumar Jain and that of former Chief Financial Officer (CFO), Mr. Amitabh Singh, as enclosures therewith. We find from para 8 of the application that the letter dated 27.04.2019 contained the reasons for proceeding with the complaint. The reasons as reproduced in para 8 (ibid) reads thus: -

The Promoter and Ex-MD, Mr. Amarjit Singh Kalra and the other two Non-Executive Directors (related to the Promoter and Ex-MD) viz. (i) Mrs. Surinder Kaur Kalra and (ii) Mrs. Jagjit Kaur Kalra qua the Corporate Debtor were presumed to be absconding and their whereabouts were not known as on the insolvency commencement date i.e. 23.01.2020.

The last available Audited Financial Statements of the Corporate Debtor i.e. pertaining to the Financial Year (FY) 2017-18 and the financial years preceding that year were downloaded by the IRP from the website of MCA. The Audited Financial Statements of the CD from the FY 2018-19 onwards were not filed with the Registrar of Companies (RoC) and were not available on the MCA website.

As has been captured in the captioned application, the investigation into the affairs of the Corporate Debtor since before commencement of CIRP is being conducted by the Directorate of Revenue Intelligence, Headquarters, New Delhi (DRI-HQ) and was under way at time of filing the application. The officials from DRI, Ludhiana had seized certain data, records and documents from the Registered Office of the Corporate Debtor in New Delhi during the search conducted by them on 27.02.2019 on the Corporate Debtor i.e., much before commencement of CIRP. The investigation qua the Corporate Debtor initiated by DRI, Ludhiana was transferred to DRI-HQ, New Delhi in the month of February, 2020 and the data, records and documents of the Corporate Debtor seized by DRI-HQ are available with it.

Also, the Ministry of Corporate Affairs (MCA) appointed an Inspector, in terms of the provisions of Section 207 of the Companies Act, 2013, to do inspection and conduct inquiry regarding the state of affairs of the Corporate Debtor, which was much prior to the CIRP Order dated 23.01.2020, passed by this Adjudicating Authority initiating the CIRP. The current status of the investigation could not be brought on record by the Applicant. However, according to the Applicant, the data related to accounting software of the Corporate Debtor available on the cloned Hard Disk Drive (HDD) were uploaded by the official of DRI-HQ in the secure Virtual Date Room (VDR) created for the purpose on 06.05.2020. The data was reviewed to identify ‘relevant data for analysis’ by the RP. The observation made by the RP qua the same as mentioned in para 17.1 to 17.3 of the applications reads thus: -

The RP also requested the DRI-HQ to provide the information related to the size of the ‘Source Data’, in the cloned HDD at their end to enable him to cross-check any data missing to be uploaded on the secure VDR. The IRP also requested to DRI-HQ provide him the details of Electronic Devices and Computer System(s) of the Corporate Debtor, which were forensically imaged on 27.02.2019, during the search conducted by DRI, Ludhiana.

It is also the case of the Applicant that Mr. Anand Lakhotia of Sarthi Capital Advisors Pvt. Ltd., the Lead Manager to the Initial Public Offer (IPO) issue in May, 2018 qua the Corporate Debtor had on behalf of two investors to the IPO viz. (a) AccePro Advisors Pvt. Ltd. and (b) Choice Broking Pvt. Ltd. filed a complaint with the DCP, Economic Offences Wing (EOW), New Delhi against the CD and its Promoters, namely Mr. Amarjit Singh Kalra (Promoter & Ex-MD), Mrs. Surinder Kaur Kalra and Mrs. Jagjit Kaur Kalra of the Corporate Debtor for cheating the public by playing Fraud and embezzling/siphoning of the funds raised from the public. The complaint of Mr. Anand Lakhotia was sent by EOW to the Securities and Exchange Board of India (SEBI) on 20.08.2019 for taking necessary action at the end of SEBI.

Also, the Andhra Bank (CoC member with majority voting share) informed the IRP during the first meeting of CoC conducted on 18.02.2020 that a Forensic Audit was conducted qua the CD at its behest (just before the Corporate Debtor shut-down operations in March 2019). According to the Applicant, despite several request made to Andhra Bank, SARM Branch, New Delhi several times for providing the copy of Forensic Audit Report, he had not received any response till filing of the present application.

In the wake, in order to determine the Avoidance Transaction under Sections 43, 45 and 66 of the Code, and to identify as to whether any business of the Corporate Debtor was carried with an intent to defraud creditor of the Corporate Debtor or for any fraudulent purpose the IRP engaged a Forensic professional/specialist on 11.03.2020 to assist his functioning as RP in the forensic examination of Avoidance Transactions of the Corporate Debtor. The list of data, records and information of the CD relied upon by IRP in performing the examination of Avoidance Transaction, as mentioned in para 31 of the application reads thus: -

The Forensic data analysis qua the bank statement was done to the extent the same were made available by the banks with whom the Corporate Debtor maintained its accounts. The following banks made the statement of bank account available to the Applicant: -

Following are the particulars of the bank statements, the details of which were provided to the RP.

As has been stated in para 33 of the application, certain statements of bank account were not made available to the IRP. The particulars of such bank statement given in para 31 (ibid) are as under: -

As has been averred in para 34 of the application, the procedures performed by the Applicant qua the bank statement data made available by the banks, available financial statements, including other information procured from public domain for identification of Avoidance Transaction of the Corporate Debtor are as under: -

According to the RP, with the support of the forensic professional he did forensic data analysis and transaction scrutiny; profiling of parties on identified receipts and payments and asset tracing exercise through open source/public domain searches based on the result of data analysis.

The Bank Statements data analysis and assessment was done to ascertain the nature of transactions with an objective to identify transactions with sole third parties and related parties; identification of trends and patterns, such as money going to and coming from some specific accounts, few parties with the maximum concentration of funds, top parties where the money was paid, parties with only one-time transaction etc., making a party-wise payment and receipt chart along with mapping of the connection between the parties identified based on open source/public domain searches carried out on select parties and information.

The list of Suspended and Ex-Board of Directors including independent Directors mentioned in para 36 of the application reads thus: -

From IPO Prospectus of May 2018, the RP could make out that the Promoters of CD were Mr. Amarjit Singh Kalra and Ms. Surinder Kaur Kalra. Mr. Amarjit Singh Kalra and Ms. Surinder Kaur Kalra are related to each other as husband and wife and Ms. Jagjit Kaur Kalra is the mother of Mr. Amarjit Singh Kalra. The list of related parties given in para 39 of the application reads thus: -

The summary of Preferential Transactions identified by the Applicant on the basis of gravimetric and volumetric analysis of transactions prepared by the Applicant, as mentioned in para 40 the application reads thus: -

It is also the case set up in the application that the CD had made an initial Public Offer (IPO) that opened on 09.05.2018 and closed on 11.05. 2018. The public issue of 33,33,000 Equity Shares of face value of Rs.10/- each (fully paid up of the CD was published for cash at a price of Rs.140/- per equity share (the issue price) including a share premium of Rs.130/- per equity shares, which was aggregating Rs.4,666.20 lakhs. The IPO proceeds (ibid) were deposited by the investors on 17^th and 18^th May, 2018 in Axis Bank IPO A/c No. 918020043283929, specifically opened for the purpose of IPO issue. Out of the IPO proceeds, an amount of Rs.4,59,00,000/- was paid to Sarthi Capital Advisors Pvt. Ltd., Lead Manager to the IPO on 19.05.2018, for which detailed break up of fees paid was not provided by Sarthi Capital Advisors Pvt. Ltd., to the IRP.

Out of the aforementioned IPO proceeds, the suspended management paid an amount of Rs.1,90,37,125/- on 23.05.2018 to Ms. Jagjit Kaur Kalra against an antecedent financial debt owed to Jagjit Traders, a related party qua which the Promoters of Corporate Debtor had significant control. The transaction has been described by the Applicant/RP as Preferential transaction, barred by Section 43 of the Code. It is the case of the Applicant/RP that Jagjit Kaur Kalra is an Ex-Director of CD, related to the Promoter of Corporate Debtor and Promoter of Jagjit Trader and the repayment of the aforementioned amount of Rs.1,90,37,125/- to her could put her into a beneficial position over the secured creditors. It is the plea espoused on behalf of the Applicant/RP that the payment was made within 2 years preceding the insolvency commencement date viz. the lookback period, thus a direction need to be issued for contribution of the amount paid to Ms. Jagjit Kaur Kalra to CIRP account of CD.

The Applicant has further alleged that out of the IPO proceeds (ibid) received on 19.05.2018, the Corporate Debtor paid an amount of Rs.3,91,866/- to Ms. Surinder Kaur Kalra on 23.05.2018, against an antecedent financial debt owed to Surinder Traders. The transaction could also fall within the meaning of Preferential transactions under Section 43 of the Code. Since, Surinder Kaur Kalra is Promoter and Ex-Director of the CD and Promoter of Surinder Traders, the repayment of the aforementioned amount within 2 years preceding the insolvency commencement date amounted to Preferential transaction.

The Applicant has also espoused that out of the IPO proceeds, the CD paid Rs.1,35,42,338/- on 22.05.2018 to Amarjit Singh Kalra, against an antecedent financial debt owed to him. According to him, the payment was made during the lookback period to a related party, as Amarjit Singh Kalra is Promoter and Ex-MD of the of the Corporate Debtor and the repayment of unsecured loan in priority over other creditors has put him into beneficial position.

The further plea espoused by the Applicant is that the CD also made payment of an amount of Rs.2,745.30 Lakhs from the IPO proceeds, which was transferred from Axis Bank IPO A/c to Andhra Bank Current A/c 3934 from 19.05.2018 till 13.06.2018. The RP is unable to state as to whether the payment is against an antecedent operational debt owed by the Corporate Debtor. Nevertheless, the RP/Applicant has described the payment as Preferential transaction, as the same is made in priority over the other creditors and the recipient of the payment are put in beneficial position over the secured creditors. Though, the transaction fall beyond 1 year preceding the date of commencement of CIRP viz. 23.01.2020, it is the plea taken by the RP that since the business operation of the CD was shut down in the month of March, 2019, the transactions which could take place from 1^st April, 2018 onwards need to be considered as Preferential transaction covered by Section 43 of IBC, 2016. The details of the payment made from 19.05.2018 till 13.06.2018 as mentioned in para 46 of the application reads thus:

The Corporate Debtor could avail business loan of Rs.2,50,00,000/-from Northern Arc Capital Limited (formerly IFMR Capital Finance Limited), which was disbursed to it on 14.03.2019 in Current A/c 743 maintained in Bank of Baroda (BoB) by the CD. On analysing the utilisation of the said loan, it was found that all payments (in round figure amounts) were made immediately, the next day i.e. 15.03.2019 to various Proprietorship concern mentioned below: -

According to RP/Applicant, public domain searches were carried out by it to gather further details about these parties, but since there were multiple parties with the same name, the details could not be procured.

In the wake of the aforementioned, the Applicant/RP has preferred the captioned IA, praying therein: -

There was no appearance on behalf of the Respondents, thus the proceedings against them had to be set ex-parte.

We heard the counsel for the Applicant and perused the pleadings and record. As can be seen from the Avoidance Transactions Audit Report of Five Core Electronics Limited (CD) conducted by R. Choudhary & Associates, Chartered Accountants, there is a finding that out of IPO proceeds, majority of the payment had been utilized to pay off Creditors and Cash Purchases which could be observed by the Auditors from the reduction in Payables, increase in inventory and high volume of purchase during 9 months ending on 31.12.2018. The relevant excerpt of the Audit Report reads thus: -

The details of related parties has given in the Audit Report reads thus: -

As can be seen from Part 1.7 of the Audit Report, the objective of the Audit was to find out Avoidance Transactions. To conduct Forensic Data Analytics and Asset Tracing of the CD to assess movement of funds based on the Bank Statements of the Corporate Debtor, the Auditor identified to undertake the exercise, mentioned in the Audit Report. The relevant excerpt of the Audit Report in this regard reads thus: -

As can be seen from the executive summary mentioned in Part 4 of the Report, the Preferential Transactions were found to be made in favour of related parties and otherwise. Besides, Preferential Transactions, the Auditor also found certain undervalued and fraudulent transactions entered into by the ex-management of the CD. The relevant excerpt of the Audit Report qua Preferential Transaction entered into by the ex-management reads thus: -

The Forensic Auditor also recorded the finding that there was probable misappropriation of stock of the Corporate Debtor by its management/employees, the record of the CD reflected the suspicious receipt of payment by it from various accounts. The findings recorded by the Auditor in this regard reads thus: -

As could be recorded in Part 5 of the Audit Report, Promoters of the Corporate Debtor are not traceable since February, 2019 and on 27.04.2019, the independent director called a Board meeting in which all the Directors including Managing Directors, Compliance Officer, CFO, Directors of Merchant Bankers were invited. Nevertheless, except the Independent Director no one participated in the meeting. In Clause 5.2, the Auditor analysed the Axis Bank-IPO Account of the CD, which was specifically opened for the purpose of depositing the receipts of IPO proceeds. In Clause 5.2.1. to 5.2.2.2. of the Report, the Auditor, the order has dealt with the movement of the amount of Rs.46,66,20,000/- i.e. proceeds of IPO. The clauses read thus: -

As the CD had transferred a sum of Rs.42,07,20,000/- to its current account maintained with Andhra Bank having A/c No. 048111100003934, the Auditor also analysed the utilisation of IPO proceeds (ibid) from Andhra Bank A/c (ibid). Clause 5.3.1. to 5.3.7. of the Report reads thus: -

The aforementioned analysis of the account was done from the period 01.04.2018 to 01.04.2020. The summary of payments from Andhra Bank A/c of CD (ibid) as mentioned in clause 5.4.4. of the Audit Report reads thus: -

The Auditor also carried out extensive analysis of the transaction as appeared in the Bank Statement of Corporate Debtor qua its Account No. 048113100000566 maintain in Andhra Bank-OCC. The summary of payment made from said account of CD, as mentioned in Para 5.5.1. to 5.5.4. of the report reads thus: -

As can be seen from the aforementioned summary, an amount of Rs. 84,42,20,977 was transferred to the aforementioned account by the CD itself and other amounts of Rs. 10,76,55,915/- and Rs. 1,56,16,846/- were unidentified transfer/customer collection in the account.

The Auditor also analysed the various transactions qua the current account no. 05860200000743 maintained by CD in Bank of Baroda, from 01.04.2017 to 23.01.2020. The various transactions analysed and summarised qua the said account in paras 5.6.1 to 5.6.4. of the Report reads thus: -

Having analysed the aforementioned statements of Bank Accounts of the CD, the Auditor found certain payments as abnormal. In para 5.7.3. noticed that these transactions/payments are wrongful and are carried just to defraud the Creditors. In clause 5.7.3., the Auditor has given specific details of circular/wrongful trading. Clause 5.7.1. to 5.7.3. of the Audit Report reads thus: -

The Audit Report also talk of certain probable misappropriation of Inventory. As could be seen from the Report, as on the date of commencement of Insolvency i.e. 23.01.2020, no physical stocks were available at the premises of the CD, while as per analysis of stock on various dates it could be seen that the Corporate Debtor was having an average stock level of Rs. 34.00 Cr. approx. at any given point of time. The table in this regard, mentioned in clause 5.8. of the Audit Report reads thus: -

In terms of the Report, as there were no stocks available at any premises of the CD, there might be a possibility of misappropriation of stock by the management of the CD, but in the wake of limited information available on record, no definition conclusion could have been arrived at.

We find from clause 5.9. of the Audit Report that during the FY 2017-18, the CD had made an investment of Rs. 14,15,18,475/-, by acquiring the Equity Shares of M/s Five Core Acoustics Private Limited. The particulars regarding the acquisition of Equity Shares transaction as mentioned in the Report reads thus: -

It is clearly reflected and is also mentioned in the Audit Report that the shareholders of Five Core Acoustics Private Limited are Suspended Directors/Promoters of the Corporate Debtor. The Corporate Debtor had acquired the shares from the shareholder of Five Core Acoustics Private Limited at the premium of Rs. 35/- per share. The valuation of shares for which the consideration was paid was not available to the Auditor for verification. It is also seen from the Report that the Corporate Debtor allotted 20,21,693 Equity Shares against purchase consideration in the ratio of 0.643:1. The shares were issued at the rate of Rs. 70/- per share with face value of Rs. 10/- and premium of Rs. 60/- per share. The valuation of the shares of the CD was not available for verification. It is observed in the Audit Report the Promoters of both the Corporate Debtor/Subsidiary Company were same and the Corporate Debtor had issued shares in lieu of shares of Five Core Acoustics Private Limited at consideration of Rs. 70/- per shares in April, 2017, while in May, 2018, the IPO had been floated by the CD at a price of Rs. 140/- per share i.e. at double the price on which shares had been issued to acquire shares of Five Core Acoustic Private Limited. It is categorical observation made in the Audit Report that undue benefit had been taken by the Promoters/relative of the Promoters by acquiring the shares at the price lower than the estimated valuation. The relevant excerpt of the report reads thus: -

The Audit Report also takes note of the fact that the Cash Flow Statement of the CD for the period from 01.04.2017 to 31.12.2017 shows misleading figure. As per cash flow in IPO prospectus, under Cash Flow from Financing Activity, the issuance of Share Capital of Rs. 2,649.44 Lakh and the adjustment of Rs. 1234.25 Lakh against the share application money pending allotment is shown. Ergo, there is net inflow of Rs. 1415.19 Lakh. However, the issue of shares of Rs. 1415.19 Lakh are against purchase of shares of Five Core Acoustic Private Limited. Actually, there was no cash inflow into the accounts of CD as the shares had been issued not for consideration in cash but for consideration in kind only. Resultantly, there was no cash outflow to acquire the shares of Five Core Acoustics Private Limited, the Corporate Debor could show it as cash flow in IPO prospectus. A statement to this effect is given in the report. The relevant excerpt of the report reads thus: -

On the basis of Bank Statement Analysis, the Auditing Firm observed that certain payments/receipt in the Bank Account of the CD were abnormal and suspicious. Clause 5.11.1. of the report reads thus: -

Clause 5.12. of the Audit Report reveals that various payments had been made to related parties during the period for which analysis was made by the Auditing Firm. The details of the payment made to the related parties reads thus: -

The Auditing Firm observe that a payment of Rs. 1,05,00,000/- had been made in the account of M/s Neha Export i.e. a party related to the Promoters of the Corporate Debtor. The Report further reflects that the Neha Export is a proprietorship firm in the name of Ms. Madhu Gulati and as per the prospectus submitted to SEBI for IPO, Ms. Madhu Gulati is the sister of Promoter of Mr. Amarjit Singh Kalra. As has been mentioned in the application, following is the registered detail of M/s Neha Export.

The aforementioned payment was made on 08.02.2019 from account of Corporate Debtor through RTGS. The Auditing Firm observes that as per Balance Sheet as on 31.03.2018, there was no amount outstanding qua M/s Neha Export and during the period for which analysis was done, no payment had been received from M/s Neha Export. Though, the Auditing Firm has tried to say that the transaction is undervalued transaction, but it has not concluded so and viewed that there was no sufficient material to arrive at such conclusion.

The Auditing Firm also found a payment of Rs. 35,50,000/- made in the account of Surinder Traders viz. a proprietorship firm in the name of Ms Surinder Kaur Kalra who is spouse of the Promoter namely Mr. Amarjit Singh Kalar and Suspended Director of Corporate Debtor. The registered details of Ms Surinder Traders derive from GST record reads thus: -

The details of another transaction made in favour of related party has been given in clause 5.12.3. of the Audit Report. The relevant excerpt of the clause reads thus: -

The loan of Rs. 2,50,00,000/- was availed from the Northern ARC Capital Limited (formerly known as IFMR Capital Finance Limited) on 14.03.2019. The loan had been disbursed in Current Account No. 743, maintained in Bank of Baroda. On analysing the utilisation of the said loan, except cash withdrawal, all other payments (in round-amounts) were found made to related party, ‘A S Electronics’ and other Proprietorship or Partnership concerns, regarding which details were not available in public domain as there were multiple parties with same names. The details of such payment as mentioned in the Audit Report reads thus: -

As the payment from proceeds of loan had been made to various Operational Creditor, the Auditing Firm considered the same as Preferential transaction. The payment of Rs. 55,17,370/- to A S Electronics, a related party was treated as undervalued transaction. The remaining payment of Rs. 2,20,00,000/- was considered as Preferential Transaction, because by making the said payment to Creditors, the Corporate Debtor had put the Creditors in the position, beneficial than the one in which they could have been, on distribution under Section 53 of the IBC, 2016.

While analysing the OCC A/c 566 qua the CD, the Auditing Firm observed that from 03.01.2019 to 26.02.2019 the Corporate Debtor had availed various exposure of Rs. 14.35 Cr. as packing credit. The amount had been utilised to make payment to various parties including related parties. The details of the payment as mentioned in clause 5.14 of the Audit Report reads thus: -

While conducting the Audit Transaction, the Auditing firm came across various foreign exchange receipts on export of goods from foreign customers for an amount of Rs. 54,75,87,021/-. Nevertheless, the name of customer/payee was not mentioned in the Bank Account Statement. As the majority of the Business of the Corporate Debtor was from the export activities, the Auditing Firm considered it necessary to enquire into the report receipts. Nevertheless, due to non-availability of information such as books of accounts, export documents like export invoices, custom clearance certificate, transportation details, the Auditing Firm considered it difficult to enquire into the export receipts. The list of export receipts in account (Andhra Bank OCC A/c 566) of the Corporate Debtor as mentioned in Audit Report reads thus: -

While analysing the Bank Statements qua the CD, the Auditing team observes that various transactions had been entered by the Corporate Debtor in the name of Five Core Electronics Limited (in Accounts 566 & 3934 of Andhra Bank). However, the detail of such account was not found available to the Auditing Firm. The details of the transaction through Bank A/c 566 and Bank A/c 3934 as given in the Audit Report reads thus:-

The Auditing Firm also found the diversion of funds by ex-management of CD in the name of investment. Clause 8 of the report reads thus: -

We see from Annexure-1 to the Audit Report that the various payments made by the CD were to/regarding identified suppliers, self-account, related party, unidentified account, cash (withdrawal), NSE, Income-Tax, employees, Export Credit Guarantee, loan repayment, PF payment, electricity payment, credit card, mobile bills, rent, donation, stamp charges, NSDL etc. The Annexure-1 to report is on record at Page-126 to 135 of the application. Annexure-2 (Page-136 to 146) and Annexure-3 to the report (Page-137 to 152) also contains the details of payment made by the CD. Annexure-4 (Page-153 to 160), Annexure-5 (Page-160-167) gives details of the receipts by the CD.

As can be seen from Section 43 (1) of IBC 2016, where the liquidator or the resolution professional, as the case may be is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-Section 2 to any person as referred to in sub-Section 4, he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for one or more orders referred to in Section 4. In terms of the provisions of sub-Section 2 of Section 43 of IBC 2016, a corporate debtor is deemed to have given preference, if there is a transfer of property or an interest thereof of the Corporate Debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owned by the corporate debtor and the transfer has the effect of putting such creditor or surety or a guarantor in a beneficial position than it would have been in the event of distribution of assets being made in accordance with Section 53. Sub-section 4 of Section 43 of IBC, 2016, provides that a preference shall be deem to be given at a relevant time, if it is given to a related party (other than by reason only of being an employee), during the period of two years preceding the Insolvency commencement date or a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date. Such is also the provision contained in Section 46 of IBC, 2016, regarding undervalued transaction. Apparently, the payments of Rs. 1,90,37,125/- made to Jagjit Kaur Kalra on 23.05.2018, of Rs. 3,91,866/- to Surinder Kaur Kalra again on 23.05.2018 and of Rs. 1,35,42,338/- to Amarjit Kalra on 22.05.2018 against an antecedent financial debt owed to them were made to related parties i.e. Promoter and Directors of the CD and were made within two years preceding 23.01.2020 (the date of commencement of CIRP) and is a Preferential Transaction. From the aforementioned discussion and analysis, we are left with no doubt that there was preferential transaction as referred to in paras 43, 44 & 45 of the application. For convenient reference, the paras are reproduced thus: -

As can be seen from para 46 of the application, it is also the case of the Applicant that there were payments made to various third parties, aggregating Rs. 2,745.30 lakhs from the IPO proceeds. These were the payments made to unrelated parties between 19.05.2018 to 13.06.2018. It is the case of the Applicant himself that the fact whether the payments were against an antecedent operational debt owed by the Corporate Debtor is not known due to absence of accounting record of the Corporate Debtor. Admittedly, the payments were made to unrelated parties between 19.05.2018 till 30.06.2018 i.e. beyond the lookback period of one year. Besides, the Applicant is not sure as to whether the payment is against antecedent operational debt owed by the CD or not. Thus, we are unable to appreciate that how the Applicant could treat the transactions as Preferential Transaction. From the contents of para 46 (ibid) the transaction seems to be fraudulent transaction.

The transaction referred to in para 47 of the application were entered into during the lookback period and by making the payments, the CD could put Ms. Mittal Trading Co., Balaji Sales Corporation, Shri Guru Containers, ABS Enterprises, S R Industries, Himanshu Trading Co., Shri Sai Ply Wood, and Bhatia Electrical and Steel in better position than the one in which they could have been in the event of distribution of assets being made in accordance with Section 53 of IBC, 2016. Thus, the total payment of Rs. 2,20,00,000/- to them is Preferential Transaction. Since, the Respondents herein before us are absconding, we could have directed the aforementioned beneficiary of the Preferential Transaction to contribute the amount paid to them to put them in a position beneficial than the one in which they could have been in the event of distribution of assets being made in accordance with Section 53 (ibid) to CD, but the Applicant has not impleaded them as parties to the present application. It is fundamental Principle of Natural Justice that any person to be affected adversely by a judicial order need to be given an opportunity of being heard. The principle is perceived to be in existence even from prior to origin of human race. The perception of natural justice embodied in the Bible is that though the God knew that the Adam was going to eat the apple and had finally eaten it, but still asked the Adam as to whether he had eaten the apple. The exercise of putting the question and taking the answer was in adherence to Principle of Natural Justice. It is fundamental principle of natural justice that anyone who is likely to be affected adversely by a decision need to be given an opportunity of hearing. In other words, no one should be condemned unheard.

In terms of the averments made in the application, the amount of Rs. 3,29,71,329/- was paid to the related parties for repayment of unsecured loan within 2 years preceding the date of commencement of CIRP and the balance Rs.2,20,00,000/- to pay off the debt to unrelated parties within 1 year of such date. Thus, the transactions are Preferential Transactions. The payments of Rs. 2,745.30 Lakhs made to such unrelated third parties, regarding which the Applicant is not aware as to whether the payments were against an antecedent operational debt owed by the CD or not from 19.05.2018 till 13.06.2018, it cannot be held that the transaction was Preferential Transaction, In fact, such transaction regarding which liability of the CD is not clear may be fraudulent/undervalued transaction. Section 66 of IBC, 2016, provides that if during the Corporate Insolvency Resolution Process over a liquidation process it is found that any business of the Corporate Debtor has been carried on with intent to defraud Creditors of the Corporate Debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of RP pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the CD as may be deemed fit. A transaction is considered undervalued where the Corporate Debtor makes a gift to a person or enters into a transaction with a person which involves the transfer of one or more assets by the Corporate Debtor for a consideration the value of which is significantly is less than the value of the consideration provided by the Corporate Debtor and such transaction has not taken place in the ordinary course of business of the Corporate Debtor.

In the backdrop of the aforementioned facts and circumstances, the IA-3804/2020 is disposed of with the following directions: -

The IA stands disposed of.

The facts of the case delineated in the application are that initially the IRP had filed an IA No. 3673 of 2020 under Section 45 and 66 of IBC, 2016. Nevertheless, the CoC in its meeting dated 03.03.2020 replaced the IRP and in terms of the order dated 02.06.2020 passed by this Adjudicating Authority, the Applicant Mr. Manoj Kulshrestha was appointed as RP. Subsequently, in terms of the order dated 29.11.2021, which Tribunal could take a view that in the wake of the judgment of Hon’ble Supreme Court in Anuj Jain vs. Axis Bank (Civil Appeal No. 8512-8527 of 2019), the RP need to file separate applications under Sections 45 and 66 of IBC, 2016.

On performance of Forensic Data Analysis qua the Bank Statements of the CD, in respect of Current Account No. 3934 and Open Cash Credit (OCC) Account No. 566, IPO Account and the Current Account 743 as well as EEFC Account maintained by the CD in Andhra Bank, Axis Bank and Bank of Baroda respectively, the Auditing Firm found that the ex-management of CD could enter into certain fraudulent transactions to defraud the Creditors of CD and with intent to defraud the Creditors. Para 37 of the application, in which the summary of Avoidance Transaction under Section 66 is given by the Applicant reads thus: -

Besides, the above the ex-management of the CD also entered into the fraudulent transactions referred to para 39 of the application, which reads thus: -

A list of date-wise circular trading" or "round-tripping" transactions from BoB Current A/c 743 of the Corporate Debtor is annexed herewith and marked as Annexure - J.”

The other fraudulent transactions referred to by the Applicant are mentioned in paras 39, 41, 44, 45, 47, 48 and 49 of the application para 39 of the application has already been reproduced hereinabove. The paras 41, 44, 45, 47, 48 and 49 of the application reads thus:-

A list of date-wise "circular trading" or "round-tripping" transactions from Andhra Bank Current A/c 3934 and OCC A/c 566 of the Corporate Debtor is annexed herewith and marked as Annexure-L. XXX

The "circular trading" or "fraudulent" transactions from Andhra Bank OCC A/c 566 as set forth in Table 11 above with ‘Rishav Exports’ is the same "Ludhiana-based" entity that is mentioned earlier under Paragraph 47, where similar such transactions in the nature of "circular trading" or “round- tripping” were undertaken from BoB Current A/c 743 of the Corporate Debtor.

The aforesaid payments to various third parties were not made in the ordinary course of business, but were made arising out of a particular situation, which is close to the period and around the time of 15^th February, 2019, when the Promoter and former Directors related to the Promoter fled and their whereabouts are not known till date.

We have perused the Forensic Audit Report. The Report reveals that the ex-management of CD could enter into the fraudulent transactions referred to in the application. The fraudulent transactions are taken note of in the clause 7, 5.7.2, 5.14 and 8 of the Audit Report and relevant pages 160, 167 and 170 of the application. The transaction mentioned in the Audit Report (ibid) contain the details of the fraudulent transactions, reproduced in paras 41, 44, 45, 47, 48 and 49 of the IA, thus the aforementioned clauses/excerpt of the Audit Report is not reproduced for the sake of brevity and conciseness.

A perusal of Sec. 66 of the IBC, 2016 amplify that if during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor for any fraudulent purpose, this Adjudicating Authority may on application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit. In terms of the provisions of Sec. 66(2) of the IBC, 2016, on an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of corporate debtor, as the case may be, shall make such contribution to the assets of the corporate debtor as it may deem fit, if before the insolvency commencement date, such director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor and the director or corporate debtor did not exercise any due diligence in minimising the potential loss to the creditors of the corporate debtor.

As can be seen from order date 14.02.2023, despite substituted service by way of publication, there was no appearance on behalf of the Respondents. Ergo, they were proceeded against ex-parte.

As can be seen from the averments made in para 7 of the application, in the Board meeting qua the CD held on 27.04.2019, a decision was taken to file a complaint regarding unethical behaviour of the Respondents. Such complaint was filed also by Mr. Aditya Agarwal, Independent Director. The Respondents never remained available at the register office of the Corporate Debtor, after 15.02.2019. They were presumed to be absconding since 23.01.2020. The IRP downloaded the last available Audited Financial Statement of the CD i.e., pertaining to the Financial Year (FY) 2017-18 and for the Financial Years preceding that year. The Audited Financial Statement from the FY 2018-19 onwards of the CD were not filed with the RoC and were not available on the MCA website. On MCA website the CD was shown as, “Active Non-Compliant”. As on date, the whereabouts of the Respondent are not known. The business of the CD could be shut down in the month of March, 2019 and the CIRP commenced on 23.01.2020. Thus, being fully conscious that the CD might be admit into CIRP, the Respondents did not exercise any due diligence in minimising the potential loss to the Creditors of the Corporate Debtor.

In the backdrop of the conduct, demeanours, approach and attitude of the Respondents, we are left with no doubt that the Respondents also remained involved in carrying the business of the CD for fraudulent purpose.

In the wake of the aforementioned, the Respondents are liable to make the contribution to the assets of the CD to the extent of the loss caused on account of their act of carrying the business of the CD for fraudulent purpose and being negligent in exercising due diligence in minimising the potential laws to the creditors of the corporate debtor. The Respondents shall contribute the amount mentioned in paras 41, 44, 47, 48 & 49 of the application to CIRP account of the CD forthwith. The application stands disposed of accordingly. No cost.

Originally, the Applicant had filed a common IA viz. IA No. 3673 of 2020 regarding the fraudulent and undervalued transactions qua the CD. Nevertheless, as can be seen from the order dated 29.11.2020, passed by this Adjudicating Authority, the Applicant could withdraw the IA with liberty to file separate applications qua different categories of avoidable transactions. In the wake, the Applicant could prefer the present application under Section 45 of IBC, 2016. The salient pleas espoused in the captioned application are: -

In the application filed by him, the Applicant has not specifically highlighted any transaction as undervalued transaction. It has simply made reference to certain analysis made by the Forensic Auditor. In para 59 of the application, the Applicant has made a vague assertion that the IRP seeks from this Tribunal for appropriate relief and direction on the Avoidance Transaction identified under Section 45 of IBC, 2016. The application filed by the RP is as nebulous as it could be. The RP is expected to indicate the undervalued transactions specifically. As can be seen from Section 45(2) of IBC, 2016, a transaction shall be considered as undervalued where the Corporate Debtor makes a gift to a person or enters into a transaction with a person which involves the transfer of one or more assets by the Corporate Debtor for consideration the value of which is significant less than the value of the consideration provided by the Corporate Debtor and such transaction has not taken place in ordinary course of business of the Corporate Debtor. In the application filed by him the Applicant has just made reference to the factual and legal aspects in a very hazy manner. However, we could refer to the Forensic Audit Report. On perusal of the Report, we could find that the CD entered into preferential/undervalued/ fraudulent transactions. The clauses 4 and an excerpt from para 5.1 of the Audit Report reads thus: -

Despite, service of notice by way of publication, the Respondents failed to enter appearance in the proceedings. There was no rebuttal of the Forensic Audit Report in any manner. In the wake, we are left with no option, but to accept the findings and the conclusions recorded by the Forensic Auditor. As can be seen from the aforementioned viz. clause 4 of Forensic Audit Report, the CD entered into following undervalued transactions: -

The CIRP qua the CD commenced on 23.01.2020. In order to be classified as undervalued transaction, the same should have taken place during the lookback period viz. two years preceding the date of commencement of CIRP. It is seen from the Audit Report that the transactions verified by the Forensic Auditor was for two years preceding the date of commencement of CIRP i.e., from 01.04.2018 till 23.01.2020. The relevant excerpt of the proceedings reads thus: -

Thus, apparently, the undervalued transaction could be entered into by the CD with related party, during the lookback period of two years. However, the predicament, one may perceive in the prevalent situation is that in terms of the provisions of Section 48(5), the order of this Adjudicating Authority required to be passed under sub-section 1 of Section 45 may require any person to pay such sums, in respect of benefits received by such persons to Liquidator or the Resolution Professional as the case may be, as deemed fit by this Authority and in the present case, the beneficiary are not the parties before us. Nevertheless, the undervalued transactions (ibid) are either for the benefit of the wholly owned subsidiary of the company or to either of the Respondents or partnership firms of the Respondent or the promoters of the CD i.e. all related parties. Such transaction in a way is the transaction deliberately entered into by the Corporate Debtor to keep the assets of the CD beyond the reach of any person who is entitled to make a claim against the Corporate Debtor and in order to adversely effect the interest of such persons in relation to the claim.

In view of the aforementioned, we are left with no option, but to order restoration of the position qua CD as it existed before the aforementioned undervalued transaction, as if the transaction had not been entered into and to direct the Respondents to pay the amounts (as per the details given in para 3 above under the present IA) of Rs. 10,00,00,000/-,1,05,00,000/-,66,52,000/-,16,00,00,0000/-, 1,19,02,370/-, 14,15,18,510/- in CIRP account of CD, jointly/severally. Ordered accordingly. The IA stands disposed of.