Shibu Job Cheeran Vs Ashok Velamur Seshadri (NCLAT Chennai)
NCLAT Chennai held that as assets proved to be fictitious/ fraudulent and seems to have been created in books of accounts with an intent to defraud the creditors. Accordingly, amount duly payable to liquidator for distribution under section 53 of I&B Code, 2016.
Facts- A Corporate Insolvency Resolution Process was initiated by the Adjudicating Authority on an application filed by an Operational Creditor M/s Minsa Tech India Pvt. Ltd. u/s. 9 of the I & B Code, 2016. Subsequently, Archana Motors Pvt. Ltd., the Corporate Debtor was initiated for liquidation, by the Adjudicating Authority.
An Interlocutory Application was filed under Section 66 of the I & B Code, 2016 by the Liquidator of the Corporate Debtor.
Adjudicating Authority being satisfied of all facts and provisions of law, agreed to the prayers sought by the Liquidator declaring the entries of Rs. 21.37 crores shown in the Audited Financial Statement for the year 2018 as fraudulent transactions and the Appellants herein were held liable to pay this amount to the Liquidator/ Respondent herein for distribution under Section 53 of the I & B Code, 2016.
Aggrieved by the impugned order, the Appellants have filed the present appeal before this Appellate Tribunal.
Conclusion- Held that the Appellants, have not turned out to be clean in their explanations and submissions, and therefore cannot avoid their responsibilities towards non-available / non-verifiable Assets of Rs. 21.37 crores, as shown in the `Balance Sheet’ for the Financial Year 2018. These `Assets’, have proved to be `Fictitious’ / `Fraudulent’, in nature and seems to have been created in the `Books of Accounts’, with an intent to `Defraud’ the ‘Creditors’.
Therefore, `no error’, is noticed in the ‘impugned order’ dated 13.07.2021, passed by the ‘Adjudicating Authority’. ‘Appeal’, is devoid of any merit(s), and the same is accordingly `Dismissed’.
FULL TEXT OF THE NCLAT JUDGMENT/ORDER
The Present Appeal is filed against the ‘impugned order’ dated 13.07.2021 passed in IA (IBC) 27/KOB/2021 in IBA/133/2019 by the ‘Adjudicating Authority’ (National Company Law Tribunal, Chennai Bench), whereby, the ‘Adjudicating Authority’ dismissed the Petition filed under the Insolvency & Bankruptcy Code, 2016 (in short ‘I &B Code, 2016).
Brief Facts:
2. A ‘Corporate Insolvency Resolution Process’ was initiated vide order dated 01.07.2019, by the ‘Adjudicating Authority’ in IBA/133/2019 on an application filed by an ‘Operational Creditor’ M/s Minsa Tech India Pvt. Ltd. under Section 9 of the I & B Code, 2016. Subsequently, Archana Motors Pvt. Ltd., the ‘Corporate Debtor’ was initiated for liquidation vide order dated 10.01.2020, by the ‘Adjudicating Authority’ in MA/38/KOB/2019.
3. The 1st Appellant was the Managing Director and Promoter of the ‘Corporate Debtor’ whereas the 2nd and 3rd Appellants were the Directors of the ‘Corporate Debtor’.
4. An Interlocutory Application was filed vide IA (IBC)/27/KOB/ 2021 was filed under Section 66 of the I & B Code, 2016 by the ‘Liquidator’ of the ‘Corporate Debtor’, the Respondent herein with following prayers :-
“(a) Pass an order to declare that the entries of Rs. 21.37 crore made in the audited financial statement for the year 2018 described in Paragraphs 15 of the application are fraudulent transactions;
(b) pass an order to declare that the Respondent No. 1 to 3 are liable for the loss of Rs. 21.37 Crore suffered by the Corporate Debtor and direct the Respondent No. 1 to 3 to pay Rs. 21.37 crores to the account of the Liquidator for distribution under Section 53 of the Insolvency and Bankruptcy Code, 2016.”
5. The ‘Adjudicating Authority’ being satisfied of all facts and provisions of law, agreed to the prayers sought by the ‘Liquidator’ declaring the entries of Rs. 21.37 crores shown in the ‘Audited Financial Statement’ for the year 2018 as fraudulent transactions and the ‘Appellants’ herein were held liable to pay this amount to the ‘Liquidator’/ ‘Respondent’ herein for distribution under Section 53 of the I & B Code, 2016.
6. Aggrieved by the ‘impugned order’ dated 13.07.2021, the ‘Appellants’ have filed the present appeal before this ‘Appellate Tribunal’.
Appellants Submissions :-
7. Learned Counsel for the Appellants gave the background of the case and circumstances which led to the present appeal. Learned Counsel for the Appellants assailed the ‘impugned order’ as well as conduct of the ‘Respondent’ for initiating false IA(IBC) 27/KOB/2021 in IBA/133/2019 under Section 66 of the I & B Code, 2016. Learned Counsel for the Appellants stated that the ‘Respondent’ filed above Interlocutory Application almost after one year of the ‘impugned order’ for liquidation of the ‘Corporate Debtor’.
8. Learned Counsel for the Appellants stated that the ‘impugned order’ has been passed without any substantial finding and proving the basic requirements of Section 66 of the I & B Code, 2016.
9. Learned Counsel for the Appellants gave the details that they were authorised dealer of ‘Tata Motors’ and due to several reasons like ‘ban on quarrying’, ‘closer of bars’ etc., the turnover of the ‘Corporate Debtor’ fell drastically from Rs. 74.43 crores in 2016-17 to Rs. 4.21 crores in 2018-19. Learned Counsel for the Appellants stated that these facts were not considered while adjudicating the application under Section 66 of the I & B Code, 2016.
10. Learned Counsel for the Appellants mentioned that the devasting flood in August, 2018 was virtually the death nail on the ‘Corporate Debtor’ and all the assets and the records of the ‘Corporate Debtor’ were destroyed and the remains were unserviceable and useless including computer systems and data contained therein. Learned Counsel for the Appellants emphasised that they have taken all efforts to bring back the business on rails and had approached the ‘South Indian Bank’ for restructuring the loans and also tried to retrieve the lost data through an agency, however, they were not successful.
11. Learned Counsel for the Appellants criticised the conduct of the ‘Respondent’ who did not even bother to visit the site physically and has not taken into account the assets and liabilities position of the ‘Corporate Debtor’ over the number of years in analysing alleged fraudulent transactions and the ‘Respondent’ also failed to factor into the impact of the flood etc. Learned Counsel for the Appellants stated that the ‘Respondent’ wrongly concluded on the basis of the earlier turnovers and assets mentioned in the balance sheet of the ‘Corporate Debtor’. Learned Counsel for the Appellants emphasised their genuine efforts to revive the company and settle the dues and made substantial payment from their own personal sources to creditors even after commencement of ‘Corporate Insolvency Resolution Process’.
12. Learned Counsel for the Appellants gave the analysis based on the various balance sheets from the year 31.03.2014 to 31.03.2017 and concluded that during these four financial years their business was very good and the cumulative turnover was Rs. 413.21 crores, cumulative purchases worth Rs. 353.09 crores, inventory aggregated to Rs. 47.16 crores and all these clearly demonstrate the Corporate Debtor’s ability to pay as well as desire to develop the business. Learned Counsel for the Appellants stated that at no stage any bank declared accounts of the ‘Corporate Debtor’ as NPA.
13. Learned Counsel for the Appellants took pains to explain that fixed assets did not show any major changes over years which indicates no disposal or alienation of the properties of the ‘Corporate Debtor’ was made to defraud any ‘Creditor’.
14. Learned Counsel for the Appellants described major floods in August, 2018 which ruined the business of the ‘Corporate Debtor’. Learned Counsel for the Appellants further stated that the ‘Respondent’ failed to bring out any specific allegation and the findings were without any concrete evidence including any ‘Forensic Audit Report’. Learned Counsel for the Appellants mentioned that mandatory ingredients of Section 66(1) of the I & B Code, 2016 is that persons knowingly should carry on of the business in a manner with an intent to defraud the creditors or for a fraudulent purpose and as per section 66(2), it is must be shown that there was no reasonable prospect of avoiding the commencement of ‘Corporate Insolvency Resolution Process’ and such directors failed to exercise due diligence in minimising the potential loss to the creditors of ‘Corporate Debtor’. Learned Counsel for the Appellants stated that they had no intention to defraud any creditor and it is only due to ‘force majeure’ by way of flood which affected the business drastically including destroying all the assets and the records of the ‘Corporate Debtor’. Learned Counsel for the Appellants stated that by no stretch of imagination, the Directors of the ‘Corporate Debtor’ can be held responsible for mala-fide intentions in such cases.
15. Learned Counsel for the Appellants stated that it is the responsibility of the Liquidator, the ‘Respondent’ herein to prove all the allegations of fraud which he miserably failed to do so. Learned Counsel for the Appellants mentioned that it is only the 1st Appellant who was involved in day to day business and 2nd & 3rd Appellants were not connected with day to day running of the ‘Corporate Debtor’, as such, the Liquidator i.e. Respondent herein as well as the ‘Adjudicating Authority’ did not differentiate between the person who was responsible and the person who were not connected with the business operations.
16. Learned Counsel for the Appellants stated that as regard loss of data and alleged failure of the ‘Appellants’ to retrieve the lost data, the ‘Appellants’ approached ‘M/s Stellar Information Technology Pvt. Ltd.’ who were the best data recovery service provider in India and despite all efforts of the agency to salvage the lost data, the agency informed the ‘Corporate Debtor’ that the agency could not retrieve 864 GB data. Learned Counsel for the Appellants stated that that only due to this reason, the ‘Corporate Debtor’ could not furnish the required data to the ‘Respondent’. Learned Counsel for the Appellants further stated that the ‘Respondent’ could have checked this fact from the agency, which the ‘Respondent’ did not bother to do find actual facts.
17. Learned Counsel for the Appellants mentioned that they made detailed submissions before the ‘Adjudicating Authority’ about alleged frauds on the basis of Mitigation of the value of the assets worth Rs. 21.37 crores.
