Mr. Varadachari Kumar, Liquidator of M/s. Akshaya Imaging Systems Private Limited vs Mr. Sreenivasan Harikrishnan
IA/1327/IB/2020 in CP/431/(IB)/CB/2018
Facts:
1) An application filed under Section 7 of IBC, 2016 by the Financial Creditor M/s. Syndicate Bank vide an order dated 31.05.2018 in CP/431/2018 initiated Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor and appointed the IRP. This Tribunal thereafter vide order dated 07.08.2018 ordered for the liquidation of the Corporate Debtor.
2) Liquidator collected the accounting data of the Corporate Debtor for the period commencing from 01.04.2017 from the suspended directors in a tally format on 03.11.2018. On perusal, the Liquidator noticed several irregularities in the books of accounts of the Corporate Debtor. On the basis of the above, he filed these applications.
Issue: Whether the application can be allowed ?
Applicant:
1) It is stated that last entry for import of raw materials was made in July 2017 which strongly raises question over any manufacturing activity post September 2017. It is alleged that incurring expenditure on DG diesel for a period during which no manufacturing activity was taken gives rise to suspicion over the alleged transactions. The alleged expenditure was paid in cash. Even it is assumed that the DG set was used for running the plant for maintenance purpose, the same does not justify the expenditure. It is stated that the monthly average expenses of Rs.18,000/- was essential to upkeep the plant and machinery, but the amount spent was exorbitant and unwarranted.
2) It is stated that during the period from 01.04.2018 to 31.05.2018, an amount of Rs.25,98,095/- towards factory expenses and Rs.5,45,554/- towards office and admin expenses were spent by cash, although there were no activities in the Corporate Debtor. On clarification the Respondents vide their letter dated 23.01.2020 stated that the alleged expenses pertain to repair and maintenance and plant which explanation is not justifiable. It is stated that during the year 2016-2017 when production activities were carried, the reported expenses were Rs.26,87,258.65 but the above expenditure were incurred during a span of 2 months when there were no business activities. It is stated that the expenses incurred are not justifiable.
3) It is stated that the genset was outstanding in the books with the asset value as Rs.13,000/- as on 31.05.2018. The Respondent failed to give any explanation. The record shows that the Corporate Debtor resorted to hiring of the genset . It is stated that an amount of Rs.4,07,200/- was written off as forfeiture charges towards non-performance of an import order which is not on record. The explanation given that advance was paid to Shanghai UPG International Ltd., Shanghai towards import of plates but they have not executed the order as committed to them due to various constraints so they refused to return the advance amount and they treated that amount as forfeiture damages is not plausible.
4) Section 66 of IBC, 2016 provides that during the CIRP or a liquidation process if it is found that any business of Corporate Debtor has been carried on with intent to defraud the creditors of the Corporate Debtor or for any fraudulent purpose, the Adjudicating Authority may pass an order against any person who is knowingly the party to such transaction to make such contribution to the assets of the Corporate Debtor. It is stated that by virtue of this provision, the Liquidator can also file an application for fraudulent trading after the commencement of the liquidation of the Corporate Debtor
Respondent:
1) Respondent Nos. 1 and 2 submitted that the applicant / liquidator is not empowered to file an application under Section 66(2) of IBC, 2016 since he is not a Resolution Professional nor he can seek directions to the Respondents to make contribution to the assets of the Corporate Debtor. Section 66(1) of IBC, 2016 allows only the RP to file such an application. It is stated that a bad commercial decision cannot be considered to be fraudulent or wrongful trading under the provisions of Section 66 of IBC, 2016.
2) It is stated that the allegations are not based on proper and correct assessment of transactions involved and no circumstance the transactions referred to in the petition, contains or reflects even an iota an intention to defraud the creditors. It is stated that the transactions for an amount of Rs.10,04,648/- made towards diesel for the generator, fall prior to CIRP. TNEB connection was terminated since the cost was more than the diesel genset. A commercial decision was taken to save the money which does not constitute fraud. Electricity charges are payable every month even there is no consumption. The bill of April 2017 was attached showing the fixed charges as Rs.2,18,925/-. It is stated that they have saved Rs.8,71,632/- during the said period and consequently increased the current assets of the company.
3) Counsel submitted that As to the allegation of Rs.1,90,000/- the value of DG set, it is stated that genset was affected by flood and it was sent for repair three times. Cost of repair was more than the actual value and it was left as unusable condition with the mechanic who is not traceable. It was not written off in the books of account as they had not documented the discarding of the assets.
4) Counsel submitted that As to the allegations of written off entry for forfeited charges it is stated that the term forfeiture is a misnomer. The transaction represents only the difference between the bargain price and final price agreed by the seller. It should have been added to the purchase cost in the normal course of accounting. It was a commercial decision taken by the Corporate Debtor.
Decision: NCLT dismissed the application.
Rationale:
1) The Hon’ble NCLAT in the judgment referred supra has held that if the Liquidator finds that there is a fraud committed by the ‘Corporate Debtor’ at any time, he can approach the Adjudicating Authority and file an Application seeking necessary directions. Thus, we are of the view that the Liquidator has the locus to file application under Section 66 of IBC, 2016 before this Tribunal.
2) It held that there seems to be a stark contrast in relation to Section 66(1) and 66(2) of IBC, 2016. It is needless to say that even the scope of sub – section (1) and (2) of Section 66 of IBC, 2016 are different. As already adumbrated supra, the Liquidator has not clarified whether the transactions impugned is sought to be reversed under Section 66(1) or 66(2) of IBC, 2016.
3) It held that in relation to IA/1327/IB/2020 it is seen that the first issue is pertaining to the Diesel Expenses amounting to Rs.10,04,658/-. It is stated by the Respondent that the TNEB connection was allowed to be terminated since the cost of payment is more than of using a Diesel Genset and that it is a commercial decision taken by them to save the money of the Corporate Debtor. Thus, the said decision of the Respondent to terminate the electricity connection and continue with the running of the Diesel Generator cannot constitute a fraudulent transaction.
4) The second issue is in relation to the cash expenses to the tune of Rs.6,02,000/-. In this regard it is seen that the Respondent has given a breakup of the expenditure which is already captured in the table supra. The Liquidator has not proved any dishonest intention on the part of the Respondent.
4) The third issue is in relation to indirect expenses to the tune of Rs.64,56,518/-. In this regard it is seen that the Respondent has categorically stated that a sum of Rs.33,12,869/- was towards finance charges to the Bank. Further, it is seen that a sum of Rs.28,48,019/- has been spent towards indirect expenses representing Factory expenses, General expenses, office expenses and repairs and maintenance. It is stated that this increase was caused by Genset hire charges, additional periodic cleaning expenses, repair expenses, etc. Thus, it is already held that hiring of Diesel Generator is a commercial decision and as such the expenses incurred on this behalf cannot constitute a fraudulent transaction.
5) The fifth issue is in relation to the missing assets (i) 30Kva Genset, (ii) Toyoto Fortuner car and (iii) TVS XL & Yamaha. The Respondent has stated that the Genset was affected by Flood and it was sent to repair for three time and the cost of repaid was more than the actual value and hence it was left with the mechanic. Further, it is stated that the Corporate Debtor has made advance towards the Toyota Fortuner car and it was used, however the Corporate Debtor could not settle the balance payment to the owner and hence the owner took the car. Further, it is seen that the two motorcycles were sold at scrap value to the employees since the same was affected very badly during the flood. Hence, these transactions also do not fall within the purview of fraudulent transaction as envisaged under Section 66 of IBC, 2016.
6) It held that the recourse for the Liquidator to recover the amount from the Trade Debtors of the Corporate Debtor is to properly institute or defend any Suit, Prosecution or other Legal Proceedings, Civil or Criminal, in the name or on behalf of the ‘Corporate Debtor’. The Liquidator has made only allegations against the Respondents and no documentary proof has been filed in support of the same, to show that the business of the Corporate Debtor was carried out by the Respondents with a dishonest intention and to defraud the creditors.
Order:
