INTRODUCTION
The NCLT, Ahmedabad in the case of Shalabh Kumar Daga Liquidator of Silver Proteins Pvt Ltd vs. Himanshu J Domadia[1] has held that as per Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations, 2016”), it is mandatory for the liquidator to form an opinion regarding preferential, undervalued and defrauding transactions, before making any determination and applying for relief.
FACTS
The Application under Sections 60(5), 43, 45 and 49 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) was filed by the liquidator of M/s. Silver Proteins Pvt Ltd. The Corporate Insolvency Resolution Process (“CIRP”) was initiated against Silver Proteins Pvt. Ltd. (“Corporate Debtor”) on an application filed by the financial creditor i.e. Central Bank of India. Eventually, liquidation order was passed on 27 January 2021.
The Applicant submitted that various preferential, undervalued and defrauding transactions were noticed, as enlisted below:
Preferential transactions:
- It was observed by the forensic auditor that the Corporate Debtor had made payment of INR 89.77 lakhs in the name of repayment of unsecured loans to directors/related parties two years prior to CIRP. It was also found that unsecured loans outstanding from 2014-15 were repaid during 2018-19.
- By passing general entries in the name of rent, the Corporate Debtor credited INR 56.70 Lakhs and outflow fund of INR 24.42 lakhs.
- The Applicant also stated that there was a related party transaction with proprietorship firm of director of the Corporate Debtor.
- The Corporate Debtor has also made payment to its directors, in the name of remuneration amounting to INR 54.91 lakhs, though the Corporate Debtor was suffering losses.
Undervalued transactions:
- There was a decline in the closing inventory during F.Y. 2014-15. The forensic auditor believed that the sale of stocks was done for an undervalued consideration.
Fraudulent transactions:
- The Corporate Debtor had realized from the debtors an amount in excess of INR 56 Crores, however, no documents in this regard had been provided. Therefore, the liquidator and forensic auditor were of the view that this transaction appeared to defraud the creditors.
- The Corporate Debtor had also written off the debt amounting to INR 10.82 lakhs without any reason.
Apart from the merits of the allegations, the application was primarily opposed on the ground that under Regulation 35A of the CIRP Regulations, 2016, the Resolution Professional has to ‘form an opinion’ whether transactions are covered under Section 43, 45 and 49 of the IBC, and only then has to take a further decision to file application. It was contended by the erstwhile management of the Corporate Debtor that no such opinion was formulated nor any determination was made, before filing the application alleging that the transactions were preferential, undervalued or fraudulent. It was observed by the Hon’ble NCLT, Ahmedabad that only the Stakeholders Consultation Committee (“SCC”) resolved to move an application.
NCLT’S RULING
The Hon’ble NCLT noted that Regulation 35A of the CIRP Regulations, 2016 requires the Resolution Professional to form an opinion whether the corporate debtor has been subjected to any transaction covered under Sections 43, 45, 50 or 60 of IBC within a period of 75 days from the insolvency commencement date and that under the sub-regulation (2) thereof, the Resolution Professional is required to make a determination regarding his opinion within a period of 115 days from the insolvency commencement date.
The Hon’ble Tribunal observed that in the present case, no opinion was formed as to whether the transactions were covered under Section 43, 45 and 49 of the IBC as required under Regulation 35A and in the present case, even the prescribed timelines of 75 days and 115 days were also not adhered to. The Hon’ble Tribunal further held that in view of Regulation 35A, it was mandatory for the liquidator to form an opinion regarding preferential, undervalued and defrauding transactions and since that was not done, it could not be said that the transactions are preferential, undervalued or those which were for defrauding the creditors.
CONCLUSION
If looked at from a form over substance issue, the conclusion reached by the Hon’ble Tribunal would appear to be correct, however many would argue that the effective determination of the transaction being preferential, undervalued or fraudulent would ultimately, in most cases be decided by the tribunal and thus, to insist on a finding or a forming of opinion, would not materially determine the final outcome of such transactions. It is a different issue that even the Insolvency and Bankruptcy Board of India vide its circular dated 20 July 2021[1] has directed that for all insolvency resolution processes ongoing or commencing after 14 July 2021, the resolution professional of the concerned corporate debtor has to also file Form CIRP 8 within a period of 140 days from the insolvency commencement date. Form CIRP 8 provides for both instances, viz. where the resolution professional forms the opinion that the transactions of the corporate debtor are preferential, undervalued or fraudulent and where they are not so, the resolution professional is required to enlist reasons.
Given that several aspects of IBC are being tested through its life cycle, the ruling even if it interpreted to have been favourable for the suspended management of a corporate debtor, accused of preferential, undervalued or fraudulent transactions, provides clarity on the role of the resolution professional/liquidator, though it remains to be seen if this outcome would be set aside by higher forums.
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[1] Order dated 11 March 2024 in Company Petition (IB) 554 of 2018.
[2] https://ibbi.gov.in/uploads/legalframwork/f6c188806f3e1357ec641821cfc62d7e.pdf
