An application under Section 66 of the IBC for fraudulent trading cannot be sustained solely on a forensic audit report; the Resolution Professional must independently comply with Regulation 35A by forming an objective opinion and determination regarding the alleged transactions to establish fraudulent intent.

JUDGEMENT

1. This application is filed under Section 66 of the IBC, 2016 by the Liquidator of the Corporate Debtor (hereinafter refer to as “CD”)- Vijay Timber Industries Private Limited inter alia seeking following reliefs;

a. To pass appropriate order directing the Respondents jointly and/or severally to pay sum to the tune of Rs.959.26 Lakhs plus the amount with respect to various assets given as Collateral Security to Punjab National Bank;

b. To pass an appropriate order under Section 66 of the Insolvency and Bankruptcy Code, 2016;

2. The CD entered into CIRP under section 7 of the IBC 2016 filed by the Punjab National Bank vide order dated 13.02.2020 thereafter, vide order dated 31.12.2020 liquidation was initiated and the applicant was appointed as liquidator.

3. The applicant has relied upon the forensic audit report conducted for the period from 01.04.2015 to 21.02.2020 submitted by M/s Pipara & Co, Charted Accountant, LLP and alleged various transactions as fraudulent transactions defrauding the creditors within the meaning of section 66 of the code, which are stated as hereunder:

a. The Corporate Debtor unlawfully reduced its closing stock value by a total of Rs. 4,59,000/- during the financial years 2017-18 and 2019-20. This was done by passing stock journal entries that had no explanation, no narration, and no supporting documents in the accounting system. The Audit Report for the 2015-20 review period proves that this stock did not actually exist, because the company only did job work for a related party and the stock quantities never changed.

b. It is submitted that during the period under review, the Corporate Debtor unlawfully wrote off Sundry Debtors amounting to Rs. 7,09,49,678/- without any justification or supporting documentation. The said write-off was executed through a single journal entry just 135 days prior to the admission of the Corporate Debtor into the Corporate Insolvency Resolution Process (CIRP), right before the records were handed over to the Resolution Professional. Further stated that Electrical Installation Furniture & Fixtures (Asset) amounting to Rs.73,200/- (Rupees Seventy Three Thousand Two Hundred Only) was Written off without substantiation, through single JV 135 days before admission in CIRP i.e. before handing over accounting information to the Resolution Professional.

c. The applicant submitted that the Corporate Debtor engaged in a wood-peeling job work contract with its related party, M/s. Nakoda Logistics Private Limited. During the review period, an unsubstantiated payment of Rs. 1,11,95,000/- was made to the said related party under the guise of "Sundry Debtors".

d. It is submitted that the Forensic Audit Report records a material discrepancy between the book value of the Plant & Machinery and the assets found upon physical verification. It is submitted that, as per the report, out of 34 assets reflected in the list furnished to the registered valuer, 20 assets were not produced for physical inspection and 5 assets were found to have been scrapped. It is further submitted that the suspended management informed the valuer that only some of the machines belonged to the Corporate Debtor, while the remaining machines were owned by a third party operating the plant. Consequently, while the book value of the Plant & Machinery as on 31.03.2020 stood at Rs. 1,41,57,121/-, the registered valuer assessed its fair value at only Rs. 26,68,000/-. On the basis of the said valuation, the Forensic Auditor concluded that the Plant & Machinery stood overstated in the books to the extent