Transaction Audit Report Alone Insufficient To Prove Undervalued Transaction: NCLT Hyderabad

The Hyderabad Bench of the National Company Law Tribunal (NCLT) has found that a Transaction Audit Report, without the underlying records, was insufficient to establish that an Audi vehicle, an asset part of a CIRP, was sold at an undervalue.

The tribunal also found that the vehicle's book value could not, by itself, establish its fair market value.

A bench comprising Judicial Member Rajeev Bhardwaj and Technical Member Sanjay Puri made the observation while dismissing the liquidator's application concerning preferential and undervalued transactions involving DQ Entertainment (International) Limited.

“In the absence of such material, this Tribunal is unable to independently verify the findings recorded in the Transaction Audit Report or determine whether the consideration received for the vehicle was significantly less than its actual value to constitute an undervalued transaction under Section 45(2)(b) of the Code,” the tribunal observed.

The dispute concerned an Audi vehicle having a net block value of ₹19.76 lakh in the company's books. On July 31, 2020, the vehicle was adjusted against an advance of ₹14.50 lakh involving one of the company's directors. The Transaction Auditor had identified the transaction as undervalued.

The respondents maintained that the company was facing financial difficulties when the transaction took place. According to them, three prospective purchasers had been approached, and the director offered the highest price of ₹14.50 lakh. The sale consideration was then adjusted against the advance payable to him.

The tribunal first found that the transaction fell within the relevant look-back period. Since the director was a related party, the two-year period under the Insolvency and Bankruptcy Code, 2016 (IBC) applied. The insolvency commencement date was June 17, 2022, placing the July 31, 2020 transaction within that period.

The tribunal then examined whether the liquidator had established that the vehicle was sold for consideration significantly less than its actual value. Under the IBC, a transaction can be treated as undervalued if an asset is transferred for significantly less than its value and the transaction was not in the ordinary course of business.

The liquidator relied on the vehicle's ₹19.76 lakh net block value and the ₹14.50 lakh sale consideration. The tribunal, however, found that no independent valuation report or other cogent material had been produced to show that the Audi's actual value on the date of the transaction was significantly higher than ₹14.50 lakh.

It also noted that the liquidator had relied on the Transaction Audit Report, but the underlying material referred to in the report had not been placed on record. This included valuation material, sale documents, quotations, correspondence, books of account, ledger extracts, vouchers, and other contemporaneous records.

In the absence of those records, the tribunal said it could not independently verify the auditor's findings or determine whether the consideration received was significantly less than the vehicle's actual value.

The tribunal consequently held that the Audi transaction could not be treated as an undervalued transaction under the IBC and dismissed the liquidator's application.