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AI Drafter ✕ Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
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Issues: (i) Whether the ex-directors/promoters carried on the corporate debtor's business with intent to defraud creditors or for a fraudulent purpose by the shareholding arrangements and continued control over the company's affairs; (ii) Whether the write-offs of receivables and operation of bank accounts after resignation constituted fraudulent trading under the Insolvency and Bankruptcy Code, 2016; (iii) Whether the cash settlements and debt write-offs relating to the identified debtors were fraudulent transactions warranting contribution to the assets of the corporate debtor.
Issue (i): Whether the ex-directors/promoters carried on the corporate debtor's business with intent to defraud creditors or for a fraudulent purpose by the shareholding arrangements and continued control over the company's affairs?
Analysis: Section 66 of the Insolvency and Bankruptcy Code, 2016 empowers the Adjudicating Authority to direct contribution where business of the corporate debtor is carried on with intent to defraud creditors or for any fraudulent purpose. The shareholding transfers to and from a company controlled by the same persons were found unexplained, and the respondents failed to establish a bona fide basis for these round-trip transactions. The evidence also showed continued financial control despite resignation from directorship.
Conclusion: The issue was answered against the respondents and in favour of the applicant; the shareholding transactions were treated as falling within Section 66 of the Insolvency and Bankruptcy Code, 2016.
Issue (ii): Whether the write-offs of receivables and operation of bank accounts after resignation constituted fraudulent trading under the Insolvency and Bankruptcy Code, 2016?
Analysis: The Tribunal relied on the pattern of bad-debt write-offs across successive years and the bank material showing cheques and authorisations linked to the ex-directors even after their resignation. It found that the respondents remained involved in the financial operations of the corporate debtor and that the resignation did not sever their control in substance. On that basis, the write-offs and account operations were viewed as part of a fraudulent design to prejudice creditors.
Conclusion: The issue was decided against the respondents and in favour of the applicant; the write-offs and post-resignation bank operations were held to be fraudulent.
Issue (iii): Whether the cash settlements and debt write-offs relating to the identified debtors were fraudulent transactions warranting contribution to the assets of the corporate debtor?
Analysis: The Tribunal found the alleged full and final settlement of substantial receivables for a small cash amount unexplained and suspicious, and it treated the corresponding debt write-offs as part of the same fraudulent course of conduct. It held that the respondents concerned were liable because the transactions were carried out while the ex-directors still exercised financial control over the corporate debtor.
Conclusion: The issue was answered against the respondents and in favour of the applicant; the cash settlements and related write-offs were held to be fraudulent transactions.
Final Conclusion: The application was allowed, and the persons found responsible were directed to contribute specified sums to the assets of the corporate debtor, with prosecution under the Code also directed to be initiated.
Ratio Decidendi: Where persons in control of a corporate debtor continue to exercise financial authority in substance and engage in unexplained share transfers, write-offs, or settlements that prejudice creditors, such conduct may be treated as fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code, 2016, warranting contribution to the corporate debtor's assets.
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