Tribunal orders repayment of over Rs. 1 billion in fraudulent transaction case

The tribunal in CP 2556/2019 allowed IA 1266/2020, directing Respondent No.1 (R1) to repay Rs. 1,19,08,05,762 to the Corporate Debtor's account. R1, along with Respondent Nos. 2 and 3, was found liable for fraudulent transactions and wrongful trading under Section 66 of the Insolvency and Bankruptcy Code. The case emphasized issues of non-cooperation by directors, misrepresentation of ledger accounts, and the classification of related parties, ultimately holding the respondents accountable for their fraudulent actions.

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Issues Involved:
1. Fraudulent Transactions and Wrongful Trading
2. Non-cooperation by Directors and Statutory Auditor
3. Classification of Related Party
4. Misrepresentation of Ledger Accounts
5. Liability under Section 66 of the Insolvency and Bankruptcy Code, 2016

Issue-wise Detailed Analysis:

1. Fraudulent Transactions and Wrongful Trading:
The Resolution Professional (RP) analyzed the books of accounts of the Corporate Debtor and Respondent No.1 (R1) and concluded that transactions amounting to Rs. 158,07,56,469 were fraudulent and provided undue advantage to R1. The RP argued that these transactions fall under Section 66 of the Insolvency and Bankruptcy Code (IBC), indicating fraudulent or wrongful trading with the intent to defraud creditors. The tribunal found that R1, along with Respondent Nos. 2 and 3 (R2 and R3), manipulated ledger entries to show sales to the Corporate Debtor, which was contrary to the usual business practice of the Corporate Debtor, a gold refinery. This manipulation was done to reduce the credit balance owed by R1 to the Corporate Debtor.

2. Non-cooperation by Directors and Statutory Auditor:
The RP highlighted the non-cooperation from the promoters and directors of the Corporate Debtor, who failed to provide relevant information and documents. Despite repeated reminders, the directors provided evasive replies and incomplete information, hindering the CIRP process. The RP also pointed out that the statutory auditor, Respondent No.4 (R4), did not provide the audited financial statements for the period ending 31 March 2019 and resigned abruptly during the CIRP period. The tribunal noted that R4 claimed he could not conduct the audit due to lack of access to the books of accounts and the seizure of documents by the Directorate of Revenue Intelligence (DRI).

3. Classification of Related Party:
The RP argued that R1 should be classified as a related party under Section 5(24)(m)(iii) of the IBC, as R3, a suspended director of the Corporate Debtor, was a key managerial person of R1 during the period when the alleged transactions occurred. R1 and R3 denied this classification, stating that R3 was not holding any position in the Corporate Debtor during his tenure at R1. The tribunal found that R1, R2, and R3 were involved in fraudulent activities and were related parties due to their interconnected roles and transactions.

4. Misrepresentation of Ledger Accounts:
The RP provided ledger accounts showing Rs. 158,07,56,469 as payable by R1 to the Corporate Debtor, based on data from the DRI. R1 and R2 & R3 provided different ledger accounts, showing a reduced amount of Rs. 31,01,83,022. The tribunal found that R1, R2, and R3 manipulated ledger entries post-DRI raid to show sales to the Corporate Debtor, which was not the usual business practice. This fraudulent manipulation aimed to reduce the credit balance owed by R1. The tribunal concluded that R1, R2, and R3 defrauded the Corporate Debtor by making illegal entries in the ledger accounts.

5. Liability under Section 66 of the Insolvency and Bankruptcy Code, 2016:
The tribunal held that the fraudulent transactions by R1, R2, and R3 were covered under Section 66 of the IBC. Section 66(1) imposes liability on any person who knowingly carries on business with intent to defraud creditors. The tribunal found that R1, as an outsider, and R2 and R3, as insiders, were liable for fraudulent trading. The tribunal also referred to relevant judgments by the Hon'ble Supreme Court and NCLAT, which supported the liability of directors and third parties involved in fraudulent activities. The tribunal directed R1 to return Rs. 1,19,08,05,762 (including the admitted dues of Rs. 31.01 crore) to the Corporate Debtor's account within seven days.

Conclusion:
The tribunal allowed IA 1266/2020 in CP 2556/2019, directing R1 to repay Rs. 1,19,08,05,762 to the Corporate Debtor's account, finding R1, R2, and R3 liable for fraudulent transactions and wrongful trading under Section 66 of the IBC. The case highlighted issues of non-cooperation by directors, misrepresentation of ledger accounts, and classification of related parties, ultimately holding the respondents accountable for their fraudulent actions.

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