Fraudulent diversion of corporate assets under insolvency law can justify contribution orders to restore value for creditors.

Section 66 of the Insolvency and Bankruptcy Code was invoked on material showing non-accounting and diversion of corporate debtor assets, including fixed assets, inventories, receivables, cash balances and loans and advances, together with unavailable books, debtor records and bank documents. The Tribunal accepted the resolution professional's independent assessment and found the management's explanations for the missing and suppressed records not credible. On that basis, it treated the conduct as intended to defeat creditor claims and directed the respondents to contribute the diverted value jointly and severally for the benefit of creditors.

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Issues: Whether the application under Section 66 of the Insolvency and Bankruptcy Code, 2016 was maintainable and whether the respondents were liable to contribute the amount found to have been diverted from the corporate debtor's assets.

Analysis: The materials placed by the resolution professional, including the transaction audit report, indicated that the corporate debtor's fixed assets, inventories, trade receivables, cash balances and loans and advances had not been properly accounted for and that books of account, debtor details and bank records were not made available. The respondents' explanation based on fire, closure of the unit, possession by the secured creditor and tax attachment did not displace the inference that the explanations offered were not credible. On the record, the conduct of the suspended directors and the state of the accounts supported the conclusion that the business had been run in a manner intended to defeat creditor claims. The Tribunal found that the resolution professional had applied independent mind before invoking Section 66.

Conclusion: The application was allowed. The respondents were directed to jointly and/or severally pay Rs. 72.45 crores on account of payments made to related parties from the corporate debtor's account, failing which the resolution professional was permitted to proceed against them.

Ratio Decidendi: Where the record and audit material disclose diversion or suppression of corporate assets and the explanation offered by the management is not credible, the Tribunal may treat the transactions as fraudulent and direct contribution to restore value for creditors under Section 66 of the Insolvency and Bankruptcy Code, 2016.

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