2022 (12) TMI 498 - AT - Insolvency and Bankruptcy

Directors Held Liable for Fraudulent Transactions, Must Compensate Creditors

The National Company Law Appellate Tribunal in Chennai upheld the decision of the National Company Law Tribunal in Kochi, holding directors personally ... Fraudulent trading/transactions - wilful default - stand of the Appellants is that the Adjudicating Authority, (National Company Law Tribunal, Kochi Bench, Kerala) had failed to distinguish between Section 66 (1) of the I&B Code, 2016 for Fraudulent Trading and Section 66 (2) of the I&B Code, 2016 for Wrongful Trading, while holding the Directors, jointly or severally, liable without reference to any particular Sub-Section of Section 66 or the Conditions to be satisfied, while invoking each particular Sub-Section - HELD THAT:- From the contents of the Forensic Auditor’s Report, the Status Report filed by the 1st Respondent / the Resolution Professional, and also on the basis of facts and circumstances of the instant Case, it is latently and patently evident that Appellants / Respondents had indulged in carrying on the Business of the Corporate Debtor in a dishonest and fraudulent manner, with a view to Defraud the Creditors and because of the Fraudulent Transactions in the subject matter, in issue,, the Appellants / Respondents are responsible in a Joint and Several Manner, to pay a sum of Rs.2,94,77,269/- only with an interest at 12% per annum, in respect of the Resolution Professional’s Account of the Corporate Debtor, of course, within Six Weeks, from the date of passing of this Judgment. The conclusion arrived at by the Adjudicating Authority, (National Company Law Tribunal, Kochi Bench, Kerala), holding that the Appellants / Respondents are required to make good the Loss, caused to the Creditors of the Corporate Debtor, because of the fact that the Transactions, mentioned in the Forensic Auditor’s Report, as detailed in this Judgment are without any simmering doubt, partake the character of Fraudulent Transaction and, as such, the Appellants / Respondents, are personally liable to pay for Knowingly and Dishonestly, committing this malevolent acts / misdeeds, are free from any Legal Flaw. Appeal dismissed. Issues Involved:1. Fraudulent Transactions2. Personal Liability of Directors3. Applicability of Section 66 of the I&B Code, 20164. Limitation Period for Fraudulent Transactions5. Distinction between Fraudulent Trading and Wrongful TradingDetailed Analysis:1. Fraudulent Transactions:The judgment revolves around the fraudulent transactions committed by the suspended Managing Director and other directors of the Corporate Debtor. The forensic audit report highlighted several fraudulent activities:- Sale of Mortgaged Land: The Managing Director entered into agreements to sell mortgaged land without the bank's consent, misrepresenting the facts to the bank and deceiving the buyer by collecting the full sale consideration.- Diversion of Funds: An amount of Rs. 1,73,45,000 was accounted as an advance for land purchase without any evidence of such payments, indicating a suspected diversion of funds.- Share Purchase Agreements: Two separate agreements to sell 100% shares of the company were found to be 'void ab initio' and executed with the intention to deceive the Corporate Debtor and the buyers.2. Personal Liability of Directors:The Adjudicating Authority held the directors personally liable for the fraudulent transactions. The directors were directed to pay Rs. 2,94,77,269 with 12% interest per annum to the Resolution Professional's account. This decision was based on the finding that the transactions were carried out with an intent to defraud the creditors.3. Applicability of Section 66 of the I&B Code, 2016:The appellants argued that the Adjudicating Authority failed to distinguish between Section 66(1) (Fraudulent Trading) and Section 66(2) (Wrongful Trading) of the I&B Code, 2016. The court reiterated that Section 66(1) deals with fraudulent trading, which requires proof of dishonest intention to defraud creditors, while Section 66(2) deals with wrongful trading, where directors continue trading despite knowing that the company is insolvent.4. Limitation Period for Fraudulent Transactions:The appellants contended that the transactions, which occurred nine to sixteen years before the insolvency commencement date, should not have been considered. However, the court clarified that Section 66 does not specify a two-year time limit for examining fraudulent transactions. The application was filed within the permissible time limit of 135 days as per Regulation 35(3) of the IBBI Regulations, 2016.5. Distinction between Fraudulent Trading and Wrongful Trading:The court emphasized the difference between fraudulent trading and wrongful trading. Fraudulent trading involves carrying on business with intent to defraud creditors, while wrongful trading involves directors continuing business despite knowing there is no reasonable prospect of avoiding insolvency. The court found that the directors had acted dishonestly and fraudulently, thus fulfilling the criteria for fraudulent trading under Section 66(1).Conclusion:The National Company Law Appellate Tribunal, Chennai, upheld the decision of the National Company Law Tribunal, Kochi Bench, holding the directors personally liable for the fraudulent transactions. The directors were directed to compensate the creditors of the Corporate Debtor for the losses caused due to their fraudulent actions. The appeal was dismissed, and the directors were ordered to pay the specified amount with interest within six weeks.