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 liable for fraudulent transactions. The directors were directed to compensate creditors of the Corporate Debtor for losses due to fraudulent actions, with a specified amount plus interest to be paid within six weeks. The appeal was dismissed, confirming the directors' personal liability for fraudulent activities as per Section 66(1) of the I&B Code, 2016.

---

---

Issues Involved:
1. Fraudulent Transactions
2. Personal Liability of Directors
3. Applicability of Section 66 of the I&B Code, 2016
4. Limitation Period for Fraudulent Transactions
5. Distinction between Fraudulent Trading and Wrongful Trading

Detailed 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.

---