Directors Liable for Fraudulent Transactions in Corporate Debtor's Financial Statement

The Appellate Tribunal upheld the Adjudicating Authority's decision, dismissing the appeal by the Directors of the Corporate Debtor. The Tribunal found the entries of Rs. 21.37 crore in the audited financial statement for 2018 to be fraudulent transactions. The Directors were held liable for the loss under the Insolvency and Bankruptcy Code, as they failed to provide necessary details and evidence to refute the allegations of fraud. The Tribunal concluded that the assets were fictitious and created with the intent to defraud creditors, affirming the original order for the Directors to pay the amount for distribution under the Code.

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Issues Involved:
1. Whether the entries of Rs. 21.37 crore in the audited financial statement for 2018 were fraudulent transactions.
2. Whether the appellants (Directors of the Corporate Debtor) were liable for the loss of Rs. 21.37 crore.

Issue-Wise Detailed Analysis:

1. Fraudulent Transactions:
The Liquidator filed an application under Section 66 of the Insolvency and Bankruptcy Code, 2016 (I&B Code, 2016), seeking to declare the entries of Rs. 21.37 crore in the audited financial statement for 2018 as fraudulent transactions. The Adjudicating Authority agreed with the Liquidator, declaring the entries as fraudulent and holding the appellants liable to pay this amount for distribution under Section 53 of the I&B Code, 2016. The Appellants challenged this order, arguing that the impugned order was passed without substantial findings and that the basic requirements of Section 66 were not proven. They contended that the drastic fall in turnover and destruction of assets due to floods were not considered. The Liquidator, however, provided evidence that many branches were not affected by floods and that the appellants failed to provide item-wise details, location, and asset registers for verification. The Appellate Tribunal found that the appellants could not furnish details of assets, locations, or asset registers for fixed assets valuing Rs. 5.33 crore, leading to the conclusion that such assets were fictitious.

2. Liability for Loss:
The appellants argued that they had no intention to defraud any creditor and that the business was affected by natural calamities. They also claimed that they made efforts to revive the business and settle dues. The Liquidator countered that the appellants entered into fraudulent transactions with the intent to defraud creditors and failed to exercise due diligence. The Liquidator highlighted that the appellants could not provide details of fixed assets, inventory, trade receivables, and loans and advances, leading to the conclusion that these were fictitious. The Appellate Tribunal noted that the appellants did not cooperate with the Liquidator and failed to provide necessary details, supporting the conclusion that the assets were fictitious and created to defraud creditors.

Conclusion:
The Appellate Tribunal upheld the Adjudicating Authority's order, finding no error in the impugned order dated 13.07.2021. The appeal was dismissed, and the appellants were held liable for the loss of Rs. 21.37 crore, as the assets were found to be fictitious and created with the intent to defraud creditors.

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