Appeal dismissed: failure to prove fraudulent transaction under Section 66 IBC over Rs 2.65 crore write-off

NCLAT (PB) dismissed the appeal, upholding the Tribunal's finding that the appellant failed to establish a fraudulent transaction under section 66 IBC arising from a purported write-off of an advance/EMD. The court noted absence of particulars-no specific date of the alleged Rs. 2.65 crore payment and no evidence of how the vendor was pursued-so the Tribunal's conclusion required no interference. The appeal was therefore dismissed.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the write-off of an advance/EMD by the suspended board falls within the scope of Section 66(1) of the Insolvency and Bankruptcy Code as a fraudulent trading/act for fraudulent purpose.

2. Whether a look-back period is required or applicable for the purposes of Section 66 of the Code.

3. Whether it is necessary, in every instance of alleged siphoning/fraudulent transaction, to trace funds continuously "from inception to end" to establish liability under Section 66(1).

4. Whether the alleged recipients/participants in the transaction can be held liable under Section 66(1) absent direct evidence of benefit, considering available documentary and oral admissions by the suspended directors and the record before the Tribunal.

5. Whether the findings of the Tribunal that (a) the transaction was fraudulent, (b) Respondents were liable to contribute the written-off amount with interest, and (c) the Resolution Professional could pursue separate recovery from the vendor, are vitiated by errors of fact or law warranting appellate interference.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Applicability of Section 66(1) to write-off of advance/EMD

Legal framework: Section 66(1) permits the IRP/RP to apply to the Adjudicating Authority for avoiding transactions of the corporate debtor if such transactions were carried out with intent to defraud creditors or for a fraudulent purpose in carrying on the business.

Precedent Treatment: The Tribunal relied on authorities holding that a single instance of conduct by a director can constitute a fraudulent act and that it is not necessary to establish fund tracing continuously for every instance of siphoning.

Interpretation and reasoning: The Tribunal found that an advance of Rs. 2.65 crores paid for a Bandra property was written off and no coherent explanation or documentary particulars (including description of property or MOU) were produced by the suspended directors or other respondents. The Tribunal considered the absence of particulars, the vagueness of replies, and the failure to demonstrate benefit as indicative of fraudulent purpose. The appellate bench noted admissions by the suspended directors that no agreement to sell was executed, no MOU was placed on record despite pleading, no recovery proceedings were instituted, and material details (exact date, property description) were not furnished. Those admitted facts and omissions supported the Tribunal's conclusion that the write-off constituted an act within s.66(1).

Ratio vs. Obiter: Ratio - a unilateral write-off of an advance without corroborative documentation, without steps for recovery, and without credible explanation can constitute an act for fraudulent purpose under Section 66(1). Obiter - observations on the conduct of the vendor/promoter shifting abroad are contextual but not determinative of the ratio.

Conclusions: The Court found no error in the Tribunal's application of Section 66(1) to the write-off and upheld the finding that the transaction fell within the scope of Section 66(1).

Issue 2 - Requirement of a look-back period for Section 66

Legal framework: Section 66 contains no express statutory look-back period; other provisions of the Code (e.g., preferences or undervalued transactions) sometimes prescribe time limits, but Section 66 is framed to address fraudulent acts broadly.

Precedent Treatment: The Tribunal correctly observed that no specific look-back period is prescribed for Section 66 and relied on that absence in rejecting a defence premised on temporal remoteness.

Interpretation and reasoning: The Tribunal rejected the contention that the age of the transaction or the promoter's relocation abroad insulated respondents from liability, holding that temporal distance alone is not a bar where the transaction is demonstrably fraudulent and unexplained.

Ratio vs. Obiter: Ratio - absence of a statutory look-back period for Section 66 means temporal remoteness is not, by itself, a defence to an application under that section. Obiter - the relevance of a respondent's physical absence (e.g., relocation) is fact-specific.

Conclusions: The Court endorsed the Tribunal's view that no look-back period is prescribed for Section 66 and that the defence of temporal remoteness was not tenable on the facts.

Issue 3 - Necessity of continuous fund tracing to establish fraudulent siphoning under Section 66

Legal framework: Proof of fraudulent trading may be established by evidentiary inference from the circumstances of the transaction and the conduct of directors/management; direct tracing of funds is helpful but not invariably necessary.

Precedent Treatment: The Tribunal relied on precedents holding it is not necessary to establish each instance of fund siphoning by tracing funds from origin to destination; a single culpable act may suffice to show fraud.

Interpretation and reasoning: The Tribunal concluded that the combination of an unexplained write-off, lack of documentation, admission of absence of agreement, and absence of recovery proceedings permitted an inference of fraudulent purpose without continuous fund tracing. The appellate bench accepted that reasoning in view of the admitted record deficiencies.

Ratio vs. Obiter: Ratio - continuous tracing of funds is not an absolute prerequisite to establish a fraudulent act under Section 66; circumstantial evidence and admissions may suffice. Obiter - desirability of forensic and documentary proof remains situationally important.

Conclusions: The Court upheld the Tribunal's conclusion that the RP was not obliged to demonstrate continuous fund tracing to establish liability under Section 66 on the present facts.

Issue 4 - Liability of participants/respondents absent direct proof of benefit

Legal framework: Liability under Section 66(1) may extend to persons who have carried out acts for a fraudulent purpose in relation to the corporate debtor's business; establishing personal benefit is a relevant but not invariably necessary component if fraudulent purpose is otherwise established.

Precedent Treatment: The Tribunal relied on authorities allowing imposition of liability where conduct of directors indicates fraud, even where each recipient's personal benefit is not exhaustively quantified.

Interpretation and reasoning: The Tribunal rejected respondents' contention that they derived no benefit, observing that respondents failed to produce coherent details (e.g., description of property, MOU, recovery attempts) and that the forensic auditor's findings, along with admissions by the suspended directors, supported the inference that the write-off was a fraudulent act by the suspended board. The appellate bench emphasized that counsel for appellants conceded absence of sale agreement and failure to prosecute recovery, undermining the defence of lack of benefit.

Ratio vs. Obiter: Ratio - where the circumstances and admissions demonstrate a fraudulent write-off, respondents may be made liable under Section 66(1) notwithstanding absence of precise proof of direct benefit; lack of credible explanation by those responsible is decisive. Obiter - quantification and demonstration of benefit remain factors to be considered in appropriate cases.

Conclusions: The Court affirmed the Tribunal's imposition of liability on the respondents to contribute the written-off amount with interest, on the ground that respondents failed to rebut the inference of fraudulent purpose.

Issue 5 - Validity of Tribunal's relief (contribution with interest and liberty to pursue vendor)

Legal framework: Section 66 remedies include avoidance and restoration measures; the Tribunal has discretion to determine appropriate relief, including recovery orders and directions for contribution, along with interest appropriate to restore the corporate debtor's position.

Precedent Treatment: The Tribunal applied precedent supporting the RP's ability to seek restitution and contribution and to pursue concurrent proceedings against third parties.

Interpretation and reasoning: The Tribunal ordered respondents to make contribution of Rs. 2.65 crores with interest at 15% p.a. from date of payment until refund to the corporate debtor, while expressly permitting the RP to initiate separate recovery proceedings against the vendor. The appellate bench found no error in the exercise of discretion given the established fraudulent nature of the write-off and the absence of credible defence by respondents.

Ratio vs. Obiter: Ratio - the Tribunal's relief to secure restitution plus interest and to leave open recovery against the vendor is a permissible exercise of powers under the Code where fraudulent transactions are established. Obiter - choice of interest rate and modalities may be fact-sensitive.

Conclusions: The Court found no infirmity in the Tribunal's relief, upheld the contribution order with interest, and dismissed the appeal as devoid of merit.

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