Fraudulent accounting entries and common control justified action to recover assets under insolvency law.

Section 66 of the Insolvency and Bankruptcy Code can be applied where evidence shows a person was knowingly involved in fraudulent conduct to reduce the corporate debtor's recoverable dues. The application was supported by DRI search material, defective books of account, absence of matching inventory, and unexplained accounting entries that sharply reduced liabilities after the search. The Resolution Professional examined the seized material, reported it to the Committee of Creditors, and then filed the application, satisfying Regulation 35A. On those facts, the appellant was not treated as an unrelated third party, and the direction to contribute to the assets of the corporate debtor was upheld.

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Issues: Whether the order directing the appellant to contribute to the assets of the corporate debtor under Section 66 of the Insolvency and Bankruptcy Code, 2016 was justified, including on the ground that the appellant was a third party and that the Resolution Professional had complied with Regulation 35A.

Analysis: The application under Section 66 was founded on material gathered from the DRI search, the state of the books of account, the absence of corresponding inventory, and the unexplained reduction of the outstanding liability from about Rs. 158 crores to about Rs. 31 crores through alleged sales entries after the search. The record showed that the Resolution Professional examined the seized material, reported the position to the Committee of Creditors, and thereafter moved the application, satisfying the procedural requirement under Regulation 35A. Section 66 empowers the Adjudicating Authority to proceed against any person who was knowingly party to carrying on the business of the corporate debtor with intent to defraud creditors or for any fraudulent purpose. On the facts, the appellant could not be treated as an unrelated third party because the materials indicated common control and sham accounting entries used to reduce the debt due to the corporate debtor.

Conclusion: The challenge to the order under Section 66 failed and the direction against the appellant was upheld.

Ratio Decidendi: Where the evidence shows that accounting entries were used to fraudulently reduce the corporate debtor's recoverable dues and a person was knowingly involved in that conduct, Section 66 can be invoked against that person to require contribution to the assets of the corporate debtor.

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