Resolution Professional wins Section 66 IBC fraudulent transaction case worth Rs. 127 crore against controlled entity

The NCLAT dismissed an appeal challenging an NCLT order under Section 66 IBC, 2016 regarding fraudulent transactions. The Resolution Professional had properly complied with Regulation 35A before filing the application. The case involved reduction of outstanding amounts from Rs. 158 Cr. to Rs. 31 Cr. through alleged fraudulent entries, causing loss to creditors. The appellant company and corporate debtor were controlled by the same person, making the appellant not a third party. The NCLAT upheld the NCLT's order directing recovery of fraudulent transactions as contribution to corporate debtor's assets, citing similar precedents and SC approval in Phoenix Arc case.

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Issues Involved:
1. Validity of proceedings under Section 66 of the Insolvency and Bankruptcy Code (IBC), 2016 against the appellant.
2. Allegations of fraudulent transactions between the corporate debtor and the appellant.
3. Compliance with Regulation 35A of the CIRP Regulations by the Resolution Professional.
4. Determination of the amount due from the appellant to the corporate debtor.

Issue-wise Detailed Analysis:

1. Validity of Proceedings under Section 66 of IBC, 2016 Against the Appellant:
The appellant argued that proceedings under Section 66 of IBC, 2016 are not maintainable against them as the Resolution Professional (RP) did not provide clear opinion or determination as required under Regulation 35A. The appellant also cited the judgment of Hon'ble Supreme Court in Gluckrich Capital Pvt. Ltd. Vs. The State of West Bengal & Ors. to support its contention that the remedy against third parties is not available under Section 66 of IBC. However, the Tribunal noted that Section 66(1) of IBC allows the Adjudicating Authority to pass an order directing "any person" who was knowingly party to fraudulent transactions to make contributions to the assets of the corporate debtor. The Tribunal distinguished the present case from the cited judgments, noting that the appellant and the corporate debtor were under the control of the same person, Mr. Manoj Punamia, and thus could not be considered third parties.

2. Allegations of Fraudulent Transactions:
The RP submitted that the business of the corporate debtor involved trading in gold bullion and that the appellant had several transactions with the corporate debtor between 01.04.2018 to 20.05.2019. The RP argued that the transactions were fraudulent, as evidenced by the sudden change in the nature of transactions post the DRI raid in May 2019, which reduced the outstanding amount from Rs. 158 crores to Rs. 31 crores. The RP also highlighted that no physical inventory was found during the DRI raid or when the RP took over. The Tribunal found that the appellant had not challenged the outstanding amount of Rs. 158 crores as of 20.05.2019 and that the reduction in liability was achieved through fraudulent entries.

3. Compliance with Regulation 35A of CIRP Regulations by the Resolution Professional:
The appellant contended that the RP did not comply with Regulation 35A, which requires a clear determination of fraudulent transactions. The RP countered this by stating that the application under Section 66 was filed after analyzing records seized by the DRI and informing the Committee of Creditors (CoC) about the lack of matching assets/inventory. The Tribunal found that the RP had complied with Regulation 35A by conducting a thorough investigation and making a clear determination of fraudulent activities.

4. Determination of the Amount Due from the Appellant to the Corporate Debtor:
The RP submitted that the total liability owed by the appellant to the corporate debtor was Rs. 1,58,07,56,469/- as on 20.05.2019, which was reduced to Rs. 31,01,83,022/- through fraudulent entries. The Tribunal noted that no books of accounts were made available for the period post the DRI raid and that the statutory auditor had also stated that he had no access to the books of accounts. The Tribunal concluded that the reduction in liability was achieved through fraudulent entries, causing a loss to the creditors of the corporate debtor.

Conclusion:
The Tribunal dismissed the appeal, finding no reason to interfere with the order of the Adjudicating Authority. The Tribunal held that the proceedings under Section 66 of IBC, 2016 were valid against the appellant, the transactions between the appellant and the corporate debtor were fraudulent, the RP had complied with Regulation 35A, and the outstanding amount due was correctly determined. All pending Interlocutory Applications were closed, and no order as to costs was made.

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