2025 (12) TMI 322 - AT - IBC

Appeal Dismissed; Directors Held Liable for Fraudulent Transactions Under Section 66 IBC, Extra Evidence Barred by Order 41 Rule 27

Anish Lawrence and Shebin Sasthamparambil Versus Mr. Renahan Vamakesan, Ernakulam

NCLAT (Chennai) dismissed the appeal and affirmed the NCLT's order holding the appellants liable for fraudulent transactions under Section 66 IBC. The ... Fraudulent transactions - Appellants did not furnish any evidence to the contrary that these amounts were used for the business of the Corporate Debtor - whether the Appellants herein indulged in fraudulent transactions and were liable to pay the amount as claimed in the application? - HELD THAT:- It is seen that the learned NCLT has gone into the details of the application and transactions, and its then only has made a detailed analysis of the facts which were presented before it on each of the items, i.e., sale of the car, withdrawals made from the bank accounts of the Corporate Debtor, without being supportedly corresponding vouchers and opening of new Bank accounts and diverting the receipts of the Corporate Debtor and has rightly come to a reasoned conclusion about each item. The submissions of the Appellants have also been recorded in the impugned order. Nowhere, the Appellants, during the course of proceedings of the learned NCLT, appears to have requested for time to produce documents, which they have produced for first time before this Appellate Tribunal. Further, no explanation whatsoever has been shown to have been offered by the appellants. Nowhere the Appellants have been shown to have prayed before NCLT for to have an access to the documents to prove their innocence. Besides making a lame excuse that they were not given an opportunity to defend themselves by the learned NCLT, they have not been able to point out a single instance where they were denied a fair chance of representation. Further, there is no explanation forthcoming from the Appellants on the observations of the learned NCLT regarding the acts of removing the files and the attempt to break open the lock of the Corporate Debtor’s office. In the instant company appeal, the new documents that were sought to be produced for the first time for appreciation were the documents which were available during the proceedings before the learned NCLT, and yet they were not filed by the Appellants. When these documents were not filed before the learned Adjudicating Authority, in that eventuality, this Appellate Tribunal cannot entertain the same documents filed as evidence for deciding the Company Appeal as they don’t fall under any of the exceptions culled out under Order 41 Rule 27 of CPC, the principles of which would appreciate as per sub section 2 of Section 424 of the Companies Act, 2013. In the matter of Jayesh Sanghrajka v. Divine Investments, relied by the appellants, the ratio of the same can’t be applied to this case as under Section 66 of the IBC, the onus is on the applicant to establish that the business of the Corporate Debtor was not conducted with an intent to defraud creditors or for fraudulent purposes - In the instant case, the Liquidator has found certain established fraudulent transactions and the fraudulent intent of the Appellants were proved behind these transactions. The Appellants did not avail of the opportunity given by the Liquidator to produce the evidence in his support, which they now seek to produce - Thus, it has to be held that the learned NCLT has rightly allowed the application, holding that the evidence presented did substantiated the determination of fraudulent transaction as envisaged under Section 66 of the IBC. The impugned order passed by the learned NCLT does not call for any interference by this Appellate Tribunal - Appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the impugned transactions identified by the liquidator (cash withdrawals, diversions from bank accounts, opening of new accounts in similar name, and sale of vehicle) constituted 'fraudulent transactions' attracting liability under Section 66 of the Insolvency and Bankruptcy Code, 2016. 1.2 Whether suspended directors are entitled, during the pendency of CIRP, to carry on business through a partnership in the same line and operate bank accounts in a name identical or deceptively similar to that of the corporate debtor, without such conduct amounting to diversion of receivables or fraudulent trading. 1.3 Whether the liquidator was required in law to conduct a forensic audit before seeking relief under Section 66 of the Insolvency and Bankruptcy Code, 2016, and whether absence of such an audit vitiated the finding of fraudulent transactions. 1.4 Whether the impugned order of the Adjudicating Authority suffered from violation of principles of natural justice, including alleged denial of adequate opportunity, non-consideration of defence, and being a non-speaking order. 1.5 Whether additional documents/evidence sought to be produced for the first time before the Appellate Tribunal could be admitted under the principles of Order XLI Rule 27 CPC, read with Section 424 of the Companies Act, 2013. 1.6 Whether the precedent relied upon by the appellants regarding Section 66 (Jayesh Sanghrajka v. Divine Investments) governed the present case and mandated a different outcome. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Fraudulent transactions under Section 66 IBC and permissibility of parallel business/identical accounts during CIRP (a) Legal framework as discussed 2.1 The application before the Adjudicating Authority was filed under Section 66(1) and Section 60(5) of the Insolvency and Bankruptcy Code, 2016 read with Rule 11 of the NCLT Rules, 2016, alleging that the business of the corporate debtor was conducted with intent to defraud creditors and that certain transactions were fraudulent. 2.2 The Tribunal referred to the concept of PUFE (Preferential, Undervalued, Fraudulent and Extortionate) transactions and recognised that the Code and Regulations cast the duty on the resolution professional/liquidator to form an opinion on existence of such transactions. (b) Interpretation and reasoning 2.3 The liquidator, after verifying accounts, auditor's report, bank statements and customer information, identified five categories of suspect transactions: (i) diversion of funds from corporate debtor's bank account without explanation or vouchers; (ii) substantial cash withdrawals without justification; (iii) collections and withdrawals through an Axis Bank account opened in the name 'Axiomata Elevators' as a partnership of the appellants; (iv) similar collections and withdrawals through a People's Urban Cooperative Bank account in the same name and partnership; and (v) proceeds of sale of a car of the corporate debtor not reflected in its accounts and misrepresented as scrap sale. 2.4 The Adjudicating Authority had found that the appellants opened unauthorised bank accounts after commencement of CIRP in names identical to that of the corporate debtor, using the PAN of the corporate debtor and false address, collected money from existing customers of the corporate debtor, withdrew the amounts in cash, and closed the accounts. These facts were traced through the 26AS statement and other materials. 2.5 The Appellate Tribunal noted that the appellants failed, both before the liquidator and before the Adjudicating Authority, to furnish vouchers, ledgers, or supporting documents demonstrating that the questioned payments and withdrawals were for the bona fide business of the corporate debtor, and that no explanation was given as to use of such funds for the corporate debtor's purposes. 2.6 The appellants' contention that they were entitled to run a partnership business in the same line during CIRP and that such activity could not affect the corporate debtor's business was rejected de facto: the material showed that the new accounts were deliberately used to receive payments intended for the corporate debtor from its existing customers, with TDS being credited under the PAN of the corporate debtor, demonstrating that such receipts belonged to the corporate debtor and were diverted. 2.7 The Tribunal further treated the dubious sale of the vehicle, non-disclosure of sale proceeds, misrepresentation to the former RP that the vehicle had been scrapped, removal of files and attempt to break open the lock of the corporate debtor's office as conduct corroborating a fraudulent intent. 2.8 It was emphasised that the appellants had been given opportunity by the liquidator (including an email request for information and documents) and yet chose not to cooperate, not to provide any clarificatory material, and later filed only a brief reply before the Adjudicating Authority without supporting documents or satisfactory explanation. (c) Conclusions 2.9 The Tribunal affirmed the finding that the appellants had carried out transactions with intent to defraud the creditors, by diverting receivables and depleting assets of the corporate debtor through unexplained withdrawals, unauthorised bank accounts in an identical name, and misappropriation of sale proceeds of the vehicle. 2.10 The conduct of the appellants in opening and operating partnership bank accounts in a name identical to the corporate debtor, using its PAN and receiving payments from its existing customers during CIRP, was held to constitute fraudulent transactions under Section 66 and not a permissible independent business activity. 2.11 The decision of the Adjudicating Authority directing the appellants to pay the quantified amount to the liquidation estate, jointly and severally, was upheld. Issue 3: Necessity of forensic audit for proceedings under Section 66 IBC (a) Legal framework as discussed 3.1 The appellants relied on an NCLT order (Jayesh Sanghrajka v. Divine Investments) to contend that forensic audit is necessary to determine fraudulent transactions under Section 66. 3.2 The Tribunal examined the scheme of the Code and Regulations which impose a duty on the resolution professional/liquidator to form an opinion on existence of PUFE transactions based on available material. (b) Interpretation and reasoning 3.3 The Tribunal held that there is no mandatory requirement under the Insolvency and Bankruptcy Code or the Regulations to appoint a forensic auditor in order to invoke Section 66. 3.4 It accepted the respondent's submission that when the liquidator, on the basis of documentary evidence (bank statements, auditor's report, customer confirmations, tax statements) is able to clearly determine the existence of fraudulent transactions, recourse to forensic audit is not a statutory precondition. 3.5 The Tribunal distinguished the precedent relied on by the appellants as not laying down a general rule requiring forensic audit in every Section 66 proceeding and as inapplicable on its facts. (c) Conclusions 3.6 The absence of a forensic audit did not vitiate the application under Section 66 nor the findings of fraudulent transactions; the liquidator's determination based on existing materials was legally sufficient. Issue 4: Alleged violation of principles of natural justice and non-speaking order (a) Legal framework as discussed 4.1 The appellants claimed violation of natural justice and relied on the requirement of reasoned orders as enunciated in judicial precedent (including reference to SN Mukherjee v. Union of India) to contend that the impugned order was non-speaking and that adequate opportunity was not granted. (b) Interpretation and reasoning 4.2 The Tribunal perused the impugned order and noted that the Adjudicating Authority had gone into details of each set of transactions (sale of car, withdrawals, opening of new accounts and diversion of receipts) and recorded the submissions of the appellants as well as findings on each head. 4.3 It found no instance where the appellants had sought additional time before the Adjudicating Authority to produce documents which they later sought to rely on in appeal, nor any request for access to records of the corporate debtor to substantiate their defence. 4.4 The Tribunal also observed that the appellants did not explain or contest the serious factual observations of the Adjudicating Authority regarding removal of files and attempt to break open the office lock, nor challenge those findings in their pleadings in appeal. 4.5 It concluded that the appellants' plea of lack of opportunity was a bare assertion not supported by the record; they had chosen not to respond substantively to the liquidator's prior requests or to file comprehensive material before the Adjudicating Authority. (c) Conclusions 4.6 The impugned order was held to be a reasoned and speaking order and not in violation of principles of natural justice. 4.7 No miscarriage of justice or denial of fair opportunity was established; consequently, there was no ground to set aside or remit the matter on this basis. Issue 5: Admission of additional evidence at appellate stage (Order XLI Rule 27 CPC read with Section 424 Companies Act) (a) Legal framework as discussed 5.1 The Tribunal expressly referred to Order XLI Rule 27 CPC as applicable by virtue of Section 424(2) of the Companies Act, 2013. 5.2 It recited the three recognised circumstances under which additional evidence may be admitted at the appellate stage: (i) where the trial court refused to admit evidence which ought to have been admitted; (ii) where the evidence was not available despite exercise of due diligence; and (iii) where the appellate court requires such evidence to enable it to pronounce judgment or for other substantial cause. 5.3 The Tribunal relied on the decision in Union of India v. Ibrahim Uddin & Another, setting out the restrictions on admitting additional evidence and emphasising that: - appellate courts ordinarily should not travel beyond the record; - parties are not entitled, as of right, to adduce new evidence in appeal; - additional evidence is not to be admitted to fill lacunae or provide a fresh opportunity where a party failed to discharge its onus at trial. (b) Interpretation and reasoning 5.4 The documents sought to be introduced by the appellants in appeal (relating, inter alia, to vehicle sale, ledgers, bank extracts, financial statements, partnership documents) were found to be documents that were available to the appellants during the proceedings before the Adjudicating Authority. 5.5 The Tribunal held that there was no case that the Adjudicating Authority had refused to admit such documents, nor any satisfactory explanation that these documents could not be produced despite due diligence; rather, the appellants had simply not filed them earlier. 5.6 It further found that the appeal could be decided on the basis of the existing record and that the Tribunal did not require additional evidence to pronounce judgment. The attempt to bring in new documents was seen as an effort to cure earlier omissions and lacunae, which is impermissible under Order XLI Rule 27. (c) Conclusions 5.7 The conditions under Order XLI Rule 27 CPC were not satisfied; the additional documents sought to be produced by the appellants in appeal were not admissible. 5.8 The Appellate Tribunal declined to entertain such documents and proceeded on the record that was before the Adjudicating Authority. Issue 6: Applicability of precedent on Section 66 (Jayesh Sanghrajka v. Divine Investments) (a) Legal framework as discussed 6.1 The appellants invoked an NCLT decision to argue that a forensic audit is necessary and that the liquidator bears a particular mode of proving fraudulent transactions under Section 66. (b) Interpretation and reasoning 6.2 The Tribunal held that the ratio of the relied-upon decision could not be applied to the present case. Under Section 66, the onus is on the applicant to establish that the affairs of the corporate debtor were conducted with intent to defraud creditors or for fraudulent purposes, but the Code does not prescribe forensic audit as a mandatory means of proof. 6.3 It found that, in the present matter, the liquidator had, on the basis of contemporaneous documentary evidence and investigation, already established fraudulent transactions and the fraudulent intent of the appellants; the appellants had declined earlier opportunities to rebut or explain. (c) Conclusions 6.4 The precedent cited by the appellants did not alter the legal position or assist them on the facts; it did not compel remand or negate the Section 66 findings. 6.5 The Tribunal upheld the Adjudicating Authority's application of Section 66 and dismissed the appeal as devoid of merit.