Suspicious cash withdrawals and related-party payments during insolvency: s.66 burden shifts to directors; contribution liability upheld

In proceedings under s.66 IBC concerning alleged fraudulent/wrongful trading, the AT held that where the suspended directors failed to cooperate and withheld records and asset possession, the RP was justified in relying on bank statements showing substantial cash withdrawals and related-party payments and in commissioning a transaction audit. The AT further held that once the RP established prima facie suspicious transactions, the evidentiary burden shifted to the directors to prove the dealings were in the ordinary course of business; having failed to produce reliable documentary justification, they could not avoid liability under s.66. The appeal challenging the order fastening contribution liability was dismissed, and the impugned directions were sustained.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether, on the material available (primarily bank statements and the transaction audit report, in the context of non-cooperation by the suspended management), the Adjudicating Authority correctly held that the impugned cash withdrawals and identified payments were fraudulent transactions attracting liability to contribute under Section 66 of the Code.

(ii) Whether the Adjudicating Authority failed to apply independent judicial mind by treating itself as not sitting "in appeal" over the Resolution Professional's opinion; and whether such approach vitiated the Section 66 determination.

(iii) Whether the appellant could avoid Section 66 liability on the plea of non-involvement in day-to-day management / non-signatory status / alleged resignation, despite absence of reliable supporting documents and the surrounding circumstances of the transactions.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Applicability of Section 66 to the impugned withdrawals and payments on the evidence available

Legal framework (as discussed by the Court): The Court examined Section 66 of the Code and treated Section 66(1) as addressing "fraudulent trading" requiring intent to defraud and knowing participation, and Section 66(2) as addressing "wrongful trading" with distinct ingredients. The Court also accepted that the facts and evidence must satisfy Section 66 requirements and that intent may be deduced on a preponderance of probability based on the record.

Interpretation and reasoning: The Court found that the Resolution Professional, faced with sustained non-cooperation and non-supply of books/vouchers, relied on available bank statements across multiple accounts, commissioned a transaction audit, and then applied for relief under Section 66. The Court held this process justified because large cash withdrawals are not ordinary corporate practice, and no alternate records were made available. The transaction auditor's process provided opportunities to explain the withdrawals and transfers; explanations given (labour/site/mess expenses) remained unsupported by any documentary material. The Court treated the timing, magnitude, pattern, and lack of documentation as indicative that the withdrawals and transfers were not in the ordinary course and were designed to place funds beyond creditor reach.

Conclusions: The Court upheld the finding that the substantial cash withdrawals aggregating to Rs. 10.54 crores and the identified related-party/director-linked payments (including an excess refund to an entity with which the appellant was connected, and other payments lacking documentation) were correctly held fraudulent under Section 66, warranting contribution directions as ordered.

Issue (ii): Whether the Adjudicating Authority wrongly abdicated its duty by stating it does not sit "in appeal" over the Resolution Professional's opinion

Legal framework (as discussed by the Court): The Court accepted that a Section 66 application requires adjudicatory scrutiny of whether the business/transactions were carried on with intent to defraud or for fraudulent purpose, but emphasised that the impugned order must be read as a whole.

Interpretation and reasoning: The Court rejected the appellant's challenge that the Adjudicating Authority merely rubber-stamped the Resolution Professional's view. It held that, read in full, the Adjudicating Authority recorded that the Resolution Professional's opinion was formed after an independent exercise, based on individually identified transactions and supporting annexures, and after opportunities were afforded to respond. The Court treated the "not sitting in appeal" remark as meaning that the Adjudicating Authority was assessing compliance with law and parameters, not re-performing the Resolution Professional's investigative function, while still undertaking sufficient evaluation of the material.

Conclusions: The Court found no perversity or non-application of mind in the Adjudicating Authority's approach and held that the Section 66 finding was supported by the material considered; hence no interference was warranted on this ground.

Issue (iii): Whether the appellant's asserted non-involvement / non-signatory status / resignation negated Section 66 liability

Legal framework (as discussed by the Court): The Court proceeded on the basis that once the Resolution Professional discharges the initial burden using available evidence, the onus shifts to directors/suspended management to justify the transactions as ordinary-course, particularly where the absence of records is attributable to their non-cooperation.

Interpretation and reasoning: The Court found the appellant's resignation plea unreliable because the appellant gave inconsistent years for resignation and produced no documentary support. The Court also noted the appellant's own admissions suggesting continued association (including involvement in company matters and litigation). Given the company's financial distress during the relevant period and the absence of vouchers/books to support the stated purpose of large cash withdrawals, the Court held that the appellant could not rely on lack of documentation which the suspended management failed to provide. The vague explanations were held insufficient to rebut the inference of fraudulent diversion drawn from the bank records and audit findings.

Conclusions: The Court held the appellant failed to provide reliable material to justify the impugned transactions as ordinary-course or to credibly establish disassociation, and therefore could not avoid liability arising from the fraudulent transactions found under Section 66. The appeal was dismissed and the contribution directions with interest were left undisturbed.

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