Fraudulent trading claims over round-tripping and sham purchases: directors ordered to contribute u/s66(1); appeal dismissed

Managing directors of the corporate debtor challenged an order directing contribution to the corporate debtor's assets under s.66(1) IBC for alleged fraudulent trading involving round-tripping and sham purchases. The NCLAT held that the absence of invoices, delivery/transportation proofs, and other contemporaneous records, despite large payments and subsequent receipt of funds back from suppliers, supported an inference of non-genuine transactions and intent to defraud creditors; circumstantial evidence can establish liability of those managing the business. The plea of denial of natural justice failed because notice, opportunity to respond, and hearing were granted, and the allegations and forensic findings were unrebutted. The impugned order was affirmed and the appeal dismissed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether the direction to the suspended Managing Directors to contribute Rs. 231.64 crores (with interest as directed) to the assets of the Corporate Debtor was sustainable under Section 66(1) of the Insolvency and Bankruptcy Code, 2016, on the findings that the Corporate Debtor's business was carried on with intent to defraud creditors through "round-tripping"/accommodation LC transactions with Magnum and absence of supporting purchase/transport records.

(ii) Whether liability under Section 66(1) required proof of direct personal benefit and/or specific transaction-wise attribution of conduct to the suspended Managing Directors, and whether, on the facts, the Court could infer "knowledge" and responsibility from their role in day-to-day management and the documentary red flags.

(iii) Whether the proceedings and decision suffered from violation of principles of natural justice due to alleged vagueness of allegations, reliance on a forensic audit report containing disclaimers, alleged limited sampling, and alleged denial of meaningful opportunity/document inspection.

(iv) Whether the defences of (a) substantial repayment by Magnum, (b) alleged bank discounting/charges of about Rs. 115 crores in LC transactions, and (c) the contention that LC issuance by multiple banks implies genuineness, displaced the finding of fraud and the quantified loss of Rs. 231.64 crores.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Sustainability of contribution direction under Section 66(1) on findings of fraudulent/round-tripping transactions

Legal framework (as discussed by the Court): The Court treated Section 66(1) as empowering the Adjudicating Authority to direct "persons who were knowingly parties" to the carrying on of the Corporate Debtor's business "with intent to defraud creditors" or "for any fraudulent purpose" to make contributions to the assets of the Corporate Debtor.

Interpretation and reasoning: The Court accepted the core factual basis relied on by the Adjudicating Authority and the forensic audit: (a) outflow of Rs. 1643.33 crores to Magnum (through LCs and direct payments) with near-absence of corresponding purchases in the books (only Rs. 6.52 crores reflected), and (b) absence of underlying purchase documentation and transport documentation evidencing genuine movement of goods. The Court held that such a vast mismatch, coupled with missing foundational trade documents, raised clear red flags and amounted to "round tripping"/accommodation transactions, not transactions in the ordinary course of business. The Court also accepted that eight sample LC cases showed absence of transport documentation and other anomalies, and treated this as supportive of the broader inference of non-genuine purchases where the books themselves did not evidence purchases commensurate with payments.

Conclusion: The Court concluded that the ingredients of Section 66(1) were met and found no error in ordering contribution of Rs. 231.64 crores (with the interest direction as made), rejecting the appeal on merits.

Issue (ii): Need for direct benefit and specificity/attribution; inference of "knowledge" and responsibility of suspended Managing Directors

Legal framework (as discussed by the Court): The Court expressly held that direct personal benefit is not a prerequisite for liability under Section 66(1); the focus is the fraudulent manner of carrying on business and the resultant harm to creditors/assets, and persons in management can be made liable if they were knowingly parties to such conduct.

Interpretation and reasoning: The Court inferred knowledge and responsibility from the Appellants' admitted position as Managing Directors managing day-to-day affairs and from the magnitude of the transactions (including that the Magnum payments formed a very large proportion of such flagged dealings). The Court treated the Appellants' inability to explain or substantiate the transactions-despite pointed queries and despite the scale involved-as unconvincing. It further relied on the absence of documentary support from the Appellants even at the appellate stage to rebut the findings derived from the books and audit material. The Court also held that Section 66 is not dependent on the use of the term "related party"; the forensic auditor's use of "interested party" did not undermine applicability of Section 66(1), though such characterization could at best support inference of intent.

Conclusion: The Court rejected the challenge that liability could not be fixed without proof of personal benefit or without specific attribution beyond the established management role and surrounding documentary circumstances, and upheld fastening of contribution liability on the Managing Directors.

Issue (iii): Alleged violation of natural justice due to vagueness, forensic-audit disclaimers, sampling, and document inspection

Legal framework (as applied by the Court): The Court examined whether the Appellants had opportunity to reply and be heard and whether the decision relied on material that could fairly found the conclusions.

Interpretation and reasoning: The Court held that there was no violation of natural justice because the Appellants filed replies and were duly heard. It found the application contained specific averments against them as Managing Directors and concluded that failure to rebut allegations with documents was attributable to the Appellants. On the forensic audit "disclaimer" argument, the Court held that such disclaimers are common in forensic audits given investigative constraints and incomplete records, and the disclaimer did not negate the apparent fraud in Magnum transactions which, in the Court's view, was evident from available documents and the Corporate Debtor's books (especially the purchase mismatch). On inspection, the Court treated the Appellants' post-inspection grievance as untenable, noting that after inspection they did not pursue further inspection requests; it also accepted that the forensic auditor had sought explanation and prepared the report after giving opportunity of representation.

Conclusion: The Court conclusively decided that the process was fair, the Appellants had sufficient opportunity, and the reliance on the forensic audit and books did not vitiate the order.

Issue (iv): Effect of repayments, alleged LC bank charges/discounting, and the "bank-issued LC implies genuineness" defence on fraud finding and quantum (Rs. 231.64 crores)

Legal framework (as discussed by the Court): The Court assessed whether these factual defences displaced the finding that business was carried on with fraudulent intent and whether they affected loss computation.

Interpretation and reasoning: The Court rejected the "ordinary course"/banking-channel defence, holding there is no presumption that LC-backed transactions cannot be fraudulent; a fraudulent transaction may be executed even through valid LCs. It also rejected the "each penny repaid" narrative on facts, finding that while Magnum repaid Rs. 1454.62 crores, this was less than the amount paid (Rs. 1643.33 crores) and interest was also payable (Rs. 42.93 crores), leaving a deficit; after considering the non-genuine purchases reflected in the books, the resulting deficit upheld by the Adjudicating Authority was Rs. 231.64 crores. On the claimed Rs. 115 crores discounting/bank charges, the Court found the contention misleading/unsupported and internally contradictory, and further held such charges (even if assumed) were a matter between Magnum and its bank and did not justify reducing the Corporate Debtor's claim or negate fraud. On "low sample size", the Court accepted reliance on eight sample LC cases showing transport-document anomalies and treated the primary basis as the overall lack of genuine purchases/documentation reflected in the books, noting the Appellants produced nothing to contradict the audit findings.

Conclusion: The Court held these defences did not rebut fraudulent intent or the quantified loss, and affirmed the contribution direction; the appeal was dismissed.

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