Directors' sale of major gold inventory on unsecured credit during insolvency held fraudulent trading u/s66; contribution upheld.

The dominant issue was whether the directors' conduct attracted liability for fraudulent or wrongful trading under s.66 IBC, warranting an order to contribute to the corporate debtor's assets. The AT held that while a transactional audit report is not conclusive, it is a valuable evidentiary basis when founded on audited records and cannot be ignored; here, the directors failed to establish that the impugned transactions were in the ordinary course. Given the timing during pending insolvency, the abnormal sale of substantial gold inventory on unsecured credit, and the apparent design to keep assets beyond creditors' reach, the transactions were found to be knowingly executed with dishonest intent to defraud creditors, constituting fraudulent trading. The appeal was dismissed and the contribution direction was upheld.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether the identified gold-sale transactions, executed on 100% credit during pendency of insolvency proceedings, constituted fraudulent trading within the meaning of Section 66(1) of the Code, warranting contribution to the corporate debtor's assets.

(ii) Whether the directors, in authorising and executing the impugned transactions without safeguards, were liable for wrongful trading under Section 66(2) of the Code on the basis that they knew or ought to have known insolvency was unavoidable and failed to exercise due diligence to minimise loss to creditors.

(iii) Whether the transaction audit report and audited financial/ledger material on record provided sufficient evidentiary basis to sustain a finding of Section 66 violations, notwithstanding the contention that such reports are not conclusive evidence of fraud.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i) & (ii): Fraudulent trading and wrongful trading under Section 66 in relation to the impugned credit sales

Legal framework: The Court examined Section 66 as containing two distinct, self-contained regimes: Section 66(1) addressing carrying on business with intent to defraud creditors or for a fraudulent purpose (liability of any persons knowingly party), and Section 66(2) addressing wrongful trading (liability of directors/partners where, before the insolvency commencement date, they knew/ought to have known there was no reasonable prospect of avoiding CIRP and did not exercise due diligence to minimise creditor loss). The Court applied the requirement that the pleaded facts and evidence must satisfy the statutory ingredients on a preponderance of probabilities.

Interpretation and reasoning: The Court treated the timeline and undisputed transaction pattern as central. It found that the impugned sales were executed while insolvency proceedings were pending, making initiation of CIRP "clearly in sight" of the directors. The Court emphasised the commercial irrationality and risk profile of the transactions: (a) a very large volume/value of gold was sold on 100% credit, (b) without security or recovery assurance, (c) with minimal actual recoveries over a prolonged period, and (d) an additional credit sale was made despite substantial earlier outstanding amounts. The Court also relied on the nature of the gold bullion trade as operating on thin margins and generally on spot/cash basis, making large unsecured credit sales "quite unusual".

On these facts, the Court inferred fraudulent intent from the timing, quantum, concentration of sales with a single counterparty, absence of safeguards, and continued exposure despite non-recovery, concluding that the transactions were designed to move valuable inventory out of the corporate debtor's reach and thereby prejudice creditors. The Court held that the directors failed to justify these transactions as being in the ordinary course of business and that they were executed "fraudulently" to keep the inventory of gold out of creditors' reach.

Conclusions: The Court upheld the finding that the transactions with the identified counterparties were rightly labelled as fraudulent under Section 66 and that the directors were correctly directed to contribute specified sums to the corporate debtor's estate with interest, finding no illegality in the impugned order and dismissing the appeal.

Issue (iii): Evidentiary sufficiency of transaction audit report and financial/ledger records for Section 66 findings

Legal framework: The Court accepted that a transaction audit report is not conclusive evidence of fraud by itself, but considered whether it could be relied upon when grounded in audited financial records and corroborated by contemporaneous ledgers and undisputed timelines.

Interpretation and reasoning: The Court held that, although not conclusive, the transaction audit report was a valuable piece of evidence, particularly because it was based on audited financial statements and ledger narration showing (i) the corporate debtor's sales revenue for the relevant year, (ii) the extraordinary concentration of sales with a single party within a short span, (iii) the minuscule receipts as against massive receivables, and (iv) the subsequent additional credit sale shortly before CIRP commencement. The Court noted that the financial position and figures relied on by the auditor were not displaced on record; instead, the directors attempted justification on "ordinary course" grounds, which the Court rejected as unpersuasive given the objective commercial features of the transactions.

Conclusions: The Court found that the audit report, read with the audited financials and ledgers and the undisputed transaction timeline, provided sufficient evidentiary foundation to support the Section 66 conclusions, and it declined to brush aside the report in the circumstances of the case.

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