Fraudulent trading and wrongful trading under IBC: tribunal affirms contribution where falsified accounts erased receivables and defrauded creditors

To satisfy fraudulent trading, transactions must be knowingly made with a dishonest intention to defraud creditors; wrongful trading liability, by contrast, attaches only to directors or partners who knew or ought to have known there was no reasonable prospect of avoiding insolvency and failed to minimise creditor loss. The tribunal found falsified entries in the corporate debtor's and appellant's accounts that effectively erased receivables, allowing a finding of fraudulent trading on the balance of probabilities and a direction for contribution to the debtor's assets. Prior appellate and Supreme Court affirmations on identical facts were relied upon; the appeal was dismissed.

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Issues: (i) Whether the transactions between the corporate debtor and the appellant amounting to Rs. 98,96,82,438/- are fraudulent within the meaning of Section 66 of the Insolvency and Bankruptcy Code, 2016 and whether an order directing refund of that amount to the corporate debtor is justified.

Analysis: The matter involves determination under Section 66(1) (fraudulent trading) and Section 66(2) (wrongful trading) read with the Code and relevant regulations, including Regulation 35A of the CIRP Regulations, 2016. Evidence considered includes financial accounts seized by the Department of Revenue Intelligence showing receivables of approx. Rs. 98.97 crores, unaudited balance sheets filed by suspended directors that subsequently reverse those receivables, absence of corroborative purchase orders or physical inventory, deleted sales entries and unilateral journal adjustments in the corporate debtor's ledgers, and findings in related customs and regulatory proceedings indicating use of the corporate debtor as a front. The Resolution Professional lacked full cooperation from the erstwhile management and relied on material obtained from DRI and internal ledger entries to form a prima facie view of fraudulent preference. Precedents and authority cited distinguish avoidance applications under Chapter III from fraudulent/wrongful trading proceedings under Chapter VI and establish that Section 66(1) may be invoked against any person who was knowingly party to carrying on the business to defraud creditors. The available documentary record, ledger discrepancies, absence of inventory and inconsistent financial statements are treated on the scale of preponderance of probability to infer dishonest transactions and resultant benefit to the appellant, sustaining liability under Section 66(1).

Conclusion: Issue (i) is answered against the appellant and in favour of the respondent; the transactions totaling Rs. 98,96,82,438/- are held to be fraudulent under Section 66 of the Code and the direction to refund that amount to the corporate debtor is upheld.

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