2026 (2) TMI 135 - AT - IBC

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 ... Fraudulent trading - Wrongful Trading - Resolution Professional - Regulation 35A of the CIRP Regulations, 2016 - Validity of the Adjudicating Authority's finding that transactions between the corporate debtor and the appellant constituted fraudulent trading u/s 66(1) and the consequent direction for contribution to the corporate debtor's assets - HELD THAT:- To qualify under Section 66(1) of IBC, 2016, the transaction should be knowingly transacted with a dishonest intention to defraud the creditors of the CD, while under Section 66(2) of IBC, 2016, which deals with ‘Wrongful Trading’, Liability can only be fixed upon only ‘Director’ or ‘Partner’ and for a transaction to qualify under this Sub Section it must be shown that the parties to such transaction knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvency proceedings and they did not take due diligence with a view to minimizing the potential loss to the creditors of the company. Thus both these sub sections of Section 66 of the Code takes care of two different situations and also the scope of sub - section (1) and (2) of Section 66 of IBC, 2016 is different. It is a crystal clear case where false entries have been made in the financial statements of the CD in collaboration with the Appellant and in this background the financial accounts of the appellant and CD, which appears to have been made subsequently may not be given much weightage and appears to be only paper work. No need to say that the facts alleged and evidence produced must satisfy the ingredients of this section and the facts from which the intention to defraud may be deduced must be proved to satisfy of the conscience of the ‘Tribunal’ certainly on the scale of ‘preponderance of probability’. However, no strait jacket formula can be formulated to fit in all factual situations and it will depend on the facts and evidence placed in each case to asses as to whether the particular transaction may be treated as fraudulent or not. On identical facts with regard to the same CD and same Directors, in the case of Baiju Trading and investment Pvt. Ltd. vs. Mr. Arihant Nenawati (liquidator for RRPL & Ors.) the orders passed by the NCLT under Section 66 of the IBC, was upheld by this Appellate Tribunal vide order dated 29.03.2023, and similarly in case of Tridhaatu Kriti Developers LLP vs. Arihant Nenawati (liquidator for RRPL & Ors.) [2023 (1) TMI 455 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI] against the same Respondents the order of NCLT passed under Section 66 of the Code was affirmed and the order of this Appellate Tribunal was challenged before the Hon’ble Supreme Court in TRIDHAATU KIRTI DEVELOPERS LLP [2023 (2) TMI 1301 - SC ORDER] and the order of this Appellate Tribunal was upheld by the Hon’ble Supreme Court. Therefore, keeping in view all the facts and circumstances of the case and for the reasons given herein before we are not having any iota of doubt in our mind that simply by making fraudulent entries in the accounts books and statements the receivables to the appellant to an amount of Rs. 98,96,82,438/- has been wiped out and in this way the genuine creditors of the CD has been defrauded without any actual sale of gold. Thus, we do not find any good ground on the basis of which any interference in the impugned judgment may be made. Resultantly, the appeal lacks merit and is hereby dismissed. 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.