2026 (3) TMI 158 - AT - IBC

Fraudulent trading requires cogent evidence; ordinary-course managerial withdrawals largely not recoverable, limited refunds ordered as applied.

The article addresses whether managerial remuneration withdrawals by suspended management constitute fraudulent or wrongful trading under insolvency law. ... Fraudulent trading - wrongful trading - intent to defraud creditors - ordinary course of business - preferential transaction Fraudulent trading - intent to defraud creditors - ordinary course of business - Managerial remuneration paid to the suspended management for FY 2019-2020 falls within Section 66 of the IBC as fraudulent or wrongful trading - HELD THAT: - The Tribunal held that Section 66 requires proof of intention to defraud by cogent and unimpeachable evidence beyond reasonable doubt; mere suspicion or circumstantial allegations are insufficient. The record (IBBI Claims Portal entries, Transaction Audit Report and ledger entries) showed the RP had admitted managerial remuneration claims for FY 2020-2021 and contemporaneous ledgers demonstrated payments and dues for FY 2019-2020. There was no pleading or proof of falsification of records or that the managerial services had not been rendered. The dates of actual withdrawals for the major payment were March 31, 2021 - substantially prior to commencement of CIRP - undermining any inference of last minute siphoning. In the absence of specific, cogent evidence linking the withdrawals to an intent to defraud creditors, the payments for FY 2019-2020 could not be characterised as fraudulent or wrongful trading under Section 66; payments made in the ordinary course for legitimate services do not attract Section 66. [Paras 9, 10, 11, 12] The characterization of the FY 2019-2020 managerial remuneration as fraudulent or wrongful trading under Section 66 is not sustained. Wrongful trading - intent to defraud creditors - Whether a specific cheque withdrawal dated 30.06.2022 (cleared after CIRP commencement) forming part of the managerial remuneration requires restitution - HELD THAT: - The Tribunal found that the withdrawal by cheque on 30.06.2022 was cleared after commencement of CIRP and that the appellant must have had knowledge that insolvency was imminent or inevitable. Unlike the other payments which were demonstrably earlier and supported by ledgers, this particular withdrawal cannot be ruled out as made without awareness of the impending insolvency and therefore did not satisfy the threshold of bona fide payment in the ordinary course. Consequently, this sum was held not to be protected and deserves restoration to the corporate debtor. [Paras 11, 12] The sum withdrawn by cheque on 30.06.2022 must be refunded to the corporate debtor. Fraudulent trading - ordinary course of business - Whether routing of receipts through a sister concern establishes fraudulent intent under Section 66 - HELD THAT: - The Tribunal observed that routing revenue or receipts through a sister concern is a common business practice and, by itself, does not establish fraudulent intent. To treat such routing as evidence of siphoning or fraud requires specific pleading and proof which were absent. Therefore, the mere fact of receipt from a sister concern did not substantiate an allegation of fraudulent trading. [Paras 13] Routing of receipts through a sister concern does not by itself establish fraudulent intent. Preferential transaction - fraudulent trading - Whether failure to deposit statutory dues (such as TDS) converts managerial remuneration payments into fraudulent or preferential transactions - HELD THAT: - The Tribunal held that inability to meet tax or statutory obligations during financial distress is not determinative of a dishonest design to defraud creditors. Payments for managerial services and non payment of statutory dues belong to different categories; treating non deposit of statutory dues as conclusive evidence of fraudulent intent would be impermissible. The threshold for Section 66 demands proof of deliberate intent to cause wrongful loss to creditors, which was not established. [Paras 14] Non payment of statutory dues does not, without more, convert managerial remuneration payments into fraudulent or preferential transactions. Preferential transaction - fraudulent trading - Whether the Adjudicating Authority erred by conflating preferential transactions with fraudulent/wrongful trading - HELD THAT: - The Tribunal noted that preferential transactions and fraudulent/wrongful trading are distinct legal concepts within the IBC, each requiring different material facts and standards of proof. The impugned order's interchangeable use of the terms was improper; specific material facts must be pleaded and proved separately for Section 43 (preferential transactions) and Section 66 (fraudulent/wrongful trading). [Paras 15] The Adjudicating Authority erred in conflating preferential transaction analysis with fraudulent trading; the two concepts must be treated separately. Final Conclusion: The impugned order holding the questioned withdrawals as vitiated by fraud under Section 66 is set aside in relation to the managerial remuneration payments for FY 2019-2020, except that the cheque withdrawal dated 30.06.2022 is directed to be restored to the corporate debtor and the appellants have agreed to restore the other admitted post CIRP amount; the appeal is disposed of accordingly. Issues: (i) Whether payments drawn by the suspended management towards managerial remuneration for FY 2019-2020 constitute wrongful or fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code, 2016; (ii) If so, whether the amounts withdrawn ought to be refunded to the corporate debtor.Issue (i): Whether payments drawn by the suspended management towards managerial remuneration for FY 2019-2020 constitute wrongful or fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code, 2016.Analysis: The Tribunal examined documentary evidence including ledger entries, claim admissions on the IBBI claims portal, the Transaction Audit Report and bank statements. It applied the high evidentiary threshold applicable to Section 66, requiring cogent proof of intent to defraud beyond suspicion or presumption. The records showed admitted remuneration claims for the appellants, corresponding ledger entries and withdrawals dated substantially before the commencement of CIRP. There was no pleading or evidence of falsification of records or conclusive proof linking the withdrawals to an intent to defraud creditors. Proximity of withdrawal dates to CIRP was factually disproved for the principal withdrawals and routing through a sister concern was found to be a standard business practice absent specific proof of siphoning.Conclusion: The Tribunal concluded that the withdrawals of managerial remuneration for FY 2019-2020, except as noted separately, do not satisfy the requirements of Section 66 and cannot be characterised as wrongful or fraudulent trading. This conclusion is in favour of the appellants.Issue (ii): Whether the amounts withdrawn ought to be refunded to the corporate debtor.Analysis: The Tribunal distinguished between the different withdrawal dates and transactions. While most withdrawals were supported by ledger entries and occurred well before CIRP commencement, one cheque for Rs. 2,00,000 was drawn on 30.06.2022 and was cleared after CIRP admission, and the appellants conceded recovery of Rs. 2.78 lakhs relating to a post-CIRP transaction. Given the timing and the appellants' knowledge of imminent insolvency as to the 30.06.2022 cheque and the admitted ineligibility of the Rs. 2.78 lakhs, the Tribunal found that those specific amounts should be restored to the corporate debtor.Conclusion: The Tribunal directed restoration of Rs. 2,00,000 (cheque dated 30.06.2022) and Rs. 2.78 lakhs (amount agreed to be restored) to the corporate debtor. This disposition is partly against the appellants for the specified sums and partly in their favour for the remainder.Final Conclusion: The impugned order holding the managerial remuneration withdrawals for FY 2019-2020 to be vitiated by fraud under Section 66 is set aside, except that specified sums (Rs. 2,00,000 and Rs. 2.78 lakhs) are to be restored to the corporate debtor; the appeal is disposed of accordingly.Ratio Decidendi: Section 66 of the Insolvency and Bankruptcy Code, 2016 can be invoked only on cogent and unimpeachable evidence demonstrating deliberate intent to defraud creditors; payments made in the ordinary course with admitted claims and supporting ledger entries, and occurring prior to CIRP commencement, do not attract Section 66 absent specific proof of fraudulent intent.