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Issues: (i) Whether the appellants were liable to contribute to the corporate debtor's assets under Section 66 of the Insolvency and Bankruptcy Code, 2016 for fraudulent trading and diversion of sale proceeds; (ii) Whether the Adjudicating Authority could directly order investigation by the Serious Fraud Investigation Office.
Issue (i): Whether the appellants were liable to contribute to the corporate debtor's assets under Section 66 of the Insolvency and Bankruptcy Code, 2016 for fraudulent trading and diversion of sale proceeds.
Analysis: The record showed that the corporate debtor's subsidiary shareholding was sold, yet the corresponding investment continued to be reflected in the balance sheets for years. The sale proceeds were not brought into the corporate debtor's accounts and were instead stated to have been routed through an arrangement with another entity. The Suspended Directors did not give a satisfactory or documentary explanation for the non-disclosure and diversion of the consideration. In proceedings under Section 66, the applicant must first place adequate material to establish fraudulent intent or wrongful conduct, after which the burden shifts to the persons concerned to explain the transactions. On the materials available, the conduct was found to amount to concealment and diversion of assets to the detriment of creditors.
Conclusion: The direction to contribute the sale proceeds to the assets of the corporate debtor was upheld and the finding of fraudulent trading was sustained against the appellants.
Issue (ii): Whether the Adjudicating Authority could directly order investigation by the Serious Fraud Investigation Office.
Analysis: The statutory scheme for corporate investigations vests the discretion to order investigation through the Serious Fraud Investigation Office in the Central Government under the Companies Act, 2013. The Adjudicating Authority may follow the procedure contemplated by law, but it cannot straightaway direct SFIO investigation on its own. The impugned direction therefore exceeded the Tribunal's competence.
Conclusion: The SFIO direction was set aside and the matter was referred to the Central Government for consideration in accordance with law.
Final Conclusion: The finding of fraudulent diversion and the monetary contribution order were maintained, while the direct SFIO investigation direction was modified to conform to the statutory procedure.
Ratio Decidendi: In a Section 66 proceeding, fraudulent trading may be inferred from cogent surrounding circumstances showing concealment and diversion of corporate assets, but a direct SFIO investigation order cannot be made by the Adjudicating Authority where the Companies Act vests that discretion in the Central Government.
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