Fraudulent trading through removal of hypothecated machinery supports unreduced contribution to restore the corporate debtor's depleted assets.
Fraudulent trading may be established under the Insolvency and Bankruptcy Code where cumulative documentary and circumstantial evidence shows that secured, high-value machinery was removed and replaced without creditor consent by materially lower-value equipment. Contemporaneous financing and hypothecation records, valuation reports, physical signs of removal, unverified asset identifiers, delayed possession and absent purchase records may support fraudulent purpose on a preponderance of probabilities, without direct proof of intent or a series of transactions. Earlier SARFAESI possession proceedings do not create estoppel or exclude jurisdiction. The contribution remedy restores the corporate debtor's depleted asset position; unsupported depreciation and substitute-equipment value assertions do not require reduction of the quantified contribution.
Issues: (i) Whether removal and replacement of creditors' hypothecated machinery with substantially lower-value equipment constituted fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code, 2016, justifying contribution to the corporate debtor's assets; (ii) Whether the contribution amount required reduction for depreciation of the financed machinery and the realisable value of the machinery found at the premises.
Issue (i): Whether removal and replacement of creditors' hypothecated machinery with substantially lower-value equipment constituted fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code, 2016, justifying contribution to the corporate debtor's assets.
Analysis: Section 66 permits contribution where the corporate debtor's business is carried on with intent to defraud creditors or for a fraudulent purpose. The financed machinery, its invoices, and hypothecation were supported by contemporaneous documents. No contemporaneous evidence established creditor consent to substitute the secured machinery or accounted for acquisition of the alleged replacement machinery. Independent valuation reports identified the machinery at site as lower-value rotogravure machinery; physical indications showed that machinery had earlier been removed; and missing or mismatched identification details prevented verification against the financed assets. The delayed handing over of possession, absence of supporting purchase records, and lack of approval for substitution cumulatively supported an inference of fraudulent purpose on a preponderance of probabilities. Earlier possession proceedings under the SARFAESI Act did not create estoppel, and the dispute over precise technical identity did not oust jurisdiction under Section 66. Fraudulent trading need not be established by a series of transactions or direct proof of intent where compelling documentary and circumstantial evidence establishes removal of valuable secured assets from creditors' reach.
Conclusion: The removal and replacement of the hypothecated machinery constituted fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code, 2016, and contribution to the corporate debtor's assets was justified against the Appellants.
Issue (ii): Whether the contribution amount required reduction for depreciation of the financed machinery and the realisable value of the machinery found at the premises.
Analysis: The contribution remedy under Section 66 is directed at restoring the corporate debtor's depleted asset position. No material established that the quantified value of the removed financed machinery was arbitrary or unsupported. The assertions concerning depreciation and the value of the substituted machinery did not displace the finding that the financed and hypothecated machinery had been removed to the detriment of the corporate debtor and its creditors.
Conclusion: The contribution amount of Rs. 17,23,05,603.50 did not warrant reduction and was upheld.
Final Conclusion: The contribution remedy remains enforceable to restore the corporate debtor's depleted asset base, and the liquidation process may continue for preservation and realisation of its assets.
Ratio Decidendi: Fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code, 2016 may be established through cumulative documentary and circumstantial evidence showing removal of secured high-value assets and their unexplained replacement with substantially lower-value assets, without direct proof of fraudulent intent or a series of transactions.