TaxTMI 
TaxTMI 
2025 (11) TMI 526
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....he RP / Liquidator of the CD, thereby issuing an IA No. 466/2020 was filed by the erstwhile Resolution Professional (RP) of the CD, before the AA, under Section 66(2) of the Insolvency and Bankruptcy Code, 2016 (IBC / Code) alleging that the Appellant, in the year 2013-14, had acquired 88,000 equity shares of a related party namely Orient Exports Pvt. Ltd. (Orient Exports), from the CD (which was acquired by the CD in the year 2011-12 for a sum of Rs. 8.80 crores) at an undervalued rate of Rs. 8.80 lakhs, thereby causing loss of Rs. 871.20 lakhs to the CD. Accordingly, the RP had prayed, to the AA, for a direction to be issued to the Appellant to make contribution of Rs. 871.20 lakhs, along with interest @ 15% from the date of the investment. Main Grounds of the Appeal/ Submissions of the Appellant 2. Appellant claims that in the application i.e., IA No. 466/2020 filed by the erstwhile RP, the only pleading is based on the balance sheet. There is neither any pleading: i. in relation to the business of the company / CD; ii. any alleged fraudulent conduct of business of the company / CD; iii. such alleged fraudulent conduct of business of the company ....
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.... standard of proof for proving fraudulent trading was not met in IA No. 466/2020. The RP had taken into consideration only an isolated transaction to allege that business of the CD had been carried on in a manner to defraud the creditors of the CD. On the basis of an isolated transaction, fraud cannot be alleged under Section 66 of the Code, as the whole period of the transaction is significantly relevant. The RP / Liquidator has failed to appreciate that the transaction in question was not fraudulent, in order to attract the provisions of Section 66 of the Code, for the following reasons: (a) It was also disclosed that Orient Exports had allotted shares, in the year 2010-11, in the name of the Appellant. (b) Documents available in the portal of the Ministry of Corporate Affairs were disclosed to show that the CD, in the year 2013-14, had suffered loss to the extent of Rs. 8.71 crores on account of loss of sale of assets. 5. The Appellant having acquired the shares of Orient Exports from the CD at a time when the CD was a loss-making entity cannot be said to be fraudulent or done with the intent of defrauding the creditors of the CD but was aimed at minimizing ....
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....lity of Section 66(2) of the Code, is narrower as it is made applicable only to CIRP / liquidation proceedings initiated against a company. Therefore, the provisions of Section 66(1) and Section 66(2) of the Code must be read together in order to give a meaning as to how and when the provision of Section 66 of the Code can be made applicable for CIRP / liquidation proceedings initiated against a company, under the Code. 8. RP / Liquidator of the CD has also strongly contended that IA No. 466/20200 was filed by the RP / Liquidator under Section 66(1) and not under Section 66(2) of the Code. However, the same is contrary to the records of the present case. The RP / Liquidator of the CD although having filed IA No. 466/2020 before the AA under Section 66(1) of the Code, however, the RP / Liquidator of the CD has sought for issuance of necessary directions from the AA against the Appellant under Section 66(2) of the Code. The aforesaid demonstrates the understanding of the RP / Liquidator of the CD itself that while Section 66(1) and Section 66(2) of the Code operate in different areas, however in cases of CIRP / liquidation proceedings initiated against a company, the provisions of....
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....the Corporate Debtor invested INR 8.80 Crores (Indian Rupees Eight Crores Eighty Lakhs Only) in the equity shareholding of Orient Exports, a related party of the Corporate Debtor by purchasing 88000 equity shares. The investment of INR 8,80,00,000/- Crores (Indian Rupees Eight Crores Eighty Lakhs Only) is clearly reflected in the audited accounts of Orient Exports for the financial year 2011 - 2012, as per the documents available on the Ministry of Corporate Affairs ('MCA') website. 13. As evidenced from the balance sheet of Orient Exports, the par value of the shares of Orient Exports was only INR 10/- (Indian Rupees Ten) per share in the financial year 2011 - 2012. Further, the book value of the shares of Orient Exports was INR 8.50 (Indian Rupees Eight and Fifty Paise) as on 31.03.2011, as per the audited accounts. Despite this, in that same year, the Corporate Debtor subscribed to 88000 equity shares at a price of INR 1000 (Indian Rupees One Thousand) per share. This fact was a highly unusual transaction defying general business sensibilities, and is further bolstered by the fact that during the immediately preceding financial year 2010 - 2011, there was a subscription of eq....
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....66 of the IBC, the tests laid out under Section 66(1) and Section 66(2) must both be satisfied. This has been the focal thrust of the Appellant's argument. Respondent-Liquidator brings to our notice that the language of Section 66(1) and Section 66(2) of the IBC both lay forth clear criteria for invoking each sub-section, as demonstrated by the table below: Requirements Sec 66(1) Sec 66(2) When can it be invoked? During the CIRP or liquidation process. During the CIRP process. Who can initiate? On an application filed by the RP. On an application filed by the RP. Cause for invocation? If during CIRP or liquidation process it is found that any business of CD has been carried on with intent to defraud creditors of the CD or for any fraudulent purpose. If before the insolvency commencement date, a director or partner knew or ought to have known that CIRP could not have been avoided and failed to exercise due diligence in minimising potential loss to the creditors. Consequence of invocation/Dire ctions that may be issued by Ld. AA AA may direct persons who were knowingly parties to the carrying on of the business in a fraudulent manner to be li....
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....ng CIRP. Given that the limitation period for invoking CIRP is 3 years, the lookback period applicable to fraud is completely negated. This could not have been the intent covered in a slew of judgements dealing with fraud. 19. Reliance is placed on the decision rendered by this Appellate Tribunal on 03.07.2025 in Gopal Kalra v. Akhilesh Kumar Gupta [2025 SCC Online NCLAT 1129] which has been taken up by us in our appraisal herein later on. 20. The Respondent also places reliance of the decision of this Appellate Tribunal in Sangeeta Jatinder Mehta and Anr. v. Kailash Shah RP of New Empire Textile Processor Private Limited [CA(AT)(INS) 104 of 2024] and also on Renuka Devi Rangaswamy, Interim Resolution Professional of M/s. Regen Infrastructure Services Pvt. Ltd. v. Madhusudan Khemka, Suspended Director of M/s. Regen Infrastructure Services Pvt. Ltd. [2023 SCC Online NCLAT 1722] 21. During the course of arguments, the Appellant relied on a very recent decision of this Hon'ble Appellate Tribunal rendered in Nalinesh Kumar Paurush, Member of Suspended Board of Directors of CD and Ors. v. Arvind Mittal, Resolution Professional of Temple Leasing and Finance Limited and Ors. [CA(....
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....tention from the crux of the matter. Instead of addressing the pivotal fact that the fraud came to light only after a detailed examination of the books of accounts, the appellant is making irrelevant and tangential statements and contentions. These submissions fail to directly engage with or refute the specific evidence and timeline establishing the discovery of fraud during the scrutiny of financial records. 26. Respondent liquidator also brings to our notice that under the IBC 2016 the transaction's falling under the ambit of preferential undervalued fraudulent and extortionate (PUFE) transactions, if influenced by fraud are not constrained by look back, which we will discuss in detail in our appraisal. 27. It is important to note that the account of the CD has long been declared as fraud and a case has been lodged with the CBI which in turn has filed charge sheet. It is also to be noted that since there were some issues between the erstwhile RP Mr Kanakabha Ray and the COC members, the RP filed the application based on material available with him considering such information to be sufficient for forming an independent view without inquiring from the lenders as to the statu....
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....Advocates representing the Appellant before the Hon'ble Adjudicating Authority. The arguments on the said date were incomplete and the matter was posted for hearing on August 7, 2024. On the said date, the application was not taken up for hearing on account of paucity of time of the Hon'ble Adjudicating Authority. The aforesaid position would be evident from the order dated August 7, 2024, a copy whereof is annexed hereto and marked as "Annexure A-14". 7. On September 19, 2024, the said application was appearing in the cause list of the Hon'ble NCLT. Mr. Souvik Sana, was the Advocate on Record of the members of the Suspended Board of Directors of the Corporate Debtor, including the Appellant. Mr. Souvik Sana, Advocate instructed Mr. Aritra Basu, Advocate to appear and represent the Members of the Suspended Board of Directors. On September 19, 2024, Mr. Souvik Sana, Advocate was engaged in Court No. 29 and Mr. Aritra Basu, Advocate was engaged in Court No. 38 in the Hon'ble High Court at Calcutta, when the matter was taken up for hearing. In those circumstances, the Members of the Suspended Board of Directors went unrepresented and the hearing of the applica....
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....said application was not taken up for hearing on November 27, 2024. The Learned Advocate of the Members of the Suspended Board of Directors were waiting for the next date of hearing to be allotted by the Court Officers of the Hon'ble NCLT. 14. On November 29, 2024 the members of the suspended Board of Directors in order to peruse the records and in order to find out the next date of hearing of the said application made online searches on the website of the Hon'ble NCLT and thereafter discovered that in terms of the order dated November 27, 2024, the hearing of the application was concluded. Furthermore, by the order dated November 27, 2024 the opportunity given to file the written notes of argument was also closed. 15. Upon discovering the above, necessary intimation was given to Mr. Souvik Sana, Advocate. Mr. Sana, Advocate thereafter instructed his office clerk to obtain necessary information in respect of the above. The office clerk of Mr. Souvik Sana, Advocate, after obtaining necessary information regarding the hearing of the application thereafter informed Mr. Sana, Advocate and the Members of the Suspended Board of Directors that an order has been p....
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.... and other matters of the Corporate Debtor 6. From the financial statements of the Corporate Debtors and the related parties as disclosed in the financial statements of the Corporate Debtor, it was found that the Corporate Debtor invested Rs. 1890 lakhs during the financial year 2011-12, in the equity share capital of the related parties, namely, Crescent Manufacturing Private Limited (Rs. 607 lakhs), Appollo Commercial Private Limited (Rs. 403 lakhs and Orient Exports Private Limited Rs. 880 lakhs. (Annexure 1 Page 1 to 3) 7. The investment of Rs.880 lakhs in the equity of the related party, namely, Orient Exports Private Limited, was also reflected in the audited accounts of this related party for the FY 2011-12 as available at the website of the Ministry of Corporate Affairs. (Annexure 2, Page 4 to 7). From the audited accounts of this related party, it will be evident that the book value of this related party as on 31.03.2011 was only Rs.8.50 per share while the share subscribed was at the rate Rs. 1000 per share. It is also pertinent to note that during the immediately preceding FY 10-11, there was subscription of shares in that company at the rate of Rs.10 o....
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....ication of this issue. The appellant in this case has appeared substantial number of times before NCLT and had failed to make its submissions. Respondent liquidator also brought to our notice that it has been nowhere stated in the order sheet dated 15th July 2024 that the adjudicating authority had directed the Counsel's appearing to file their convenience note. But even then after so many days the Appellant neither mentioned the matter nor turned up for providing any justified reason to file the convenience note. Thereafter on 22nd October 2024, last chance was given to make submissions on the next date of hearing, failing which an appropriate order would be passed. Respondent liquidator also brings to our notice that the adjudicating authority had given repeated opportunity to the appellant for their appearance. However, not complying with the same, the right to file written notes were closed, reserving it for orders. Furthermore, the appellant had time and again taken the same ground of non-appearance which itself should not stand a reason to keep the matter in abeyance. Further, we note that the Appellant was in fact heard in detail and the Impugned Order records the submission....
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....n of the books of accounts. Fraudulent transactions cannot be shielded by the lapse of time. Respondent Liquidator also contends that fraud nullifies the protections of any statutory limitation as the intention behind fraudulent transactions is to deceive creditors and subvert the insolvency resolution process. The appellant instead of disputing the Commission of fraud is attempting to divert the focus to the timeline of transactions, which has no bearing in the matter, given that fraud was discovered only recently and falls within the scope of investigation under Section 66 of the IBC. Therefore, we find that the contentions of the appellant regarding the time of the transactions are irrelevant. 37. We also note that fraud by its very nature cannot be overlooked or condoned merely because of procedural technicalities or partial identification. Whether there is one fraudulent transaction or multiple, the principle remains the same that fraud vitiates all transactions. Even a single instance of fraud once proven is sufficient to establish the intent to deceive creditors and manipulate the insolvency process. The appellant's contention that procedural timelines should bar or restr....
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....the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if- (a) before the insolvency commencement date, such director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and (b) such director or partner did not exercise due diligence in minimizing the potential loss to the creditors of the corporate debtor. (3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10 A. Explanation. For the purposes of this section or director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor. 41. Appellant canvassed the argume....
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.... CD in the year 2011-12 for a sum of Rs. 8.80 crores) at an undervalued rate of Rs. 8.80 lakhs, thereby causing loss of Rs. 871.20 lakhs to the CD. Accordingly, it is a fit case for a direction to be issued to the Appellant to make contribution of Rs. 871.20 lakhs and for that reason we cannot find any infirmity in the order of the Adjudicating Authority that Appellant should be making such a contribution. 44. We further note that the next subsection 66(2) relates to specific provisions for a Director or partner of the CD for which CIRP is going on. This subsection provides that if before the insolvency commencement date, a director or partner knew or ought to have known that CIRP could not have been avoided and failed to exercise due diligence in minimising potential loss to the creditors, AA may direct the erring director or partner to be liable and make such contributions to the assets of the CD as it may deem fit. We observe that the first provision (section 66(1)) is very broad but not the second one (Section 66(2)) and, moreover, they operate independently. This gets clarified by Section 67 which is clear from the first line of the Section. "Section 67. Proceeding....
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....Court in Hussain Ahmed Choudhury and Ors. v. Habibur Rahman(Dead) Through LRs and Ors. [Civil Appeal No. 5470 of 2025], wherein the Apex Court reiterated the existing position of legal interpretation in paragraph 26 of the decision by stating: "26. Section 34 entitles a person to approach the appropriate court for a declaration, if that person is entitled to (i) any legal character or (ii) any right as to any property. "Legal character" and "right to property" are used disjunctively so that either of them, exclusively, may be the basis of a suit. The disjunctive 'or' cannot be read as a conjunctive 'and'." 46. Appellant places its reliance on decision of this Appellate Tribunal in the judgement of 03.07.2025 in Gopal Kalra v. Akhilesh Kumar Gupta [2025 SCC Online NCLAT 1129], wherein the Bench framed the issue to be adjudicated upon as - "I. Whether the transactions undertaken by the Appellant in the LED Bulb business during FY 2016-17 constituted fraudulent trading under Section 66(1) of the Code?". We find that the bench proceeded to adjudicate upon the issue by first categorically stating the ingredients to be met in order to attract Section 66(1) of the IBC. The rel....
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....rnishing 'Requisite Facts', so as to come within the purview of the ingredients of Section 66 of the I & B Code, 2016. Suffice it, for this 'Tribunal', to pertinently point out that the ingredients of Section 66(1) and 66(2) of the I & B Code, 2016, operate in a different arena." This judgement also supports the case of the Respondent and rebuts the case of the Appellant in very clear terms as the Respondent had been successfully able to set up a case that the business of the corporate debtor was carried on with intent to defraud creditors of the Corporate Debtor. 49. During the course of arguments, the Appellant relied on a very recent decision of this Hon'ble Appellate Tribunal rendered in Nalinesh Kumar Paurush, Member of Suspended Board of Directors of CD and Ors. v. Arvind Mittal, Resolution Professional of Temple Leasing and Finance Limited and Ors. [CA(AT)(INS) 346 of 2024 and IA 6783 of 2024] and claims that " one of the main ingredient of Section 66 of the Code is that a transaction may only be termed as a fraudulent transaction if it has been carried on with a intention to defraud creditors and before the insolvency commencement date the directors knew that there wa....
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....lear finding that the business of the CD was being carried on with the intent to defraud the creditors as we note that share purchase and sale were being carried on, which had already been apparently loss-making transactions, even though the accounts of the CD were declared as NPA by the Creditors. Therefore, the above judgment of the Supreme Court is of no assistance to the Appellant. 51. The Appellant has also relied upon Ashok Kumar Agarwal vs. Narayan Chandra Saha & Ors., Company Appeal (AT) (Ins.) No. 139 of 2025. The relevant extracts of the judgments are reproduced below: - "... 6. The fact that Corporate Debtor who was to receive the sum of Rs.37.50 Lakhs has settled with the Orient Export Pvt. Ltd. by transferring shares of another group Company cannot lead to conclusion that the transaction was fraudulent. Adjudicating Authority has clearly held that mere possibility of fraud without any specific finding of fraud is not legally sustainable. Liquidator's presumption of under valuation and fraud without any circumstantial evidence even, if not direct evidence, cannot be a basis for allowing the Application under Section 66 of the Code." The above ord....
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....it abundantly clear that the Hon'ble Appellate Tribunal was dealing with a matter wherein Sec 66(2) of the IBC was being argued and adjudicated upon. Therefore, the entire discussion on ingredients of the section refers to the ingredients for invocation of Sec 66(2) of the IBC only and can in no manner be inferred to deal with Sec 66(1) of the IBC. In fact, there is no mention of Sec 66(1) of the IBC in the findings of the Appellate Tribunal and therefore, the intent to limit the analysis to Sec 66(2) of the IBC is not only implied, but is the only appropriate conclusion that may be drawn and this judgment doesn't support the case of the Appellant. 53. We find that the arguments presented by the Appellant are not sufficient to deny the factual matrix which has been placed before us by the RP. This is supported by the balance sheet of the CD, which bears the signature of the Appellant. RP obtained them from the records with Ministry of Corporate Affairs, as the CD had not provided them and not cooperated in the proceedings. We also observe that the Appellant is a KMP in both the companies and has caused a loss to the CD by these transactions by first buying the shares from a rela....