TaxTMI 
TaxTMI 
TaxTMI 
2025 (11) TMI 1803
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.... to the liquidation estate of the CD. 2. Brief facts necessary for the disposal of the instant appeal as are reflected from the pleadings from the parties are that vide an order dated 25.06.2021 Corporate Insolvency Resolution Process (CIRP) was started against CD, M/s Temple Leasing and Finance Ltd. and Mr. Arvind Mittal was appointed as an Interim Resolution Process (IRP) and vide order dated 21.02.2022, he was also confirmed as Resolution Professional (RP). 3. It is further reflected that after approval of the CoC with 100% voting share Resolution Professional vide I.A. No. 5874/2021 filed an application under section 33(2) of the Code, to liquidate the corporate debtor and he was also proposed to be appointed as liquidator of the CD. 4. During the course of proceedings, a Transactional Auditor was appointed by the liquidator who has submitted a Transaction Audit Report dated 24.12.2021, after examining the books of accounts of the CD for the period 01.04.2016 to 25.06.2021. 5. It also reflected that the Respondent liquidator filed an application under Section 66 of the Insolvency and Bankruptcy Code 2016, bearing IA No. 2536/ND/2022 alleging two transactions with re....
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....lier de- listed from the stock market are relisted again and their shares have fetched higher prices. 10. It is also submitted that there is no evidence which may show that the transaction of purchasing the shares of these two companies was fraudulent or has been carried out with the intent to defraud creditors and the onus to prove the fraudulent intent was on the Respondent, while except the transaction audit report, which could not be relied on, there is no other substantial piece of evidence which may indicate the transactions as fraudulent. 11. It is further submitted that only evidence on which the reliance has been placed by the Ld. Tribunal is transaction audit report which is full of contradictions and could not be relied as such and conclusions arrived at therein are also not conclusive and therefore on the basis of such shaky conclusions the conduct of appellants could not be termed as fraudulent. 12. It is reiterated that to take any action under Section 66 (1) of the Code the proof of dishonest intention is a pre-condition and Ld. Tribunal has not considered this aspect and without, even finding the ingredients of Section 66 (2) of the Code has directed the ap....
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....ny demat account without complying with the relevant rules, regulations, guidelines and instructions issued by the RBI and SEBI in the manner and thus due diligence has not been exercised to minimize the potential loss with the creditors of the company. 19. It is also submitted that the impugned transactions were made without any diligence without checking that the equity shares in purchasing which the funds of the CD are being invested, are not traded for long and were not listed and thus prima facie shows lack of transparency in the transaction ignoring the risks involved in purchasing these non- traded/unlisted shares and thus deliberately a sunk investment was made. 20. Reliance in support of the contention has been placed on Amardeep Singh Bhatia vs. Abhishek Nagori liquidator for asian natural resources (India Ltd.), CA (AT) (Ins) No. 671 of 2020, decided on 28.11.2022 and Mr. Thomas George vs. K. Easwara Pillai Resolution Professional M/s. Mathstraman Manufacturers and Traders Private Limited decided on 05.12.2022. 21. Respondent -Arvind Mittal in his reply has submitted that the appeal, as has been preferred is a gross misuse of the process of law and deserves to b....
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....are been termed as purchase fraudulently. 26. It is further stated that the investment in question has attributed value to the corporate debtor's asset and cannot be alleged to be causing loss. In this regard reliance has been made on the independent auditor's report of the year ending 31.03.2021 evidencing the investment in question as the sole assets of the CD. It is reiterated that the transaction in question may never be termed as fraudulent. 27. We have heard Ld. Counsel for the parties and have perused the record including the written submissions submitted by the parties. 28. It is evident that during the course of pendency of this appeal an IA No. 6783 of 2024 was filed by the Respondent - Shree Vishwamurte Trad Invest Pvt. Ltd. (SVTIPL) for its impleadment as one of the Respondent and on 27.11.2024 noticing the statement made on behalf of the liquidator that the company has already been sold and liquidator be discharged, Respondent No. 1 liquidator was deleted from the array of the parties and IA No. 6783 of 2024 moved by the Shree Vishvamurte TradInvest Pvt. Ltd. was allowed and Shree Vishvamurte Trad Invest Pvt. Ltd. (herein after called Vishvamurte) was impleade....
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....CIRP in respect of the Corporate Debtor. Thus, the submission put forth on behalf of the Respondents that the act of the Respondents was not covered under Section 447 of the Companies Act is misconceived. As far as the reference to Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016 is concerned, the mandate of the Regulation is that the RP should adhere to the timeline prescribed for completion of the Insolvency Process. The provision is not incorporated to allow the Suspended Directors to get away with preferential, undervalued, extortionate, or fraudulent transactions. 7. In view of the aforementioned, we are convinced that within 7 months of the purchase of the non-traded equity shares out of the funds of the CD, the application for admitting the CD into CIRP was filed, thus, the Respondents were quite aware that the avoidance of commencement of Insolvency Resolution Process in respect of the CD had no reasonable prospect and they did not exercise due diligence while investing the funds of CD in such equity shares, which could not be further sold". 31. The basis of passing the impugned order appears to be the transaction....
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.... (2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as 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 minimising the potential loss to the creditors of the corporate debtor. Explanation. "For the purposes of this section a 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". 33. Before moving further let us have a glance with regard to the ingredients of Section 66 ....
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....". 35. As a matter of fact, the "aspect" of "fraudulent trading" requires a very "high degree of proof", which is attached to the "fraudulent intent". To put it emphatically, a more compelling "material"/ "evidence" is required to satisfy the conscience of this "Tribunal", "on a preponderance of probability". Apart from that, an "isolated"/ "solo fraud" case, against the person, then, action in "tort" can be resorted to, as opined by this "Tribunal". No wonder a "creditor", who was defrauded, will have "recourse" to an "alternative remedy", under "civil law". 38. This appellate tribunal again in Renuka Devi Rangaswamy vs. Mr. Madhusudan Khemka and Ors., 2023 SCC Online NCLAT, 1722 while considering the ingredients of Section 66 of the Code has held as under: "33. To be noted that, the expression 'Party to the carrying on business', indicates 'taking positive steps', in carrying on 'company's business', in a 'fraudulent manner'. The intent to 'defraud', is to be judged, by its 'effect' on a 'Person', who is the 'object of conduct', in question. 34. A 'preponderance of probability suffices', but the degree of probability must be such that the 'Tribunal',....
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....s powers to the 'Adjudicating Authority' to pass suitable orders, if it is found that any person has carried on the business of the 'Corporate Debtor' with an intention to defraud its 'Creditors' or other 'stakeholders'. Section 66 also give powers to the 'Adjudicating Authority' to give directions for making contribution to the assets of the 'Corporate Debtor'. This also includes Directors of the 'Corporate Debtor', and their personal liability towards contribution, provided such Directors did not exercise due diligence or failed to take reasonable steps to minimize potential losses to the creditors when there was no possibility of avoiding the commencement of 'Corporate Insolvency Resolution Process'. However, a director can be deemed to have exercised due diligence, if such diligence was exercised as expected reasonably of a director carrying out a business in ordinary course of business. 43. It is therefore clear that for establishing the fraudulent purpose, it must be shown that the Ex-Directors of the 'Corporate Debtor' knew that the Company was Insolvent but continued to run business with dishon....
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....ncial Creditors Sr. No. Name of the Financial Creditor Type of Facilities i.e. Term Loan or Cash Credit or Bank Guarantee or Letter of Credit, Bill Discount ing Secured or Unsecured Total amount admitted (in Rs.) Voting Share (in %) Distribution of proceed (in Rs.) Rec overy (in %) 1 Novelty Buildwell Pvt. Ltd. Short- term inter Corporate Deposit Unsecured 4,00,000 10% 86,061 22% 2 Prominent Hospitals Pvt. Ltd. Short- term inter Corporate Deposit Unsecured 7,00,000 17% 150,606 22% 3 Shree Vishvamurte Tradinvest Pvt. Ltd. Unsecured loan Unsecured 1,527,161 37% 328,572 22% 4 Orchid Recruiter Pvt. Ltd. Unsecured loan Unsecured 2,90,000 7% 62,394 22% 5 BNS Tour & Travel Pvt. Ltd. Unsecured loan Unsecured 7,00,000 17% 150,606 22% 6 Navjyoti Farming Pvt. Ltd. Unsecure d loan Unsecured 5,50,000 13% 118,334 22% 4,167,161 100% 896,573 22% 43. From the table above the admitted claims of the six unsecured financial creditors have been shown and the total value of these admi....
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....ot exercise due diligence in minimizing the potential loss to the creditors of the CD. Thus non-exercise of due diligence alone may perhaps be not sufficient to label a transaction as fraudulent in order to attract sub-section 2 of section 66 of the Code. 45. The Ld. Tribunal has given much emphasis on the fact that the CIRP process application has been moved within 7 months of purchase of these equity shares. As we have already stated that having regard to the trade wherein the CD was involved and keeping in view the amount of debt owed by the CD it may be not presumed, in absence of any direct evidence that these transactions of purchasing shares of unlisted companies were made for the purpose of avoiding the CIRP or that these transactions have been done as the appellants knew that there is no reasonable prospect of avoiding the CIRP. 46. It is also reflected that only Rs. 15,00,000/- has been paid by the directors/appellants in making the impugned transaction and thus the whole amount of shares value has also not been paid. It may be taken that if the intention of the directors was to defraud the creditors they have shown payment of the whole amount of the shares i.e. Rs.....