AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2025 (12) TMI 116
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the Insolvency and Bankruptcy Code, 2016 ("the Code"), along with interest. Submissions on behalf of the Appellants 2. Appellant contends that Adjudicating Authority has directed the Appellants herein being the suspended directors of Corporate Debtor to contribute an amount of Rs. 91,00,000/- (Rupees Ninety One Lakhs only) within thirty (30) days from the date of the Order, failing which they will be liable to pay an interest @12% p.a and clarified that the amount, if any, recovered from Respondent No.1 and 2 in I.A. No. 3921 of 2022, shall discharge Appellants to that extent from the Principal Amount. 3. In the present case the Adjudicating Authority allowed Interlocutory Application No. 1099 of 2024, despite pending Company Appeal (AT) (Insolvency) No. 535 of 2024 before the AT in another IA, thereby violating the principles of judicial discipline and finality. Company Appeal (AT) (Insolvency) No. 535 of 2024 challenges the Order dated 02nd January 2024 in Interlocutory Application No. 3921 of 2023. The Appellant claims that Adjudicating Authority had already observed that the Appellants were not liable for the amount of Rs. 91,00,000/- and only granted liberty to proc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assistance to Shreeniwas Developers to enable it to complete construction and deliver the rehab component and refund the money back upon completion of the entire project/scheme. The purpose was to preserve the value of the project and prevent exposure to litigation or penal liabilities. In pursuance of the said MOU, the CD issued two cheques dated 31.07.2020: one for Rs. 50,00,000/- (RBL Bank, Cheque No. 791037) and another for Rs. 41,00,000/- (Induslnd Bank, Cheque No.791035), both drawn in favour of Ms Darshan Developers, a contractor engaged by Shreeniwas Developers, prior to commencement of CIRP, which was admitted on 03.08.2020. The payments were intended solely for on-site work completion, in accordance with the MOU clauses cited above. 8. The 3rd Meeting of the Committee of Creditors (CoC) held on 31.12.2020 recorded that Appellant No.1, Mr. Praful Satra, had placed the MOU before the Interim Resolution Professional ("IRP") and explained the reasons for the said payments. The IRP noted that the cheques were issued pursuant to the MOU and that the transaction was not in the nature of siphoning of funds or preferential payment. The IRP therefore did not consider it necessar....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... No. 1627 and 1628 of 2024, wherein the implementation of the resolution plan has been stayed. Appellant further contends that as per Notification No. IBBI/2024-25/GN/ REGxxx issued by the Insolvency and Bankruptcy Board of India (IBBI), the role of Monitoring Committee is limited to supervising the implementation of the resolution plan and does not possess independent legal personality to prosecute litigation. 13. Appellant contends that impugned order fails to establish fraud under Section 66 of the Code. The Impugned Order fails to satisfy the legal requirements of Section 66 of the Code, which necessitates proof that the Appellants knowingly carried out the business of the Corporate Debtor with the intent to defraud creditors. The allegations against the Appellants are vague, unsubstantiated, and devoid of any concrete evidence. 14. Appellant contends that it is an abuse of process and legal precedent. The Respondent failed to take any action in Interlocutory Application No. 3921 of 2023 but is now attempting to misuse the liberty granted by the Adjudicating Authority to file a fresh application under Section 66. By allowing such an action it would set a dangerous precede....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpugned were made pursuant to a Memorandum of Understanding dated 17 December 2019 executed with Shreeniwas Developers under an existing Joint Venture Agreement of 2005. The MOU required the CD to assist the JV partner financially so that the project could be completed. The funds were transferred to Darshan Developers, a contractor, not to the Appellants personally. The Hon'ble NCLT, while deciding I.A. No. 3921 of 2022 on 02.01.2024, recorded that no adverse remarks had been made by auditors or authorities and did not grant any relief against the Appellants. 18. Appellant contends that for proving allegations under Section 66, there need to be cogent averments in the application as also findings of fraud. For invoking Section 66 of the Insolvency and Bankruptcy Code, 2016, which concerns fraudulent or wrongful trading, the law mandates that the allegations must be supported by specific, cogent averments demonstrating the existence of fraud or intent to defraud creditors. Courts and tribunals have consistently held that mere reproduction of statutory language or general accusations of mismanagement, siphoning, or diversion of funds are insufficient. The Applicant /RP must pl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....A. No. 1099 of 2024 (Annexure A-14, pg. 374-380) contain no such pleading or proof. 21. Appellant contends it to be re-litigation and abuse of process. The very same transaction was adjudicated in I. A. No. 3921 of 2022, resulting in the NCLT's order dated 02 January 2024 holding that no fraudulent or wrongful trading was made out. The RP's liberty to proceed further was merely procedural and contingent upon new material, which never emerged. Filing I.A, No, 1099 of 2024 without new evidence constitutes re-litigation. The Amendment Application (Annexure A-18) changed only nomenclature ("Resolution Professional" to "Monitoring Committee") and added no substance. Such repetition offends finality and judicial discipline. 22. Appellant contends that section 66 is being misused as a recovery tool. RP's purpose was to recover Rs. 91 lakhs, not to establish fraudulent intent. The RP's own pleadings show no case of mens rea but a demand for restitution. The Supreme Court in Anuj Jain v. Axis Bank Ltd, (2020) 8 SCC 401 (Para 29.1) clarified that avoidance provisions are not debt-recovery mechanisms, Section 66 is punitive, not compensatory; its misuse undermines the Co....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... contrary to the settled principles of statutory interpretation under the Code. 25. Accordingly, the Appellants pray that the present Appeal be allowed and the Impugned Order be set aside. Appraisal 26. We have heard the councils of both sides and also perused the material placed on record. 27. The Main issue before us is whether the Appeal by the suspended directors is maintainable in this case under Section 66(2) of the Code to jointly and severally refund a sum of Rs. 91,00,000/- to the Corporate Debtor. 28. The appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 ("IBC"/"Code") has been preferred by the erstwhile directors of the Corporate Debtor challenging the order dated 23.01.2025 ("Impugned Order") passed by the National Company Law Tribunal, Mumbai Bench ("Adjudicating Authority") in I.A. No. 1099 of 2024 in C.P. (IB) No. 1632/MB/2019, whereby the Appellants were held liable under Section 66(2) of the Code to jointly and severally refund a sum of Rs. 91,00,000/- to the Corporate Debtor. 29. Appellant contends that the disputed payment was a bona fide pre-CIRP commercial arrangement, made transparently pursuant to a valid MOU, with the aim ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....7.2020 were cleared post- commencement of CIRP and in violation of the moratorium under Section 14 of the Code. It was held that the Appellants were fully aware of the imminent CIRP, deliberately issued cheques - two days prior to admission of insolvency in anticipation of future credits, thereby causing withdrawal of Rs. 91,00,000/- from the Corporate Debtor's accounts. It was held that such conduct attracts liability under Section 66(2) of the Code. 32. To recapitulate the undisputed facts, we note that a petition under Section 7 of IBC (C.P. No. 1632/MB/2019) against the Corporate Debtor was reserved for orders on 19.02.2020. Notwithstanding knowledge of imminent admission, the Appellants, then directors, issued two cheques dated 31.07.2020 aggregating Rs. 91,00,000/- in favour of M/s Darshan Developers, allegedly at the behest of one M/s Shreenivas Developers under a claimed "MOU" dated 17.12.2019. On the date of issuance of these cheques, petitioner's bank accounts did not have sufficient funds to honor the cheques. As per the bank records closing balance in RBL Bank account of CD as on 31.07.2020 was Rs. 8,398/- and the closing balance in IndusInd Bank account of CD as on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f Sunil Hitech Engineers Ltd., Company Appeal (AT) (Ins.) No. 515 of 2025. "27. We now proceed to dwell on the tenability of the three cheque payments which were integral to the impugned transactions. We have already taken notice that two cheques were issued on 06.09.2018 which was a day before commencement of CIRP and also before moratorium became effective on 10.09.2018. The third one was dated 08.09.2018 which also pre-dated moratorium which took effect on 10.09.2018. However, all the three cheques were encashed subsequent to declaration of moratorium. Since the encashment of the cheques were post-moratorium, the Adjudicating Authority had concluded that the cheques were deliberately ante- dated only to conjure the impression that they were handed over before commencement of CIRP. We also find that the Adjudicating Authority arrived at this conclusion since nothing was explained by the Appellant as to why these cheques though issued prior to CIRP commencement date were kept on hold by Respondent Nos. 2 to 5 and encashed after the commencement of CIRP. 28. Assailing the above finding of the Adjudicating authority, the Appellant has relied on the judgment of this....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ver but it cannot be encashed after the moratorium starts, in view of the specific provisions, to recover the amount from the Corporate Debtor as referred above." 30. We find no reasons to disagree that after commencement of CIRP once moratorium kicks in, no person can unilaterally recover any amount from the account of the Corporate Debtor. No action violating moratorium can be countenanced. Even for argument's sake, if we agree that in the present case, the date depicted on the three cheques co-relates with the date of cheque handing over, nonetheless, in view of the specific statutory provision of moratorium which precludes any such recovery, the cheques cannot be encashed after moratorium starts. Since no such arrangement is envisaged in the IBC and yet the amounts have been encashed, the RP in seeking recovery of the same is found to have acted well within the boundaries of the IBC. The recourse open to the Respondent Nos 2 to 5 is to file their claim before the RP/Liquidator in respect of such dues." 37. Notably, in SREI Equipment Finance (supra) and Sunil Guttee (supra), this Hon'ble Tribunal was dealing with cheques issued against pre- existing liabilities. Even....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l (AT) (Insolvency) No. 2355 of 2024, by order dated 06.11.2025 has clarified the law on this position and held that Section 66(1) and 66(2) are self- contained and must be read as distinct provisions, which can be invoked independently. The relevant paragraphs are as follows: "41. Appellant canvassed the argument that the RP had filed an Application under Section 66(2) of the Code but the necessary conditions under this Section were not fulfilled. The prayer itself is under Section 66(2), even though the heading of the application by RP is under Section 66(1) of the Code and Adjudicating Authority has passed the order under Section 66(1), but there was no prayer under this section. Appellant claims that both these sections are inter-related and they have to be read together. We observe that whatever the heading of the application be, the matter has been dealt in Section 66(1) of the Code by the Adjudicating Authority and decided accordingly and this argument by the Appellant is not sustainable. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... interconnected and cannot be invoked independently also doesn't stand the legal scrutiny as well as the judicial precedents. Moreover, the appellant has not been able to controvert the facts but has been delaying the proceedings bases artificially created technicalities and procedural requirements. Under these circumstances, we don't find any infirmity in the orders of the Adjudicating authority." 42. We note that headings or titles alone cannot be used while interpreting a section which is plain and simple. The argument of the Appellant regarding interpretation of Section 66(1) and Section 66(2) by aid of the heading of the section is contrary to the individual sections. The Hon'ble Supreme Court of India has established this rule through a catena of judgments including Forage & Co. v. Municipal Corpn. of Greater Bombay, (1999) 8 SCC 577, wherein it was observed that: "10. ... In this regard we may usefully refer to a decision of this Court in the case of Frick India Ltd. v. Union of India [(1990) 1 SCC 400: 1990 SCC (Tax) 185] where in connection with the question of referring to the headings in connection with the interpretation of statute it was observed at p. 405 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the CD as contemplated in section 66, the properties and the persons involved may or may not be ascertainable and therefore the Adjudicating Authority is not empowered to pass orders to avoid or set aside such transactions, but is empowered to pass orders to the effect that any persons, who were knowingly parties to the carrying on of business in such manner, shall be liable to make such contributions to the assets of the CD, as it may deem fit. The Adjudicating Authority in such applications may also direct that the director of the CD shall be liable to make such contribution to the assets of the CD as it may deem fit, as contemplated in section 66(2). In case of fraudulent trading or wrongful trading, it would be a matter of inquiry to be made by the Adjudicating Authority as to whether the business of the CD was carried on with intent to defraud creditors of the CD or was carried on for any fraudulent purpose." And in this case, we find that the Adjudicating Authority has gone into the details of the circumstances of the transactions and has come to a conclusion that these transactions attract Section 66(2). 46. Appellant argues that its decisions were taken to protect c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mate business purpose or consideration. 49. Further, Appellant has failed to exercise due diligence to minimize the potential loss to creditors. The purported MOU dated 17.12.2019 with M/s Shreeniwas Developers does not create any obligation on CD warranting payment to M/s. Darshan Developers. The MOU is stated to have been entered into pursuant to a development agreement dated 07.06.2005 (between Borbhat S.R.A Co-operative Housing Society Ltd. and M/s Shreeniwas Developers) and a joint venture agreement dated 11.08.2005 (between M/s Shreeniwas Developers and the Corporate Debtor) for the development of a property. The attending circumstances raise serious questions on the purported transaction with M/s Shreeniwas Developers. The MOU dated 17.12.2019 provides for financing M/s Shreeniwas Developers with an interest-free loan up to Rs. 20,00,00,000/-. Notably, at the relevant time the Corporate Debtor was already facing financial distress and several Section 7 petitions had been filed against the Corporate Debtor and group companies of the Corporate Debtor independently by other financial creditors. In fact, the C.P. (IB)No.1632 of 2019 under Section 7 of the Code against Corpora....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ligence to minimize losses to the creditors by dissipating the assets of the Corporate Debtor. 54. Appellant has canvassed another argument that the Appellants derived no personal benefit. They were directors of the CD and promoters of the JV; their economic interest lay in project completion. The funds went directly to Darshan Developers, not to the Appellants' accounts and hence, any recovery, if at all - can only be made from Darshan Developers and not the Appellants. Appellants claim that all transactions were duly recorded in the Corporate Debtor's accounts and disclosed to the Resolution Professional. There is no allegation of falsified records or of suppression of liabilities. The Appellants' conduct, therefore, satisfies the test of good faith. The principle stated by the Supreme Court in Salim Akbarali Nanji v. Union of India, (2006) 5 SCC 302 (Para 14) applies: fraud must be specifically pleaded and strictly proved. The RP's pleadings in I.A. No. 1099 of 2024 contain no such pleading or proof. We find these arguments. Such an argument is contrary to the facts which we have noted herein. In fact, the conduct of the Appellant has been under cloud and ther....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... firm as on the date of the application. (3) The provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator." And the debt means ""debt" means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt". As such, the interim moratorium is applicable for proceedings which related to a liability or obligation due i.e., due on the date when the interim moratorium has been declared. We observe that Section 96(1)(b) IBC cannot be read to mean that any future liability or obligation is contemplated to be stayed, more so a stay of proceedings under Section 66 IBC. Section 66 of IBC is intended to prevent fraudulent trading or business by corporate debtor through its corporate insolvency resolution professional or suspended directors, during insolvency resolution process or liquidation process. Furthermore, Section 96(1)(b) IBC does not bar the Adjudicating Authority to pass appropriate orders in the pending proceedings against the suspended directors and related parties, before the Adjudicating Authority, ....