TaxTMI 
TaxTMI 
TaxTMI 
2025 (12) TMI 1391
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....h-I ("Adjudicating Authority") in M.A. 423 of 2020 in C.P.(IB) No. 1058/MB/2017. Alok Saksena, who is the Liquidator of Unity Infraproiects Limited, is the Respondent herein. 2. It is contended by the Appellants that they are the promoters and suspended directors of the Corporate Debtor, namely, Unity Infra Projects Limited, and are aggrieved by the aforesaid Impugned Order, which erroneously directs them to contribute a sum of Rs. 231.64 Crores to the assets of the Corporate Debtor, together with interest at 12% per annum. 3. The Appellants submitted that Section 66 of the Code requires the attribution of specific knowledge and active participation to an individual before any order thereunder can be sustained. In the instant case, neither the application bearing MA 423 of 2020 nor the Impugned Order dated 19.04.2024 records any such attribution vis-à-vis the Appellants. It is the case of the Appellant that this glaring omission renders the Impugned Order not merely non-compliant with the foundational requisites of Section 66 of the Code but also in violation of the principles of natural justice, as it was rendered sans any opportunity to the Appellants to address p....
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....mistake about the facts, positing a disbursement of Rs. 1643.33 Crores to Magnum via LCs, whereas the evidentiary matrix discloses utilization of LCs to the tune of merely Rs. 1317.18 Crores for such payments, and a direct remittance of Rs. 326.14 Crores unencumbered by any LC. Following standard banking practices, the issuing bank would have deducted around Rs. 115 crores as fees when releasing the funds to Magnum. This left an actual pay-out of about Rs. 1,200 crores through the LC. On top of that error, the Adjudicating Authority overlooked Magnum's admitted repayment of Rs. 1,412 crores to the company, as noted in the Forensic Audit Report, a figure that exceeds the total LC amount disbursed, including those bank charges. 9. The Appellants submitted that without affecting the company's right to fully recover the money from Magnum, the appellants claimed that neither the company nor they played any part in Magnum holding back various amounts, which were supposedly due to bank charges (totalling Rs. 115 crores) and transportation costs. 10. The Appellants also argued that the challenged order relies solely on alleged problems with "transport documents," which shows ....
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....e silence in the Report and in Respondent's arguments about any wrongdoing or delay by the banks clearly shows that these transactions followed all required laws and standard business practices. The Appellants argued that it makes no sense to base liability on mere guesses from an admittedly incomplete report, especially without any mention of bank errors in a process that heavily relies on banks. 16. The Appellants submitted that in response to Respondent's application, the Appellants properly filed a counter-affidavit. Unfortunately, the Forensic Audit Report is flawed because it relies too heavily on incomplete information and missing evidence, with many parts of the Report lacking the data the auditors themselves requested. As a result, most of its supposed findings turn into mere speculation without any solid factual support. 17. The Appellants stated that the Forensic Auditor asked the Corporate Debtor for various important documents, including reports submitted to banks, bank statements, loan approval letters, and other financial records. After the CIRP began, control of the Corporate Debtor and all these documents passed to the Respondent, who failed to provid....
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....ts, an unreasonable exaggeration. 21. The Appellants submitted that the auditors' conclusion that loans were being round-tripped through "interested entities," based on missing records in the Corporate Debtor's books for Magnum payments, falls apart under closer look: issuing an LC requires submitting basic supporting documents to the banks, which should have been requested. Also, the auditors only reviewed limited records, making their conclusions nothing more than guesses. 22. The Appellants stated that after the CIRP started, control over the Corporate Debtor's records including those related to Magnum went to Respondent. Any missing transport documents, if they exist, would be held by the banks or Respondent. Importantly, purchase orders and other Magnum-related documents were provided to Respondent after the CIRP began, which clears the Appellants of any blame for diverting funds or creating circular transactions. Therefore, the auditors' criticisms based on small procedural gaps, limited review of documents, and the shift in control after the CIRP cannot support claims of wrongdoing. Any missing evidence can be traced back to the banks' records or Re....
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....licitly acknowledged the Appellants' reply dated 10.12.2021, which claimed absence of Section 66(1) ingredients, vagueness in the application, and the need for opportunity to defend against omnibus allegations, while emphasizing that a forensic auditor's perceptions cannot substitute judicial wisdom. Despite this, after affording due opportunity, the Adjudicating Authority analysed the fraudulent transactions and concluded loss to the Corporate Debtor, thereby adequately dealing with the Appellants' pleas. 30. The Respondent submitted that the Appellants' reliance on the Forensic Audit Report's disclaimer is misconceived, as the fraudulent nature of Magnum transactions is evident from available documents, including the absence of underlying purchases or supporting evidence. The Letters of Credit (LCs) were opened on fictitious purchase documents not accounted in the Corporate Debtor's books, with only Rs. 6.52 crores recorded as purchases against Rs. 1643.33 crores disbursed, rendering the transactions ex facie fraudulent. 31. The Respondent contended that the Appellants' repeated assertion of full repayment to the Corporate Debtor and banks is mis....
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....009 per MCA records and cannot deny knowledge of flagged transactions. The Respondent contended that during the forensic audit, the Auditor sought explanations via email dated 09.07.2019, conducted thorough inspection of financials, and prepared the Report only after affording representation to the Appellants. 38. The Respondent submitted that during M.A. No. 423 of 2020's pendency, parties agreed to document inspection on 22.12.2020. The Appellants' post-inspection email dated 23.12.2020 claiming inability to inspect auditor-examined documents is untenable, as the Report's "Work Steps Performed" section lists reviewed data/documents, and no further requests were raised. 39. The Respondent contended that the Appellants, aware of the audit via representation opportunity, raised inspection pleas only post-filing of M.A. No. 423 of 2020 as an afterthought. All relevant documents were provided to the Auditor; additionally, the Respondent verified books, confirming fraudulent trading, leading to the application under Section 66. 40. The Respondent submitted that even in this appeal, the Appellants failed to produce material contradicting the Forensic Audit Report or....
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....e Respondent contended that there exists no presumption of legitimacy merely by virtue of the issuance of Letters of Credit by banks, as fraudulent transactions may nonetheless be effectuated through valid LCs; the Forensic Auditor duly compiled and scrutinized documents sourced from both the Corporate Debtor and the relevant banks, ensuring a comprehensive inspection; furthermore, as Managing Directors overseeing the day-to-day operations of the Corporate Debtor since 2009, the Appellants possessed unequivocal knowledge of the transactions flagged in the Forensic Audit Report. 46. The Respondent submitted that the Forensic Audit Report has been prepared based on review of the Corporate Debtor's audited financial statements, alongside comprehensive scrutiny of ledgers pertaining to sales, purchases, major expenses, and borrowings, complemented by thorough fund tracing from banks and financial institutions. The Respondent emphasized that, an opportunity of representation was duly extended to the Appellants prior to the Report's finalization, but the Appellants could not explain the transactions. 47. The Respondent submitted that the Appellants' case is founded on vague....
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....urther submitted that both M.A. No. 423 of 2020 and the Impugned Order comprehensively address the fraudulent Magnum transactions and the unpaid amounts; the Appellants executed these transactions fraudulently, as evident from the books of account. The Impugned Order also records that the Letters of Credit were mere accommodation entries used to inflate borrowings without effecting a complete refund of amounts to Magnum. The Respondent submitted that no principle of natural justice was violated, since the Appellants filed replies and participated in hearings. The Respondent contended that the application specifically set out detailed allegations against the Managing Directors, who failed to rebut them or produce any supporting material, and the allegations were not directed towards "any individual" but towards those in charge of operations. 54. The Respondent submitted that the Appellants' reliance on an analogy with Section 339 is misplaced and that the ingredients of Section 66 of the Code are fully met in view of the fraudulent intent. The Respondent further contended that the claim that "every penny was repaid" is false, since an amount of Rs. 231.64 crores remain outstandin....
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....Insolvency Resolution Process (CIRP) was initiated vide order dated 20.06.2017, with Mr. Arun Kapoor initially appointed as Interim Resolution Professional. In the absence of any approved resolution plan by the CoC, Respondent filed MA 227 of 2018 seeking liquidation of the Corporate Debtor. 60. We observe that M/s MGRS & Associates was engaged by the erstwhile IRP for due diligence of the Corporate Debtor, submitting their report on 25.07.2017. Subsequently, at the direction of the CoC, the Respondent appointed BDO India LLP on 05.10.2018 to conduct a forensic audit, culminating in the Forensic Audit Report ("FAR") dated 25.09.2019. 61. We have already noted the facts while recording the submissions of the parties. We take into consideration that Forensic Auditor submitted their report on 25th September 2019, which flagged certain transactions carried out with entities as interested party and an amount equivalent to Rs. 1946.15 Crores being fraudulent transactions. One, of the alleged interested party is Magnum, to whom a sum amounting to Rs. 1643.33 Crores were issued by Corporate Debtor from various banks without any supporting purchase document and only recording a minusc....
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....ed the very basis of obligation made by the Resolution Professional seeking contribution from the Appellants since the Forensic Auditor themselves have used disclaimer while giving the Forensic Audit Report. The Appellants also took objection that suitable records were not available with the Forensic Auditor, as such the Forensic Audit Report is incomplete as it was based on facts which were not verifiable from the records. 66. The Appellants strongly argued that the Forensic Audit Report or the MA 423 of 2020 did not give any specific information regarding knowledge and involvement of the Appellants and the Appellants, therefore, cannot be compelled to contribute to the Corporate Debtor without any specific allegations. 67. It is further the case of the Appellants that to pass the order in such cases there should be very high standard of proof under Section 66 of the Code and merely on the allegations the Adjudicating Authority ought not to have passed the Impugned Order. 68. We also take into consideration the plea made by the Appellants that all transactions were made that the Magnum Infra Projects Ltd. were done as normal course of business and significantly the entire....
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....done due diligence through independent entities including detailed Forensic Report submitted by BDO India LLP which pointed out several irregularities. The Respondent strongly defended that Impugned Order which is stated to be well reasoned and speaking order that a specific direction to the Appellant to pay Rs. 231.64 Crores plus 12% interest compounded interest. 74. The Respondent countered all arguments of the Appellants including disclaimers used by the Forensic Auditors, which according to Respondent is commonly used in such reports, since, in case of frauds, it is seldom that all records are available. 75. The Respondent further argued that in most of the cases including the present case, the Promoters & Managing Directors never co-operate and did not give any documents as such the Forensic Auditors submitted report based on documents available or obtained by bank etc. which has happened in the present case. 76. The Respondent also alleged that there is clear case of round tripping, which has caused havoc on the Corporate Debtor and it was purely intended to be done to defraud creditors. 77. The Respondent further differentiated between Section 66(1) vis-à-....
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....ound tripping refers to the process of routing funds through intermediary entities or offshore channels to disguise their origin, often for purposes like money laundering, inflating revenues, or evading taxes. It typically involves investments where funds are cycled back to the Corporate Debtor. This process can manifest in scenarios like sham loans or transactions where funds are diverted and returned via paper entries especially in insolvency cases where apparent financial debts are revealed as mere round-tripped amounts without real economic substance. The adverse impact on the Corporate Debtor is significant since Round tripping often leads to fund diversion, triggering avoidance proceedings under the Code, allowing resolution professionals to claw back such transactions. Moreover, it undermines creditor recovery by inflating apparent debts or assets, complicating the CIRP. Overall, round tripping accelerates insolvency risks by masking underlying financial distress and defrauding stakeholders. 84. We note that in the present case Rs. 1643.33 Crores were given to Magnum by the Corporate Debtor via various LCs through several banks, as well as through Direct Payments, without....
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....ission is not factually correct as although a sum of Rs. 1454.62 crores were paid back by Magnum, the total amount paid to Magnum was Rs. 1643.33 crores and interest payable were Rs. 42.93 crores. Thus, there was a clear loss to the Corporate Debtor on account of these alleged circular transactions carried out by the Appellants. We had put pointed queries to the Appellants during hearing before us that whether they can link and establish all required documents to substantiate their claims even now. The Appellants however failed to disclose any details and nature of transactions carried out with Magnum, which creates further doubt on the veracity of these transactions. 89. We will now examine another issue raised by the Appellants that since, there was no specific instance highlighted against the Appellants to be responsible for in the alleged frauds under Section 66 of the Code and further, no direct benefits have been proved against the Appellants, the Impugned Order is perverse. In this connection, we note that Section 66(1) of the Code, addresses fraudulent trading, holding persons liable if the business of the CD was carried on with intent to defraud creditors or for any fra....
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....uing large-value LCs, precautions are crucial to avoid fraud, insolvency triggers, or liabilities. CD is required to conduct thorough due diligence on beneficiaries and suppliers to verify legitimacy and prevent sham transactions. LC terms need to be strictly aligned with underlying contracts, specifying clear documents like bills of lading to avoid discrepancies. In the present case, we note that payment of Rs. 1643.33 Crores (both LC payment & direct payment), were issued to Magnum without any suitable documentation. It was clearly the responsibility of the CD and its management (the appellants herein being Suspended Managing Directors of the CD) to ensure that for the LCs issued through banks, all financial safeguards do exist and all documents are complete. In the present case, we have noted that there is almost complete absence of documents and transportation documents to establish such claims of alleged percentage to Magnum of Rs. 1643.33 crores were done in normal course of business as only Rs. 6.52 crores of goods are stated to have been received by the CD. 94. During pleadings, it has been brought to notice that the appellants have been in the business of construction a....
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....was filed, the Appellants, started raising the plea of inspection of documents. In any event, all relevant documents were provided to the Forensic Auditor. In addition to the said report, the Respondent verified the books of the corporate debtor and concluded that the Appellants carried out fraudulent trading. Accordingly, the Respondent filed MA. No. 423 of 2020 under Section 66 of the Code before the Adjudicating Authority. 97. We note that even in the present appeal before us, the Appellants have not brought any document/record/evidence on record which were relevant in contradicting the Forensic Audit Report, or the averments made in the application under Section 66 of the Code. 98. We are aware that the Section 66 of the Code, empowers the Adjudicating Authority to pass an order for recovery from fraudulent transactions as contribution to the assets of the Corporate Debtor. The relevant portion of Section 66 is reproduced below: "(1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent ....
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....res which was never received and after considering the non-genuine purchases of Rs. 6.52 crores, there is a total deficit of Rs. 231.64 Crores in the hands of Corporate Debtor. Further, Appellants failed to produce any document to show the true commercial nature of the transaction. 101. As regard, the issue raised by the Appellant regarding alleged deemed charging of interest or discounting by banks on LC which Appellant have assumed a figure of Rs. 115 Crores, we shall examine the same. In this connection, we note that Banks charge interest or apply discounting on Letters of Credit (LCs) as part of trade finance services, primarily to cover the risk and cost of advancing funds. Discounting involves the bank purchasing bills or documents under an LC, advancing payment to the supplier minus a discount fee (interest equivalent), depending on the bank and transaction type. For usance LCs (deferred payment), interest is charged for the credit period, often at commercial rates aligned with RBI guidelines. In LC-backed bill discounting allows suppliers to receive immediate funds, with the bank recovering from the buyer's bank on maturity, minus charges. For inland/domestic LCs, banks ....
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....justice as the Appellants filed their replies and were duly heard by the Adjudicating Authority. The Respondent's application has specific averments against the Appellants who were Managing Directors of the Corporate Debtor. It is the Appellants who failed to rebut the allegations or place on record any material to contradict the findings of the Forensic Audit Report and the averments in the application. The Appellants are not "any individual" but were Managing Directors of the Corporate Debtors who had foreseen the day to day operations of Corporate Debtor. 105. Thus, we are not impressed with the arguments of the Appellants that such huge payment to Magnum either through LC or through direct payment, were done in ordinary course of business since no documentations could be brought out to establish that these transactions were genuine. Further, the Appellants could not substantiate any purchase documents or transportation receipt or related document to prove the same. 106. Based on above detailed analysis, we do not find any error in the Impugned Order. The Appeal is devoid of any merit and stand rejected. No cost. I.A., if any, are closed. ============= Document 1 8.1 ....