TaxTMI 
TaxTMI 
2026 (9) TMI 1385
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....othecated in favour of the Financial Creditors was not the machinery which was found at the premises of the Corporate Debtor. Submissions of the Appellant/ Suspended Directors 2. The Appellant claims that those were allegations of irregularity and not fraudulent business as contemplated under Section 66 of the Code. It claims that even if the allegation of a machine swap is taken as true, this act, in and of itself, does not automatically constitute a "fraudulent business" under Section 66 of the Code. A single fraudulent transaction is not a pointer to the entire business being fraudulent. The Appellant relies on the judgment of this Appellate Tribunal in the case of Renuka Devi v. Regen Powertech, (2023 SCC Online NCLAT 4726) wherein it was held that a single fraudulent act on a Corporate Debtor during business does not itself necessarily infer that the business was carried on with the intent to defraud creditors. Paragraph 30 of the said decision reads thus: "30. It must be borne in mind that whenever a "fraud" on a "corporate debtor" is committed, in the course of carrying "business", it does not necessarily mean that the "business" is being carried on with an in....
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.... Code. The Legislature has consciously kept the applications in respect of fraudulent trading or wrongful trading falling in Chapter VI, outside the purview of section 25(2), which requires the resolution professional to undertake the actions and file applications for the avoidance of transactions in accordance with Chapter III. Both, the avoidance applications under Chapter III and the applications in respect of fraudulent trading or wrongful trading under Chapter VI, operate in different situations. The powers of the Adjudicating Authority in respect of the avoidance applications filed under Chapter III and the powers of the Adjudicating Authority in respect of the applications pertaining to the fraudulent and wrongful trading filed under Chapter VI, have also been separately circumscribed." 5. The Appellant also claims that the findings of the Ld. Adjudicating Authority, on the identity of the machinery are contradictory. The NCLT's order contains mutually contradictory findings regarding the identity of the machinery. While the order proceeds to hold that the Appellants was liable for the discrepancy, it simultaneously casts doubt on the ability of the parties to conclus....
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....nd waiver. 8. The Appellant claims that the identity of the machinery was duly established and verified on multiple occasions. A Court Receiver appointed by the Hon'ble Bombay High Court submitted a report verifying and confirming the presence of the machine, a Flexographic Press NSA-14. This report was signed by the financial creditor's representative. 9. The Financial Creditors took possession of the machinery under Section 13(4) of the SARFAESI Act on 19.09.2020, without raising any objections regarding the machine's identity. 10. The Appellant claims that the Financial Creditors' prior acceptance and verification of the machinery's identity, both through the Court Receiver's report and their own due diligence, create a clear case of estoppel. They cannot now, through the RP, question the identity of the very machine they previously verified and took possession of. 11. The Appellant further contends that the entire email of 12.10.2023 by Pranav Ambaselkar was rebutted by relying on the affidavit of Francis Fernandes, the purported supplier of the machine, who denied having supplied machinery or parts to the Corporate Debtor. The affidavit, on ....
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....nes, 6 colours Varieties along with its accessories. 17. The Corporate Debtor purchased the C.I. Flexographic Press with 6 Colour Variety along with accessories from Brick and Byte Innovative Products Private Limited vide Invoice No. 107 dated 23rd December 2016 for total amount Rs. 11,50,33,603.50/- by utilizing the proceeds of loan obtained from Tata Capital Financial Services Limited to the tune of Rs. 8,00,00,000/. The said invoice duly reflects the delivery note number and the vehicle number through which it was dispatched. (Invoice at Page No. 178 of the Appeal Memo). 18. The Corporate Debtor further purchased second C.I. Flexographic Press with 6 Colour Variety from Nyles Sales Agencies Private Limited vide Tax Invoice No. NSA/16-17/1182 dated 14th March 2017 for a total amount of Rs. 5,72,72,000/-by utilizing the proceeds of loan obtained from Hero Fincorp Limited (now Phoenix ARC) for an amount of Rs. 4,00,00,000/-. The said invoice also contains details of vehicles through which the said machine was dispatched to the factory premises of the Corporate Debtor, being D-51, MIDC Buti-Bori, Nagpur. (Invoices at Page No. 177 of the Appeal Memo). 19. The Corporate Debto....
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....d to support as to why and under what circumstances the make, model, manufacture type etc. of machine was removed or why there were inconsistencies in the labels of the machines than those mentioned in the invoice. The same is without prejudice to the fact that, neither of the said 2 (two) C.I. Flexographic Press Machines or even Flexographic Printing Machine as contended by the Appellant were found or available at the factory premises of the Corporate Debtor. (Valuers Email dated 12th October 2023-Page No. 193 of Appeal Memo & Valuer Pranav Ambaselkar Report dated 13th September 2023 Page No. 433 of the Appeal Memo)). 23. The Respondent No. 2 submits that both the valuers appointed by the RP being Mangesh Khedkar and Pranav Ambaselkar registered with the Board and being Mechanical Engineers have categorically observed in their valuation report that both machines at site are Rotogravure Printing Machine. It is further submitted that the valuer Pranav Ambaselkar, Chartered Engineers in his valuation report dated 13th September 2023 has stated that there exists evidence wherein it appears that machinery had been installed but since it had been removed. Therefore, it is evident tha....
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.... RP and the senior industrial expert stating that the senior industrial expert did not actually visit or inspect the machines in question and on other hand relies on and seeks to solely establish their case based on opinion of valuer Mr. Ankit Goel appointed suo moto by them who never actually inspected the said machines by himself but had rather merely sent a representative having no technical knowledge whatsoever and merely on the basis of photographs clicked by him, gave an opinion on certain comparative features of machines at site and not even a determinate opinion that machines are Flexographic Printing Machines 8 colour variants and yet, the Appellants quite astoundingly contend that they are in fact Flexographic Printing Machines 8 colour variants and from the aforesaid, it is evident that the case of Appellants is without substance and fall flat on its head. (Impugned Order dated 18.12.2024 Para 14 to 17 at Page No. 131 & 132 of the Appeal Memo). 26. Respondent No. 2 submits that viewed from any angle or perspective, the fact that loans were obtained to purchase (two) machines of certain description C.L. Flexographic Press Machine 6 colour variant by the Corporate Debto....
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....). 28. Even the Hon'ble High Court of Bombay in the order passed on 8th January 2020 passed in Commercial Arbitration Petition (L) No. 1603 of 2019 in paragraph No. 9 has recorded the inconsistencies in the stand of the Appellant that despite the loan documents clearly mentioning the vendor and the year of manufacturing as of 2016, but there are even records now to indicate said machine at site was not of manufacturer in the year 2016 but 2017 and some parts supplied by Brick & Byte Innovative Products relates to some printing machinery units without specifications and not to the machine itself while only one machine at the site was bearing endorsement of the manufacturing year as of 2017 which the Hon'ble High Court noted raises more questions than giving the answers. (Page No. 355 of Appeal Memo). 29. The Respondent No. 2 submits that on CIRP being commenced on 18th April 2023, the Appellants were duly bound to handover C.I. Flexographic Press 6 Colour Variant or in any case Flexographic Printing Machine 8 Colour Variant as contended by Appellants themselves, but what machines were available on site after possession was taken over by the RP on 5th July 2023 pursuant....
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....hines were purchased then why they were different in size and why does their own valuer Ankit Goel refer to second machine on site as 6 colour variant. Hence, it is prayed that present Appeal be dismissed with cost. Analysis and Findings 32. We have considered the submissions of the parties and perused the material placed on record. The principal question for consideration is whether the Adjudicating Authority was justified in exercising jurisdiction under Section 66 of the Code and in directing the Appellants to make contribution to the assets of the Corporate Debtor on account of the removal and replacement of the machinery financed and hypothecated in favour of the Financial Creditors. 33. At the outset, the documentary record establishes that the Corporate Debtor had obtained finance from the two Financial Creditors for purchase of two C.I. Flexographic Press Machines of six-colour variety. The relevant invoices record the purchase and dispatch of the machines to the factory premises. The machinery was also subjected to hypothecation in favour of the Financial Creditors. Thus, the existence of the financed and hypothecated machinery is not founded merely upon an oral a....
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....nting-type machine. The photographs attached with this report clearly indicate the label of Frans Engineering Corporation with its address noted therein, which is placed on record at page 443. 37. On further inquiry the valuer had clarified that, specifically, the C.I flexographic machines for which invoices were shown to him were not present on site but there was the presence of a rotogravure printing machine. The valuer also notes that during their on-site assessment they observed the existence of machinery foundations that suggested that machines had previously been installed but had subsequently been removed. The valuer also brings to the notice of the liquidator that the most reliable way to validate the presence of particular machinery is by cross-checking the serial number, model number, or make of the on-site machine with the information outlined in the invoices or documents. However, in this particular case, they faced challenges verifying the serial number and model number due to either missing or mismatched nameplates. 38. Thus we find that the reports, read with the physical indications at the factory premises and the absence of documentary material accounting for....
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....r are Rotogravure Machines that are valued much less than the sanctioned machines. A high standard is always applied for the proof of a positive fact, while the standard of preponderance of probability is sufficient to prove a negative fact. In the present case, it is more probable than not that the Respondent Nos. 1 and 2 have changed the machinery in the Corporate Debtor's premises with machinery of much less value for their own unjust enrichment. 24. In light of the above discussion, we find that the Respondent Nos. 1 and 2 acted in bad faith and defrauded the creditors by availing a loan of Rs. 12 crores for the purchase of certain machinery and have instead installed completely different machinery, that is valued at a much lower price, in the premises of the Corporate Debtor." 42. The plea that Section 66 of the Code, cannot apply because the case concerns only one transaction is equally without merit. For better appreciation of the power relating to fraudulent or wrongful trading as per the Insolvency and Bankruptcy Code, the relevant provisions are extracted as below: "Section 66-Fraudulent or wrongful trading. (1) If during the corpor....
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....not a mere technical irregularity. It directly affects the asset base of the Corporate Debtor and the security and recovery prospects of its creditors. We find that the adjudicating authority is sufficiently empowered to delve into the issue of fraudulent or wrongful trading and the resolution professional has rightly moved the application. The Adjudicating Authority was well empowered to direct the suspended director of the Corporate Debtor to make such contribution to the assets of the Corporate Debtor as it deemed fit. 44. Furthermore, we are conscious of the principle, relied upon by the Appellants, that a finding under Section 66 of the Code, requires the statutory ingredients to be established and that mere negligence or an isolated irregularity cannot automatically be characterized as fraudulent trading. The authorities cited by the Appellants therefore do not lay down that direct evidence of fraudulent intent is indispensable in every case. On the contrary, the nature of the enquiry permits the adjudicatory authority to draw a conclusion from the totality of the circumstances. Thus we find that the appellant's reliance on Renuka Devi (supra) is of no assistance to it....
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....nt determined by the Adjudicating Authority. The Appellants have not demonstrated before us that the quantum directed by the Adjudicating Authority is so arbitrary or unsupported by the record as to warrant appellate interference. The plea regarding depreciation and realizable value, in the circumstances of the present case, does not dislodge the substantive finding that the financed and hypothecated machinery was removed and that the Corporate Debtor's asset position was thereby depleted. 49. We also reject the submission that the Resolution Professional or Liquidator was required to conduct a forensic investigation of every aspect of the alleged removal before an application under Section 66 could be maintained. The insolvency process cannot be rendered ineffective merely because the precise manner in which an asset was removed cannot be reconstructed with mathematical certainty. The adjudicatory determination is based upon the evidence available on record and the cumulative inferences arising therefrom. 50. The conduct of the suspended Board in resisting or delaying the taking over of possession assumes relevance in the present factual matrix. The CIRP commenced on 18.04.2....