Nandkishor Vishnupant Deshpande vs. Worldwide Online Services Private Limited & Ors - The use of phrase ‘any persons’ in section 66(1) suggest that ‘outsiders’ can also be liable for fraudulent trading,

NCLT Mumbai (29.01.2021) in Nandkishor Vishnupant Deshpande vs. Worldwide Online Services Private Limited & Ors. [I.A. 1624/2020 in C.P. 2556/I&B/MB/2019] held that;

• Hence the contention of Respondent that there is no “meeting of mind” or “means-rea” is not a pre-requisite for filing and pursuing an application under section 66 of the Code. In fact the Regulation 35A of IBBI (CIRP) Regulations, 2016 uses the words “shall form an opinion” which means that the Resolution Professional is mandated to form an opinion and is not subjected to any onerous requirement of “proving” means-rea.

• The use of phrase ‘any persons’ in section 66(1) suggest that ‘outsiders’ can also be liable for fraudulent trading, as long as they had a dishonest intention of fraudulently carrying on such trade. The provision is not only restricted to ‘insiders’ like employees, directors or partners. It is wide enough to include fraud on behalf of third parties like other corporate persons and creditors. 

Excerpts of the order;

# 1. The IA was filed by the Applicant seeking the following reliefs:

• a. Consider and allow the IA No. 1624 of 2020 in terms of Section 66 read with Section 26 of IBC, 2016;

• b. Direct the Respondents as detailed in this application, to make such contributions to the assets of the Corporate Debtor equivalent to the sums as stated in this Application, in respect of benefits wrongfully availed by from the Corporate Debtor;

• c. Pass appropriate directions / orders in terms of Section 67 of the Code including for recovery/ restoration of legitimate amounts due to the Corporate Debtor;

# 21. It is relevant to refer section 66 of the Code and section 66 is produced as below;

• “Section 66- Fraudulent trading or wrongful trading

• (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 purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.

In view of the present transaction carried on by the erstwhile directors Respondent No. 2 and Respondent No. 3 it can be said that these transactions were carried on with the intention to defraud the creditors of the Corporate Debtor and the parties were well aware of the fact that no goods were purchased by the Corporate Debtor and simple entries were created in the books of accounts to clear the liability of any fraudulent transaction by and between Respondent No. 1, Respondent No. 2 and Respondent No. 3.

# 22. At the outset the provisions of the Code does not require a “pre- existence” of “means-rea” and the Resolution Professional is warranted to file an application for “avoidance of transaction” once he “shall form an opinion” whether the Corporate Debtor has been subjected to any transaction covered under section 43, 45, 50 or 66. Reference is made to Regulation 35A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016:

• 35A. Preferential and other transactions.

• (1) On or before the seventy-fifth day of the insolvency commencement date, the resolution professional shall form an opinion whether the corporate debtor has been subjected to any transaction covered under sections 43, 45, 50 or 66.

• (2) Where the resolution professional is of the opinion that the corporate debtor has been subjected to any transactions covered under sections 43, 45, 50 or 66, he shall make a determination on or before the one hundred and fifteenth day of the insolvency commencement date, under intimation to the Board.

• (3) Where the resolution professional makes a determination under sub-regulation (2), he shall apply to the Adjudicating Authority for appropriate relief on or before the one hundred and thirty-fifth day of the insolvency commencement date.

Hence the contention of Respondent that there is no “meeting of mind” or “means-rea” is not a pre-requisite for filing and pursuing an application under section 66 of the Code. In fact the Regulation 35A of IBBI (CIRP) Regulations, 2016 uses the words “shall form an opinion” which means that the Resolution Professional is mandated to form an opinion and is not subjected to any onerous requirement of “proving” means-rea.

# 23. Section 66 (1) imposes a liability on any persons who were knowingly parties to the carrying on of business with a dishonest intent to defraud creditors, to make contributions to the assets of the corporate debtor as per the order of the Adjudicating Authority.

# 24. The use of phrase ‘any persons’ in section 66(1) suggest that ‘outsiders’ can also be liable for fraudulent trading, as long as they had a dishonest intention of fraudulently carrying on such trade. The provision is not only restricted to ‘insiders’ like employees, directors or partners. It is wide enough to include fraud on behalf of third parties like other corporate persons and creditors. In this case covers the conduct of Respondent No 1.

# 25. The words used in section 66(1) i.e. “...the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit , shows that Adjudicating Authority has the power to demand contribution to the assets of the corporate debtor, from the defrauding party. In this case Respondent No 1 party would be responsible, without any limitation of liability, for the losses cause due to their fraudulent trading.

# 26. It is also important to note that unlike provisions of section 43 and 45, section 66 does not have a “look back period”. The primary reason behind not having a look-back period in the wisdom of the law maker is to ensure that no person who has acted dishonestly against the interests of stakeholders and creditors of the Corporate Debtor, should not be allowed to get away by using the defence of lapse of time.

# 27. Section 66(2) deals with a scenario where the directors take action at the instant onset of any financial distress, with sufficient due diligence. Hence, directors can be punished under this section even if they did not have a dishonest intention, but acted negligently and recklessly, hence exposing the company to further risk due to such actions.

# 28. Section 66 (2) provides for a broad spectrum of actions a director could possibility take to mitigate losses, the Adjudicating Authority would ascertain whether the director has acted as a reasonable competent director would, based on the special skills he is required to possess.

# 29. It is important to note that the directors cannot plead ignorance or lack of knowledge under Section 66 (2). The directors have a twofold duty to ensure that the interests of the stakeholders are secured and to ensure that the company does not incur any further debts during the twilight period. Directors must also make an active effort in the rehabilitation and revival of the company.

# 30. Upon perusal of the above records, there is a clear demonstration of Respondent No. 2 and Respondent No. 3 in the capacity of erstwhile directors connived with Respondent No. 1 to create such documents of ledger accounts knowing fully well that if these entries were not created they would squarely covered under the rigour of section 66 of the Code.

# 31. The professional appearing for the applicant further relied upon the judgement of the Hon’ble Supreme Court reported in the case of Official Liquidator, Supreme Bank Ltd. v/s. P A. Tendolkar [1973] 1 SCC 602 wherein the Apex court has held:

• “(6) It is a question of fact, to be determined upon the evidence in each case, whether a Director, alleged to be liable for misfeasance, had acted reasonably as well as honestly and with due diligence, so that he could not be held liable for conniving at fraud and misappropriation which takes place. A Director may be shown to be so placed and to have been so closely and so long associated personally with the management of the Company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of the business of a Company even though no specific act of dishonesty is proved against him personally.

• He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the Company even superficially. If he does so he could be held liable for dereliction of duties undertaken by him and compelled to make good the losses incurred by the Company due to his neglect even if he is not shown to be guilty of participating in the commission of fraud. It is enough if his negligence is of such a character as to enable frauds to be committed and losses thereby incurred by the Company. [386E-H]

# 32. He further relied upon the judgement of the Hon'ble NCLAT in the case of Vijay Pal Garg & Ors vs Pooja Bahry (Liquidator of Gee Ispat Private Limited) [Company Appeal (AT) (Insolvency) No.949 of f2019] wherein the Hon'ble NCLAT was dealing with identical facts of an Application filed by RP under section 66 and it was found that the records and accounts of the Corporate Debtor have been falsified and eventually proceeded to trigger an investigation under section 213 of the Companies Act 2013. 

Conclusion:

# 33. Upon perusal of the unaudited balance sheets for the year 1st April 2018 to 31st March, 2019 and 1st April, 2019 to 13thNovember, 2019, as produced in IA 1212/2020 filed by the Resolution Professional and copies of Unaudited Balance sheets for the same year, as produced/filed in the present IA, it can be said that, both the unaudited balance sheets relates to the same year, but contains different data, it is evident that there has been a clear falsification/ fabrication of accounts of the Corporate Debtor. These unaudited balance sheet, evidenced that an outstanding balance of Rs.57.72croreswas receivable from Respondent No. 1. In order to escape the wrath of provisions of Section 66 r/w 69, 70, 71 and 72 of the Code, the Respondent Nos. 2 and 3 created new book entries and hence the tally data shows that the entire outstanding receivable of Rs. 98.97 Crores stood reversed.

# 34. The mere purchase entries in the ledger accounts without description of invoices and purchase orders does not substantiate the claim of purchase made by and between Respondent No. 1 and Respondent No. 2 and 3 herein. Further no record is produced to show payment of GST towards the said sales. Hence it is concluded that the above transactions are fraudulent in nature and there has been no sale of gold by Respondent No.2 & 3 to Respondent No.1 and therefore Respondent No.1 is liable to refund the monies outstanding in the books of Accounts of the Corporate Debtor.

# 35. This is the serious offence committed by the Respondent No. 1, Respondent No. 2 and Respondent No. 3 and the Respondent No. 1 being beneficiary of falsification of documents.

# 36. This Tribunal doth orders as follows:

• a) The Respondent No.1 is directed to refund Rs. 98,96,82,438/- immediately forthwith.

• b) The IA is allowed and disposed off with the above direction.

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