Imp. Rulings;- Fraudulent Transactions [Section 66(1)] of IBC.
Index;
NCLAT (2024.03.06) in Md Sadique Islam & Ors. Vs. Niraj Kumar Agarwal & Ors. [Company Appeal (AT) (Ins.) No. 1081 of 2022 & I.A. No. 3178 of 2022] (Ingredients of each transaction to be examined)
NCLAT (2023.08.04) In Mr. Tenny Jose & Ors. Vs. Mr. Prathap Pillai Resolution Professional of M/s. Tenny Jose Limited, [Company Appeal (AT) (CH) (INS.) No. 95 / 2023] [ Burden of Proof]
NCLAT (2023.06.05) In Renuka Devi Rangaswamy,IRP of M/s. Regen Infrastructure and Services Pvt. Ltd. Vs. Mr. Madhusudan Khemka [Company Appeal (AT) (CH) (INS.) No. 356 of 2022] [dishonest intention’, to `defraud’]
Supreme Court (2023.05.19) In Gluckrich Capital Pvt. Ltd. Vs. The State Of West Bengal & Ors. [Miscellaneous Application No. 1302/2023 ] [Remedy against Third Party]
High Court Tripura (2023.01.18) in Smt. Sudipa Nath Vs. Union of India [WP(C) (PIL) 04 of 2023] [such person who are responsible]
NCLAT (2022.10.10) in Mrs. Renuka Devi Rangaswamy, RP of M/s. Regen Infrastructure and Services Pvt. Ltd. Vs. M/s. Regen Powertech Pvt. Ltd. [Comp. (AT) (CH) (Ins) No. 357 / 2022 & IA/814/2022] [Wrongful Trading - Incipient Insolvency]
NCLAT (2022.09.23) in Regen Powertech Pvt Ltd Represented by Erstwhile RP Vs. M/s. Wind Construction Private Limited, & Ors. [Company Appeal (AT)(CH)(Ins) No.349/2022] [‘High Degree of proof’]
NCLT Kolkata (2022.05.30) in Shri Kuldeep Verma, RP v. Induslnd Media and Communications Limited (IMCL) & Ors. [I.A. (IB) No. 841/KB/2020 And I.A. (IB) No. 1288/KB/2020 In C.P. (IB) No. 1510/KB/2018] [Satisfaction & Determination by RP]
NCLT Kolkata (2022.04.19) in Pinaki Sarkar, Liquidator of Bansal Refineries Private Limited Vs Amicus Oil & Chemicals Private Limited & Ors. [IA (IB) No.295/KB/2020 in CP (IB) No.11/KB/2019] [Onus of Proof lies with the Liquidator]
NCLAT (2022.04.06) in Aditya Kumar Tibrewal RP Vs. Om Prakash Pandey, Suspended Director [Company Appeal (AT) Insolvency No. 583 of 2021] [Timeline is not Mandatory]
NCLT New Delhi-V (2022.02.21) in Satya Prakash Resolution Professional Y M Foodways Private Limited Vs. Uttam Roy & Ors. [L.A. No. 5610 of 2020 in Company Petition (IB)No.421/ND/2019] [Absence of specific Averments]
NCLT, Mumbai (2021.11.29) in Venkatesan Sankaranarayanan, the Resolution Professional for RTIL Limited v. Nitin Shambhukumar Kasliwal & Ors. (CP No. 382 / I & B / MB/2018) [bad commercial business decision cannot be considered to be fraudulent or wrongful trading]
Supreme Court of India (2020.02.26) in Anuj Jain IRP for Jaypee Infratech Limited Vs Axis Bank Limited Etc. (Civil Appeal Nos. 8512-8527 of 2019 and other petitions) [Attributes of Avoidance Application]
NCLT Chennai (2019.02.06) in The Resolution Professional for M/s. Orchid Pharma Limited Vs. M/s. Hospira Healthcare India Pvt. Ltd & Others [MA/87/IB/2018 in CP/540/IB/2017] [Attributes of Fraudulent Transactions - Fraudulent Intention & Presumption of due diligence]
NCLT Chennai (2019.01.10) in Mr. Ramkumar SV Vs. M/s. Serum Institute of India Limited [MA/92/ 1B/2018 in CP/540/IB/CB/2017] [Attributes of Fraudulent Transactions - Payment to Creditors]
Supreme Court of India (1975.12.09) In Union Of India vs M/S.Chaturbhai M. Patel & Co. [Civil Appeals Nos. 972- 973 of 1968] [Burden of Proof]
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# 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.
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(3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10A.]
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.
Attributes of Section 66(1)
Blogger’s Comments;
Payments made to the creditors cannot be brought under the caption of either fraudulent trading or wrongful trading,
Sub-section (3) of Section 66 signify that application of wrongful trading/business [Sub-section (2) of Section 66] has different attributes with that of fraudulent trading/business under Sub-section (1) of Section 66, hence separate application is required to be filed under these two Sub-sections.
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1). NCLAT (2024.03.06) in Md Sadique Islam & Ors. Vs. Niraj Kumar Agarwal & Ors. [Company Appeal (AT) (Ins.) No. 1081 of 2022 & I.A. No. 3178 of 2022] held that;
When we look into the aforesaid paras, it is clear that the Adjudicating Authority has recorded only its conclusions and that too without considering the preferential, undervalued and fraudulent, each transaction separately and there is general observation that the transactions are undervalued transactions as well as preferential and fraudulent transactions.
The ingredients of preferential, undervalued and fraudulent transaction are entirely different and there has to be application of mind to the ingredients of each transaction to come to conclusion that ingredients are satisfied and the transaction falls in the said category adverting to the given pleadings in the application.
The Adjudicating Authority ought to have adverted to the said pleadings and returned the finding regarding the fulfilment of ingredients of each provision.
[ Link Synopsis ]
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2.). NCLAT (04.08.2023) In Mr. Tenny Jose & Ors. Vs. Mr. Prathap Pillai Resolution Professional of M/s. Tenny Jose Limited, [Company Appeal (AT) (CH) (INS.) No. 95 / 2023]
# 40. In `Law’, a `Fraudulent Intent’, is to be `proved’, after a careful examination of all materials / evidence, as the case may be. If a `Fraudulent Intent’ or `Fraudulent Purpose’, is made out, the `Liability’, must follow. An action can also lie, when there is a `Fraudulent Purpose’, upon the `Customers’ of the `Company’. The `Burden of Proof’, is the same as in a `Civil’ case, where `Serious Allegations of Misconduct’, such as, `Fraud’ are in `issue’. In an `isolated fraud’ case, an `Individual Tort Action’ (`Civil Wrong’), will lie.
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3). NCLAT (2023.06.05) In Renuka Devi Rangaswamy,IRP of M/s. Regen Infrastructure and Services Pvt. Ltd. Vs. Mr. Madhusudan Khemka [Company Appeal (AT) (CH) (INS.) No. 356 of 2022] held that;
# 37. `Dishonesty’, is an essential ingredient of `Fraudulent Trading’. The `Aspect of Dishonesty’, is to be established and it cannot be inferred in any manner. Whether a `Director’, had exercised his skill, experience and general knowledge, to be expected of a person, in carrying out the `duties of his functions’, is to be determined for a `Liability’, in the considered opinion of this `Tribunal’.
# 38. The Appellant has a `duty’, to establish to the satisfaction of this `Tribunal’, that a `person’, is knowingly carrying on the business with the `Corporate Debtor’, with an `dishonest intention’, to `defraud’, the `Creditors’. For a `Fraudulent Trading’ / `Wrongful Trading’, necessary materials are to be pleaded by a `Litigant’ / `Stakeholder’, by furnishing `Requisite Facts’, so as to come within the purview of the ingredients of Section 66 of the I & B Code, 2016. Suffice it, for this `Tribunal’, to pertinently point out that the ingredients of Section 66 (1) and 66 (2) of the I & B Code, 2016, operate in a different arena.
[ Link Synopsis ]
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4). Supreme Court (2023.05.19) In Gluckrich Capital Pvt. Ltd. Vs. The State Of West Bengal & Ors. [Miscellaneous Application No. 1302/2023 ] held that;
Accordingly, an application under Section 66(1) by the resolution professional would not bar any civil action in accordance with law, either at the instance of resolution professional or liquidator or by the corporate debtor in its new avatar on a successful CIRP for recovery of any dues payable to the corporate debtor by such organization / legal entities.
The remedy against third party, however, is not available under Section 66 of IBC, and the civil remedies which may be available in law, are independent of the said Section.
[ Link Synopsis ]
Blogger’s Comments; Provisions of Section 67 signify that “third party” mentioned in the order refers to the person who is neither beneficiary nor knowingly party to the fraudulent transaction
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5). High Court Tripura (2023.01.18) in Smt. Sudipa Nath Vs. Union of India [WP(C) (PIL) 04 of 2023] held that;
However, under section 66(1) of the IBC, only an application filed by resolution professional can be entertained by NCLT.
However, under Section 66(1) of IBC, the NCLT can pass an order holding such person liable to make contribution to the assets of the corporate debtor or it may deem fit.
firstly It {section 66) confers no jurisdiction but declaring any transaction as void, even if fraudulent, but confers jurisdiction on NCLT to fix the liabilities on the persons responsible for conducting business of corporate debtor which is fraudulent or wrongful.
Secondly section 66(1) contemplates an application thereunder only by the resolution professional and by none other.
Thirdly section 66 (1) also restricts the power of NCLT subject to being satisfy with pre-requisite that any business of the corporate debtor has been carried on with intent to defraud creditors or the corporate debtors or for any fraudulent purpose and if satisfied it powers to pass an order is only against such person who are responsible for the conduct of such fraudulent business of the corporate debtor with mens rea to make them personally liable to make such contributions to the assets of the corporate debtor as it may deem fit.
[ Link Synopsis ]
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6). NCLAT (2022.10.10) in Mrs. Renuka Devi Rangaswamy, RP of M/s. Regen Infrastructure and Services Pvt. Ltd. Vs. M/s. Regen Powertech Pvt. Ltd. [Comp. (AT) (CH) (Ins) No. 357 / 2022 & IA/814/2022] held that;
In the present case, the reason given by the Respondent in respect to transfer of assets among its group companies appears to be plausible and cannot be brought under Section 66 (1) of IBC, 2016.
Fraud is a sensitive and serious allegation and the authority claiming such allegation is duty bound to provide the copies of the report concerning the allegations even before issuing the Show-cause notice.
Therefore, non-disclosure of the report of the transaction audit conducted by the RP of the Corporate Debtor is sufficient for this Tribunal to dismiss the present application since it amounts to gross violation of principles of natural justice.
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 intent to ‘defraud’ the ‘Creditors’.
In this connection, this ‘Tribunal’ pertinently, points out that if the ‘Directors’ of a ‘Company’ had acted on a bona-fide belief that the ‘Company’ will recover from its ‘Financial Set Back’ / ‘Difficulties’ / ‘Problems’, then, it will not be liable for the ‘Act’ / ‘Offence’ of ‘Fraudulent Trading’, in the considered opinion of this ‘Tribunal’.
The aspect of `Fraud’ is the cementing platform for a `Liability’. An element of Dishonesty’, is to be `Proved’ and the `Aspect of Dishonesty’, cannot be inferred, when the `Conduct of the concerned Individuals’ is `Receptive’ of more than one explanation,
A company may actually be insolvent at a given time; but its directors may bona fide hold a different view. Even in a case where they are aware of the true position, they may still think that all was not lost and that they would be able to stem the rot by further borrowings and improving the business.
Transfer of Asset’ among / within the ‘Group Companies’, will not partake the character of a ‘Fraudulent Trading’/`Wrongful Trading’, in the teeth of the ingredients of Section 66 (1) of the Insolvency & Bankruptcy Code, 2016.
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7). NCLAT (2022.09.23) in Regen Powertech Pvt Ltd Represented by Erstwhile RP Vs. M/s. Wind Construction Private Limited, & Ors. [Company Appeal (AT)(CH)(Ins) No.349/2022] held that;
# 33. Be it noted, this ‘Tribunal’, significantly, points out that, whenever ‘Fraud’ on a ‘Creditor’ is perpetrated in the course of ‘carrying on Business’, it does not necessarily follow that the ‘Business’ is being carried on with an ‘Intent to Defraud’ the ‘Creditor’.
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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’.
[ Link Synopsis ]
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8). NCLT Kolkata (2022.05.30) in Shri Kuldeep Verma, RP v. Induslnd Media and Communications Limited (IMCL) & Ors. [I.A. (IB) No. 841/KB/2020 And I.A. (IB) No. 1288/KB/2020 In C.P. (IB) No. 1510/KB/2018 ] held that;
From the above, and the relief sought in prayer part, it is clear that the RP himself was not sure as to whether the transactions impugned are wrong as alleged. He himself is seeking a Forensic Audit, as is evident from one of his prayers in the application.
We are of the view that the RP can file an application under section 25(2) (j) only after being satisfied about the particular transactions being avoidable, fraudulent or undervalued.
Similarly, in terms of Section 25(2(d), it was incumbent upon the RP to seek assistance of the Forensic Audit if so required, to engage the services of accountants, legal or other professionals with a view to satisfy himself about the transactions being avoidable.
Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code.
As noticed, the scope of enquiry in relation to the questions as to whether a transaction is of giving preference at a relevant time, is entirely different. Hence, it would be expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority”.
the arena and scope of the requisite enquiries, to find if the transaction is undervalued or is intended to defraud the creditors or had been of wrongful/fraudulent trading are entirely different
“It is settled law that shares are separate and distinct from the assets of the company, and transfer of shares cannot be construed as transfer of assets of the company.
[ Link Synopsis ]
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9). NCLT Kolkata (2022.04.19) in Pinaki Sarkar, Liquidator of Bansal Refineries Private Limited Vs Amicus Oil & Chemicals Private Limited & Ors. [IA (IB) No.295/KB/2020 in CP (IB) No.11/KB/2019] dismissed the avoidance application due to non-appearance & non prosecution by RP.
The Liquidator has stated in his application that the above transactions are undervalued and fraudulent in terms of sections 45 and 66 of the Code as the sale of inventory was entered into with the related parties at a price lower than the book value . . . . . . . However, these are allegations that cannot be made lightly, and the Liquidator has to prove the same before the Adjudicating Authority.
The Liquidator should not expect that applications filed by him will be given due consideration even if he, as applicant, does not choose to appear. We do not see any reason to treat the Liquidator differently from other applicants whose applications will meet the same fate if they choose not to appear on multiple occasions.
[ Link - Synopsis ]
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10). NCLAT (2022.04.06) in Aditya Kumar Tibrewal RP Vs. Om Prakash Pandey, Suspended Director [Company Appeal (AT) Insolvency No. 583 of 2021] held that;
“The question as to whether a statute is mandatory or directory depends upon the intent of the legislature and not upon the language in which the intent is clothed.
The meaning and intention of the legislature must govern, and these are to be ascertained, not only from the phraseology of the provisions but also by considering its nature, its design, and the consequences which would follow from construing it the one way or the other….”
In event the actions taken by the Resolution Professional after the timeline prescribed in Regulation 35A of the CIRP Regulations are to be annulled, the undervalued and fraudulent transactions will go out of the reach of Resolution Process, reach of the Court and shall cause great inconvenience and injustice to Corporate Debtor.
Hence, we are of the view that timeline prescribed in Regulation 35A of the CIRP Regulations is only directory and any action taken by the Resolution Professional beyond the time prescribed under Regulation 35A of the CIRP Regulations cannot be held to be non-est or void only on the ground that it is beyond the period prescribed under Regulation 35A of the CIRP Regulations.
There may be genuine and valid reasons for Resolution Professional not to file application for avoiding the transactions within time prescribed which are question relating to each case and has to be examined on case-to-case basis and if there are reasons due to which Resolution Professional could not file the Application within time the same has to be examined on merit.
The Law laid down by the Hon’ble Supreme Court in the above judgment which deals with the interpretation of provisions of the Code itself are applicable to interpretation of Regulation 35A of CIRP Regulations and following the above judgment we hold that timeline prescribed in Regulation 35A of CIRP Regulations is directory and not mandatory.
We thus conclude that for transactions defrauding creditors and fraudulent trading or wrongful trading as under Section 66 the timeline prescribed under Section 46 is not applicable.
The expression “shall” in regulation 35A (1), 35A(2) and 35A(3) is not mandatory and requirement of “forming an opinion” under Section 35A(1) “make a determination” under Section 35A(2) and “shall apply to the Adjudicating Authority for appropriate relief on or before 135th day of the Insolvency Commencement Date” are only directory.
The timeline prescribed for transactions under Section 46 does not cover the transactions covered by Section 49 and 66 of the Code.
[ Link - Synopsis ]
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11). NCLT New Delhi-V (2022.02.21) in Satya Prakash Resolution Professional Y M Foodways Private Limited Vs. Uttam Roy & Ors. [L.A. No. 5610 of 2020 in Company Petition (IB)No.421/ND/2019] held that;
# 20. As per the averments made in the application and the report of the transaction Audit Report, we observe that the period of transaction is from 20th November, 2017 to 21 November, 2019 and both the respondents were not the directors from 22nd November, 2017, rather Respondent No.- 1 was appointed on 07th September, 2018 and the Respondent No.- 2 was appointed on 20th February, 2018.
# 21. We further notice that the applicant has not bifurcated the amount which was defrauded during the tenure of Respondent No.-1 and Respondent No. - 2 respectively rather he simply reproduced the report of the Transit Audit Report without stating the liability of the individual directors. We further observe that nowhere in the application, the applicant has stated if these two respondents were not the directors of the Corporate Debtor, then who were the directors from 22nd November, 2017 till the date of appointment of Respondent No.- 2 Le. 20th February 2018, therefore, in our considered view, the averments made in the application is vague and not clear, under such circumstances, it is very difficult to establish the liability of the Respondents under Section 66 of the IBC.
# 22. In sequel to the above, in our considered view, in the absence of specific averments against the individual respondent, the applicant has failed to established that to what extent and from which period the Respondent No. 1 and 2 are liable under Section 66 of the IBC, 2016.
# 23. Under such circumstances, we have no option but to reject the prayer of the applicant, accordingly, the prayer (B) of the applicant is hereby rejected, and the application is hereby dismissed. However, the applicant is at liberty to file a fresh application after specifying the specific period and the amount for which the respondents are liable.
[ Link - Synopsis ]
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12). NCLT, Mumbai (2021.11.29) in Venkatesan Sankaranarayanan, the Resolution Professional for RTIL Limited v. Nitin Shambhukumar Kasliwal & Ors. (CP No. 382 / I & B / MB/2018) held that;
6. ``The Bench observes that it is a fact that management of company have taken certain decision which has not worked out as intended by the management and eventually loss occurred. However, such bad commercial business decision cannot be considered to be fraudulent or wrongful trading under provisions of Section 66 of the IBC.’’
[ Link Synopsis ]
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13). Supreme Court of India (2020.02.26) in Anuj Jain IRP for Jaypee Infratech Limited Vs Axis Bank Limited Etc. (Civil Appeal Nos. 8512-8527 of 2019 and other petitions) held that;
# 29. Having found that the transactions in question cannot be countenanced, for being of preference during a relevant time to a related party; and having approved the order passed by NCLT in that regard, we do not consider it necessary to deal with the other length of arguments advanced by the learned counsel for parties on the questions as to whether the transactions are undervalued and/or fraudulent too. In the totality of circumstances, we would prefer leaving the said questions at that only, while also leaving all the related questions of law open; to be examined in an appropriate case.
# 29.1. However, we are impelled to make one comment as regards the application made by IRP. It is noticed that in the present case, the IRP moved one composite application purportedly under Sections 43, 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In our view, in the scheme of the Code, the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions. As noticed, the question of intent is not involved in Section 43 and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time. However, whether a transaction is undervalued requires a different enquiry as per Sections 45 and 46 of the Code and significantly, such application can also be made by the creditor under Section 47 of the Code. The consequences of undervaluation are contained in Sections 48 and 49. Per Section 49, if the undervalued transaction is referable to sub-section (2) of Section 45, the Adjudicating Authority may look at the intent to examine if such undervaluation was to defraud the creditors. On the other hand, the provisions of Section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons responsible therefor. We are not elaborating on all these aspects for being not necessary as the transactions in question are already held preferential and hence, the order for their avoidance is required to be approved; but it appears expedient to observe that the arena and scope of the requisite enquiries, to find if the transaction is undervalued or is intended to defraud the creditors or had been of wrongful/fraudulent trading are entirely different. Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. As noticed, the scope of enquiry in relation to the questions as to whether a transaction is of giving preference at a relevant time, is entirely different. Hence, it would be expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority.
# 29.2. In the present case, it is noticed that NCLT in its detailed and considered order essentially dealt with the features of the transaction in question being preferential at a relevant time but recorded combined findings on all these three aspects that the impugned transactions were preferential, undervalued and fraudulent. Appropriate it would have been to deal with all these aspects separately and distinctively.
# 29.3. We are conscious of the fact that IBC is comparatively a new legislation and various aspects expected therein are in the progression of taking proper shape, particularly in the adjudicatory processes envisaged. Having said so, we would leave this aspect at that only, while expecting all the concerned to be more attentive to the scheme, object and requirements of the provisions contained in the Code.
[ Link Synopsis ]
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14). NCLT Chennai (2019.02.06) in The Resolution Professional for M/s. Orchid Pharma Limited Vs. M/s. Hospira Healthcare India Pvt. Ltd & Others [MA/87/IB/2018 in CP/540/IB/2017] held that;
The elementary difference between section 66 and other avoidance transactions is, fraudulent intention to defraud the creditors has to be proved by the person asserting such allegation. Intention is the element of difference in this section.
it is pertinent to note that the person filing this kind of application, with an imputation of fraud, has to give all the details disclosing how these Respondents Mhave committed fraud in respect to the transaction impugned before this Bench, not only that, the RP has to prove that these answering Respondents committed fraud as detailed in the application.
One more aspect that should not be ignored from reading of section 66 is, it is a qualified section with multiple caveats to invoke this subject matter jurisdiction, first, transaction shall be entered into with an object to defraud the creditors, second, such parties shall be in know of such intention, and to pass an order under this section, it has to be seen that director/partner of the corporate debtor is for sure aware of the fact that commencement of CIRP is inevitable and lastly, it has to be proved that such director or partner has not exercised due diligence in minimising the potential loss to the creditors of the Corporate debtor.
On the top of it, in explanation to section 66 of the Code, it has been laid down that presumption lies in favour of the director/partner that he has exercised due diligence as expected from a person carrying such function, to rebut this statutory presumption, sufficient material has to be placed.
One thing is evident from this section that burden is cast upon the RP to prove that fraud is committed by the director/partner, unless it is proved the presumption remains in force in favour of the director/partner.
[ Link - Synopsis ]
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15). NCLT Chennai (2019.01.10) in Mr. Ramkumar SV Vs. M/s. Serum Institute of India Limited [MA/92/ 1B/2018 in CP/540/IB/CB/2017] Held that;
To say it is a preferential transaction, it has to be tested u/s.43 of the Code, to say it is fraudulent trading, it has to be tested u/s.66 of the Code.
As to Section 66 is concerned, here the case is that R1 is creditor to the Corporate Debtor company, therefore the Corporate Debtor was under obligation to make payment to R1 herein. If at all payment has been made other than in ordinary course of business, at the most it could be considered as a preferential transaction but not as a fraudulent transaction because payment was made towards the Creditor.
Payments made to the creditors and such payments cannot be brought under the caption of either fraudulent trading or wrongful trading, moreover legislature normally will not provide overlapping jurisdiction under two heads,
[ Link - Synopsis ]
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16). Supreme Court of India (1975.12.09) In Union Of India vs M/S.Chaturbhai M. Patel & Co. [Civil Appeals Nos. 972- 973 of 1968] held that;
It is well settled that fraud like any other charge of a criminal offence whether made in civil or criminal proceedings, must be established beyond reasonable doubt; per Lord Atkin in A. L. N. Narayanan Chettyar v. Official Assignee, High Court Rangoon.
However suspicious may be the circumstances, however strange the coincidences, and however grave the doubts, suspicion alone can never take the place of proof.
[ Link Synopsis ]
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Collateral Issues in Fraudulent Transactions [Section 66] of IBC.
1. RP/Liquidator is required to place evidence to satisfy all of these criterias/caveats specified under section 66.
1.1. NCLT Mumbai-II (2023.08.11) in Mr. Anuj Bajpai, RP of Tollways (Ujjain) Private Limited. Vs. Surendra Lodha, Suspended Director & Anr.. [IA/2874/2021 In CP(IB)4106/MB/2018] held that to prove the transaction to be fraudulent in nature, the degree of proof and evidence required should be of unimpeachable nature and a transaction cannot be dubbed as fraudulent, on the basis of inadequate and tentative findings, as recorded in the forensic audit report.
We are of the view that the Applicant/RP has placed no proof on record to satisfy the ingredients of Section 66.
It is settled proposition of law that to prove the transaction to be fraudulent in nature, the degree of proof and evidence required should be of unimpeachable nature and
A transaction cannot be dubbed as fraudulent, on the basis of inadequate and tentative findings, as recorded in the forensic audit report relied upon by the applicant.
[ Link Synopsis ]
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2. Further, no report can ever form the only basis for convicting a person of an offence. The prosecution has to prove the offence, by adducing evidence. Reliance is being placed on the following;
2.1. HC Madras (2021.02.23) in M.Suresh Khatri & Anr. Vs. Directorate of Enforcement Rep. by the Deputy Director GOI. [CRL.O.P.Nos.20127 & 25688 of 2018] held that;
It is these words which amply suggest that an opinion is to be formed only after due application of mind that there is sufficient basis for proceeding against the said accused and formation of such an opinion is to be stated in the order itself. The order is liable to be set aside if no reason is given therein while coming to the conclusion that there is prima facie case against the accused, though the order need not contain detailed reasons. A fortiori, the order would be bad in law if the reason given turns out to be ex facie incorrect.
No report can ever form the only basis for convicting a person of an offence. The prosecution has to prove the offence by adducing evidence and this opportunity has to be given to the prosecution in this case too.
[ Link Synopsis ]
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3. Report of opinion & determination by RP/Liquidator. It has been observed that in majority of cases the avoidance application filed by RP/Liquidator is without the report of RP/Liquidator of his opinion & determination as required under Regulation 35A of CIRP Regulations. Provisions of the Code & Regulations do not recognize any such Transaction/ Forensic Audit Report to form the basis of avoidance application under section 66 of the Code, and in no case third party (Forensic/Transaction Auditor) opinion, even if submitted, can substitute the mandatory report of opinion & determination by Resolution Professional/ Liquidator required under provisions of the Code & Regulations (Regulation 35A of CIRP Regulations). In absence of the said report of opinion & determination by Resolution Professional/ Liquidator, the avoidance application filed by RP/Liquidator is not maintainable. Reliance is being placed on the following;
NCLT Kolkata (2022.05.06) in Jitendra Lohia vs. Nikhil Chowdhury and others [I.A.(IB) No. 208/KB/2021INC.P (IB) No.204/KB/2019]
NCLT Kolkata (2022.06.30) in Kshitiz Chhawchharia vs. Madhumalati Merchandise Private Limited & Ors [I.A. (IB) No. 346/KB/2019 In CP(IB) No. 349 /KB/2017
3.1. CIRP Regulations
# Regulation 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 .
(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 thirtieth day of the insolvency commencement date.
3.2. NCLT Kolkata (2022.05.06) in Jitendra Lohia vs. Nikhil Chowdhury and others [I.A.(IB) No. 208/KB/2021INC.P (IB) No.204/KB/2019] wherein it was held;
# 16. ``We have carefully seen the averments of the application and corresponding reply of the respondents. We have noticed that the allegations made in application do not constitute anything actionable against the respondents. It was the duty of the RP to come to conclusive determination before filing an application with the Adjudicating Authority. Simply by repeating the extracts or observations made in the forensic auditors report, the RP could not make an independent determination about the nature of transactions as required by Regulation 35A (2) of the CIRP Regulations.’’
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3.3. NCLT Kolkata (2022.06.30) in Kshitiz Chhawchharia vs. Madhumalati Merchandise Private Limited & Ors [I.A. (IB) No. 346/KB/2019 In CP(IB) No. 349 /KB/2017] held that;
6.7. ``According to regulation 35A(1) of the CIRP Regulations, 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 on or before the seventy-fifth day of the insolvency commencement date. According to the regulation 35A(2), on or before the one hundred and fifteenth day of the insolvency commencement date, the Resolution Professional is also required to make a determination to that effect.
6.8. Further, Regulation 35A(3) of the CIRP Regulations provides that upon making such determination under regulation 35A(2), the Resolution Professional shall apply to the Adjudicating Authority for the appropriate relief on or before the one hundred and thirty-fifth day of the insolvency commencement date. In this case, the one hundred and thirty fifth day is on 23 May 2018. The instant application being IA. (IBC) 346/KB/2019 has been filed on 20 March 2019, thus making it clear that the Applicant has not complied with the provisions of regulation 35A within the timeline provided therein.
6.9. . ., we do not see any “determination” within the meaning of regulation 35A of the CIRP Regulations. Therefore, we will not act as court of first instance to determine the nature of the transactions mentioned hereinabove.
6.1 In light of the above facts and circumstances, the adjudicating Authority is satisfied that the instant application is not maintainable and the same is therefore rejected.
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