Mr. Nitin Ramchandra Jadhav & Ors. Vs. Mr. Vijendra Kumar Jain, & Anr. - The crux of this decision is that the forensic transaction report is alone is not sufficient to label a transaction fraudulent in absence of any supporting document or any other reliable evidence”

 NCLAT (2026.05.20)  in Mr. Nitin Ramchandra Jadhav & Ors. Vs. Mr. Vijendra Kumar Jain, & Anr. [Company Appeal (AT) (Ins) No. 1044 of 2024] held that;-.

• Thus the necessary ingredients of invoking Sub Section (1) appears to be that the business of the CD has been carried on with intent to defraud creditors of the CD or for any fraudulent purpose. and for Sub Section (2) that Before the insolvency commencement date such director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of CIRP and such director or partner did not exercise due diligence in minimizing the potential loss to the creditors. Thus both these Sub Sections take care of two different factual situations.

• The crux of this decision is that the forensic transaction report is alone is not sufficient to label a transaction fraudulent in absence of any supporting document or any other reliable evidence”

• 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’.

• However, in cases of “fraudulent or wrongful trading” in respect of the business of 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,

• 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

• In Union of India vs Chatur Bhai M Patel & Co. (1976) SCC 747, Hon’ble Supreme Court held that suspicion howsoever grave cannot take the place of proof and circumstances alleged by the appellant therein are not sufficient to prove fraud against Respondent.

• We are of the considered view that the initial onus to prove the facts attracting Section 66 of the Code is on the RP/IRP but when this burden has been discharged by the IRP/RP the onus shifts to the Suspended Directors to explain the transactions which have been labelled as fraudulent and it is on the basis of the evidence/material brought on record by the parties just adjudication could be made by the Adjudicating Authority.

• Admittedly the procedure for investigation in the affairs of the company has been provided under Section 212 and 213 of the Companies act, 2013 and keeping in view the provisions contained under Section 213 of the Companies Act, 2013 the discretion to get the matter investigated by the SFIO only vests in Central Govt.,

• Therefore, with regard to the direction of the Adjudicating Authority to investigate the matter through SFIO, we modify the impugned order and refer the matter to the Central Govt. for investigation through Inspector or Inspectors. The matter is thus referred to the Secretary, Ministry of Corporate Affairs for investigation by Inspector/Inspectors strictly in accordance with law.

Excerpts of the Order;

The instant appeal has been preferred by the Appellants assailing the order dated 07.05.2024 passed in IA No. 677 of 2023 in CP IB No. 1023 of 2021 (impugned order by the National Company Law Tribunal, Mumbai, Court-V (Adjudicating Authority) whereby the Ld. Adjudicating Authority directed the appellants to contribute Rs. 9,04,61,725/- along with additional unquantified amount to the Corporate Debtor (CD). 

# 2. Brief facts necessary for the disposal of the instant appeal appears to be that on an application moved by the financial creditor (State Bank of India) under Section 7of the Insolvency and Bankruptcy Code, 2016 (Code) insolvency resolution process (CIRP) was initiated against the CD Gajanan Solvex Ltd. Vide order dated 20.07.2022 of Ld. Adjudicating Authority passed in CP/1023/IBC(MB)/2021 and Mr. Vijendra Kumar Jain (Respondent No. 1) was appointed as the Interim Resolution Professional (IRP) , who issued the public announcement and constituted the Committee of Creditors (CoC) on 12.08.2022 and was also appointed as Resolution Professional (RP) in the first meeting of the CoC held on 18.08.2022. 

# 3. It is further reflected that in the 2nd CoC meeting dated 03.09.2022 the CoC appointed Mr. Parekh Shah and Lodha as the Forensic Auditor of the CD to carry out the transaction audit of the books of the accounts of the CD for the last 5 years, however it was noted by the CoC in its meeting dated 29.09.2022 that Suspended Directors had failed to furnish the audited financials and tally Back-up of accounts for the financial years 2017-2018 to 2021-2022 and also for the period ranging from 01.04.2022 to 20.07.2022 along with certain other documents as sought by the RP and forensic auditor and in this regard an application bearing IA No. 3392 of 2022 was also filed by the RP under Section 19 (2) of the Code. 

# 4. It is further reflected that CD had invested Rs. 8,84,91,725/- in its subsidiary company namely M/s. Rio Resource PTE. Ltd. (Rio Resource) which is based in Singapore and had a fixed deposit of 3 Million United States Dollars (USD) with the Indian Bank, Singapore Branch. The RP appears to have informed the CoC that the Indian Bank had filed an application against M/s Gajanan Oil Pvt. Ltd. which was stated to have availed the credit facility by creating a lien on the above fixed deposit, before the Hon’ble High Court of Bombay and an ad- interim injunction was granted and also that the Mr. Nitin Jadhav Suspended Director of the CD informed that there was no lien on this fixed deposit. 

# 5. It is also reflected that in the 4th CoC meeting held on 28.10.2022 the RP informed appointment of a new forensic auditor namely Shambu Gupta and Company due to the in action of earlier forensic auditor. Consequently, in the 5th CoC meeting held on 08.12.2022 credit report of Dun and Bradstreet was presented and the RP apprised that as of as on date no shares of M/s Rio Resource PTE. Ltd. were held by M/s Gajanan Solvex Ltd. (CD) and 100% shareholding of M/s Rio Resource PTE. Ltd. is now held by M/s Bellwether International Trade PTE. Ltd. (Bellwether) and the name of Rio Resource PTE. Ltd. has now been changed as Aspira Company PTE. Ltd. and one Amogh Malviya and Mr. Chee Teng Joo are now its new Directors from June 2022, however the audited financials of the CD as on 31.03.2022 still showing investment of the CD in M/s Rio Resource PTE. Ltd. of Rs. 8,84,91,725/-. It is stated that as per the report these shares have been transferred on 20.02.2019 and no consideration for the same is shown to have been received by the CD. 

# 6. In the report of the forensic auditor a finding is also recorded that as on 23.06.2017 M/s Rio Resource PTE. Ltd. was allotted 19,00,000 shares for Rs. 8.85 Crore and after such investment the CD was holding 51% share in M/s Rio Resource PTE. Ltd., which has become a subsidiary of the CD. The RP stated to have sought explanation from the Suspended Board of Management regarding this and it was informed that on 20.02.2019 the CD transferred the above mentioned 19,00,000 shares to Amogh Malviya and Mr. Chee Teng Joo the new Directors of M/s Bellwether International Trade PTE. Ltd. while in the books of accounts of the CD this investment of Rs. 8,84,91,725/- clearly reflected as the investment in the shares of M/s Rio Resource PTE. Ltd. under the head Investments in the subsidiary. 

# 7. It is further reflected that the Suspended Board of Director vide its email dated 12.01.2023 stated that they have entered into a contact with Aero Steel Resources Ltd. (Aero Steel), UAE and a share transfer agreement with Bellwether, according to which the CD had sold its shares in M/s Rio Resource PTE. Ltd. to Bellwether. While as per the audited balance sheet of the CD of the year 2021-2022 the CD still holds the investment in M/s Rio Resource. 

# 8. It is further reflected that the RP has stated in his application that through share transfer agreement the above mentioned shares of the CD are shown to have been transferred for a consideration of Rs. 19.95 Crores and an explanation has been given by the CD that a penalty of 1.8 million USD was settled with Aero Steel Resources Ltd. against payment of 1.37 million USD by Bellwether which is in contradiction to the guidelines issued by the RBI. 

# 9. It is further reflected that the forensic auditor was also of the view that some sales invoices were fraudulently created in order to show fictitious sale and also that the CD is shown to have made transactions amounting to Rs. 282.56 Crores with certain firms and entities owned by the individuals who were the ex-employees of the group companies of the CD and also that the CD purchased goods of Rs. 84 crores from M/s Shakti Soya Industries while the GST registration of this company was cancelled with effect from 31.12.2017 but as per the books of the accounts of the CD GST was levied on purchase of goods from this company even after cancellation of the registration. Likewise, the forensic auditor observed that CD have shown to have sold goods worth Rs. 134.42 crores to M/s Shri Tirupati Traders which was owned by Deepak Vyas an Employee of the group company and also that the inventory was brought down to a considerable low in the financial year 2017-2018, 2018-2019 and the reduction in sales was deliberately shown considerably low in the financial year 2018-2019. The forensic auditor also observed that sale of Rs. 19,70,000/- to Ms/ SR Minerals is found to be fake as no such party existed in the books of accounts of the CD. 

# 10. The RP after being satisfied filed the aforesaid application before the Ld. Adjudicating Authority and Ld. Adjudicating Authority by passing the impugned order directed the appellants to contribute amount of Rs. 9,04,61,725/- /- to the assets of the CD with a direction to make additional contributions on account of profit earned on the sale of shares of M/s Rio Resources PTE. Ltd. with a further direction to get the matter investigated by SFIO with consequential directions. Aggrieved by the same the appellants have come in appeal. 

# 11. Ld. Counsel for the Appellants submits that the Ld. Adjudicating Authority has committed a mistake and failed to take into account that the entire application moved by the RP is based on the transaction audit report without placing on record any independent material while the transaction auditor themselves have qualified their findings by stating that their information may not be fully complete. In this regard reliance is placed on State Bank of India vs. Dommeti Surya Ramakrishna Saibaba and Ors., CA (AT) (CH) (Ins) No. 461 of 2023. 

# 12. It is further submitted that the transaction with Aero Steel Resources Ltd. was a genuine commercial settlement and could not be termed as a sham agreement and the RP has failed to establish any nexus between the CD and Aero Steel and that was a genuine transaction. 

# 13. It is further submitted that keeping in view the law laid by this Appellate Tribunal in Union of India vs. Maharashtra Tourism Development Corporation and Anr., (2019) SCC Online NCLAT 1414 submits that the Adjudicating Authority has no jurisdiction to direct investigation by the SFIO. 

# 14. It is further submitted that the Ld. Adjudicating Authority has passed the impugned order without attributing any role or involvement to the appellants in the transaction in question and the application moved by the RP is silent with regard to any specific acts or omission by the appellant. Reliance in this regard has been placed on Gopal Kalra vs. Akhilesh Kumar Gupta CA (AT) (Ins) No. 567 of 2024. 

# 15. While highlighting the phraseology of Section 66 (1) of the Code it is submitted that a high degree of proof is required to act under this Section and reliance in this regard has been placed on Union of India vs. Chaturbhai M and Company, (1976) 1 SCC 747. 

# 16. It is further submitted that standard of proof from proving fraud is heavy on the applicant and the Respondent RP has failed in this regard. Reliance has been placed on Nalinesh Kumar Paurush and Ors. vs. Arvind Mittal, RP, CA (AT) (Ins) No. 346 of 2024. 

# 17. Ld. Counsel for the Respondent No. 2- Liquidator of the CD submits that there is no illegality in the impugned judgment as it was evident that the CD despite being under financial distress and even after initiation of recovery action by the financial creditor sold its shareholding in its subsidiary M/s. Rio Resources PTE. Ltd. based in Singapore without any justifiable valuation and failed to bring the sale proceeds of the same in the CD on the pretext of sending the proceeds to Aero Steel Resources Ltd. of UAE showing the same to be for the settlement of penalty for breach of contract by the CD which was evidently appearing to be a sham agreement and also a sale transaction of Rs. 19,70,000/- was also conspicuously a fraudulent transaction as no record with regard to the same was available in the record of the CD. 

# 18. It is further submitted that CD had acquired 19,00,000 shares in Rio Resources for Rs. 8.85 Crore which amounts to 51% of the shareholding of the same and the shareholding of the Rio Resources at that point of time was in terms that the CD was having 19,00,000 shares and Pillai Nandkumar was having 18,21,000 shares and thereafter the CD stated to have entered into an agreement with Aero Steel Resources Ltd. Dubai on 15.10.2017 for supply of 100000 metric tons of Soya @ 360 USD per metric ton, amounting to 36 million USD and in 2018 the CD was classified as NPA and on 29.08.2018 notice under Section 13(2) of the SARFAESI Act was issued against it and it was thereafter on 31.12.2018 the share purchase agreement was executed and the shares of the CD in Rio Resources were transferred to Bellwether for 1.37 million USD to settle the alleged penalty imposed by the Aero Steel for non-performance of the agreement. 

# 19. It is further submitted that the 51% share of the CD in Rio Resources were sold in consideration of Rs. 19.95 Crore however that money was not brought in the CD and the balance sheet of the CD of the years 2019 till 2022 was showing the investment of Rs. 8,84,91,725/- in Rio Resources and the fact of sale of shares could only be disclosed by the Suspended Board of Directors of the CD only on 12.01.2023 while the CIRP against the CD was initiated on 20.07.2022. 

# 20. It is further submitted that the forensic auditor in its report has analysed the whole of the transactions and found the sale of shares and consequent transfer of the consideration to Aero Steel at Dubai directly by the Bellwether is a fraudulent transaction which was executed only for the purpose of diverting the assets of the CD. 

# 21. It is further submitted that sales and purchase agreement dated 15.10.2017 executed between the CD and Aero Steel was a sham agreement wherein a clause has been shown that in case of breach the CD would be liable to compensate the buyer to the extent of 5% of the Contract value and it is under this sham agreement the consideration of the sale of the shares in Rio Resources has been diverted to a sham company namely Aero Steel. 

# 22. It is further submitted that the Aero Steel and the CD did not transact any business in the past there is no communication of any kind between them and keeping in view the fact that the said information was not shared by the Suspended Board of Directors for a long time with the CoC or RP, the agreement with Aero Steel at Dubai was a fake and sham agreement and has been shown only for the purpose of diverting the asset of the CD. 

# 23. It is further submitted that so much so the Suspended Board of Director committed another illegality in signing the balance sheets of the CD post initiation of CIRP which was legally not permissible and likewise the transaction of sale of Rs. 19,70,000/- in favour of M/s SR Minerals is also a fake transaction as nothing has been found by the forensic auditor in the books of accounts of the CD with regard to this transaction and thus the impugned judgment passed by the Ld. Adjudicating Authority is not required to be interfered with. 

# 24. We have heard Ld. Counsel for the parties and have perused the record. 25. Section 66 of the Code is important for our consideration and the same is reproduced as under: 

• “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. 

• (2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if— 

• (a) before the insolvency commencement date, such director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and 

• (b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor. 

• 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”. 

The requirement of Section 66 (1) is that if during the Corporate Insolvency Resolution Process or in liquidation process it is found that any business of the CD has been carried on with the intent to defraud creditors of the CD or for any fraudulent purpose the adjudicating authority, on an application by the RP may pass an order that any persons who were knowingly parties to the carrying on the business in such manner would make such contributions to the assets of the CD as it may deem fit. Sub-section 2 of this section also provides that on an application by a resolution professional during the Corporate Insolvency Resolution Process (CIRP) the adjudicating authority may direct the director or partner of the CD to make such contribution to the assets of the CD if before the Insolvency Commencement date such director or partner knew or ought to have known that there was no reasonable prospect of avoiding the insolvency process in respect of the CD and such director or partner did not exercise due diligence in minimizing the potential loss to the creditors. Thus the necessary ingredients of invoking Sub Section (1) appears to be that the business of the CD has been carried on with intent to defraud creditors of the CD or for any fraudulent purpose. and for Sub Section (2) that Before the insolvency commencement date such director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of CIRP and such director or partner did not exercise due diligence in minimizing the potential loss to the creditors. Thus both these Sub Sections take care of two different factual situations. 

# 26. This Appellate Tribunal in COMPANY APPEAL (AT) (CH) (INS) NO. 461/2023, State Bank of India vs Dommeti Surya Rama Krishna Saibaba decided on 18.08.2025 held as under: - 

• “10. We are in an disagreement with the arguments of the learned counsel for the Appellant that, the order is not based upon a sound reasoning, for the reason being that if the application under Section 66 of the I & B Code, 2016, is being attempted to be considered exclusively based upon the Forensic Auditor' Report, the same has to be established on its own merit and its genuineness on the strength of supporting documents and evidence which has not been produced to be by the Tribunal." 

• The crux of this decision is that the forensic transaction report is alone is not sufficient to label a transaction fraudulent in absence of any supporting document or any other reliable evidence”. 

# 27. This Appellate Tribunal in Swapan Kumar Saha v. Ashok Kumar Agarwal, (2025) ibclaw.in 911 NCLAT, while considering many cases, including those relied on by Ld. counsel for the appellants, held as under: 

• “28……b. Can Section 66(1) of the Code be interpreted or invoked or made operational without recourse to Section 66(2) of the Code? Do they operate independent of each other or jointly?” 

• 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 that if before the insolvency commencement date, a director or partner knew or ought to have known that CIRP could not have been avoided and failed to exercise due diligence in minimising potential loss to the creditors, AA may direct the erring director or partner to be liable and make such contributions to the assets of the CD as it may deem fit. We observe that the first provision (section 66(1)) is very broad but not the second one (Section 66(2)) …… 

• 45. From a bare reading of Section 66(1) and Section 66(2) of the IBC we find that both have self-contained provisions, with clear mechanisms for their invocation during a CIRP. Further, a perfunctory glance at Section 67 of the IBC will make it abundantly clear that the draftsmen and legislators clearly intended for Sec 66(1) and Section 66(2) to operate independently, as the opening line of Section 67(1) and 67(2) of the IBC would reflect, ……..” 

• 46. Appellant places its reliance on decision of this Appellate Tribunal in the judgement of 03.07.2025 in Gopal Kalra v. Akhilesh Kumar Gupta [2025 SCC Online NCLAT 1129], wherein the Bench framed the issue to be adjudicated upon as “I. Whether the transactions undertaken by the Appellant in the LED Bulb business during FY 2016-17 constituted fraudulent trading under Section 66(1) of the Code?”. We find that the bench proceeded to adjudicate upon the issue by first categorically stating the ingredients to be met in order to attract Section 66(1) of the IBC. The relevant paragraph has been reproduced below: 

• “32. To determine whether these transactions amount to fraudulent trading, we must apply the ingredients of Section 66(1) of the IBC, which authorizes the Adjudicating Authority to direct any person who was knowingly a party to carrying on business with intent to defraud creditors or for any fraudulent purpose, to contribute to the assets of the Corporate Debtor. This requires us to examine: 

• i. Whether there was an intent to defraud; and 

• ii. Whether the Appellant was a knowing party to such conduct.” Therefore, instead of supporting this case of the Appellant, the judgement supports the case of the RespondentLiquidator. 

• ” 47. The Respondent also places reliance of the decision of this Appellate Tribunal in Sangeeta Jatinder Mehta and Anr. v. Kailash Shah RP of New Empire Textile Processor Private Limited [CA(AT)(INS) 104 of 2024] wherein the Bench has held, 

• “7. Section 66, sub-section (1) provides that if it is found that any business of the Adjudicating Authority may on the application of the RP 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.” 

• 48. Finally, reliance is also placed by the Appellant on the decision of this Appellate Tribunal in Renuka Devi Rangaswamy, Interim Resolution Professional of M/s. Regen Infrastructure Services Pvt. Ltd. v. Madhusudan Khemka, Suspended Director of M/s. Regen Infrastructure Services Pvt. Ltd. [2023 SCC Online NCLAT 1722] wherein the Hon’ble Bench held that 

• “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.” 

# 28. This appellate tribunal again in Nalinesh Kumar Paurush and Others v. Arvind Mittal and Another, 2025 SCC OnLine NCLAT 1537, after considering, Regen Powertech Pvt. Ltd, Renuka Devi Rangaswamy , Shibo Job Cheeran (Supra) opined in paragraph no. 44 that to attract section 66 of the Code though the standard of proof would be preponderance of probability but the same is subject to the heavy proof to the applicant, as each and every commercial transaction which has resulted in the loss may not be labelled as fraudulent. This observation is in the background that the party who is alleging the existence of a fact is obliged to prove the same and it cannot be taken as proved without any substantial material or evidence produced before the court. Thus the applicant of an application under section 66 of the Code is obliged to prove the contents of the application by placing adequate material and evidence on record and in addition the Court may also take into consideration the attending facts and circumstances in consideration on the principle that a fact may also be proved by leading circumstantial evidence. it is also to be recalled that the onus in civil matters keep on shifting and when the burden has been discharged by the one party it is obligatory on the contesting party to discharge its onus. 

# 29. Hon’ble Supreme Court again in Piramal Capital & Housing Finance Ltd. v. 63 Moons Technologies Ltd., (2025) 256 Comp Cas 707: 2025 SCC Online SC 690 held as under: 

• “60. However, in cases of “fraudulent or wrongful trading” in respect of the business of 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.” 

# 30. In Union of India vs Chatur Bhai M Patel & Co. (1976) SCC 747, Hon’ble Supreme Court held that suspicion howsoever grave cannot take the place of proof and circumstances alleged by the appellant therein are not sufficient to prove fraud against Respondent. 

# 31. Perusal of record would reflect that during the CIRP of CD Gajanan Solvex Ltd. an application was filed by the IRP of the CD being IA No. 677 of 2023 stating therein that in pursuance of the decision taken by the CoC the decision was taken to appoint a forensic auditor of the CD and incidentally Shambu Gupta and Company was appointed as the forensic auditor who has filed its report and further the RP informed the CoC about the shareholding of the CD in its subsidiary Rio Resources based at Singapore having 51% of share (19,00,000 shares) which were purchased for an amount of Rs. 8,84,91,725/- and thereafter in the 5th CoC meeting held on 08.12.2022 the DNB report of subsidiary Rio Resources was presented by the RP and it was found that on that date there were no shares of the CD were found in the subsidiary and the 100% shareholding of the same was held with one M/s Bellwether and also that the name of the company has been changed with effect from June 2022 to Aspira Company Pte. Ltd. and some other persons have been appointed as the Directors of the same while the audited financials of the CD as on 31.03.2022 were still showing the investment of the CD in subsidiary Rio Resources for an amount of Rs. 8,84,91,725/- while as per the DNB report these shares have already been transferred on 20.02.2019 and no consideration for the same has been received by the CD and despite multiple reminders to the Suspended Board of Directors about this consideration it was on 12.01.2023 the CD came up with a contract with Aero Steel Resources Ltd. and share transfer agreement with Bellwether and stated that the CD has sold its share in M/s. Rio Resources to Bellwether for consideration approximately Rs. 19.95 Crores which is only 3.45% of the net worth of the Rio Resource as on 23.11.2022 as Rs. 282 Crores and with regard to the non-receipt of consideration by the CD it was stated that a penalty of Rs. 1.8 million USD was to be paid to the Aero Steel Resources Ltd. in lieu of breach of afore-stated contract and the same has been settled against payment of 1.37 million USD which have been paid by Bellwether and thus the aforesaid transaction of selling the shareholding in Rio Resource and non-receipt of the consideration in the opinion of the IRP was a fraudulent transaction and in this way the money of the CD has been siphoned to Aero Steel which was a sham company. 

# 32. The defence of the appellant is in terms that the CD was having 19,00,000 shares along with Pillai Nand Kumar (18,21,000 shares) in its subsidiary Rio Resource at Singapore and on 31.12.2018 the CD entered into a share purchase agreement with Bellwether to sale 19,00,000 shares for consideration of 1370000 USD for the purpose of paying the penalty to Aero Steel at Dubai for breach of contract committed by the CD and the penalty of 18,00,000 USD was settled in 1370000 USD and the same were transferred directly to Aero Steel by the Bellwether to which the shares were sold. It is further the defence of the appellant that with regard to the sale transaction of Rs. 19,70,000 to M/s SR Minerals the same was subsequently cancelled and the goods were not supplied nor the money was receivable by them. 

# 33. Perusal of the impugned judgment would reveal that the Ld. Adjudicating Authority has found that the forensic auditor has reported in its report that in the audited balance sheet of the financial year 2021-2022 CD was having an investment in Rio Resource Singapore but suddenly on 06.01.2023 the CD claimed that this investment was sold on 31.12.2018 however this investment was continue to be reflected in the balance sheet of  the CD and thus the CD has either misreported or was concealing this transaction from its creditors which comes under fraudulent transaction. 

# 34. Ld. Adjudicating Authority has also noticed the forensic audit report in terms that as per the terms of the contract with Aero Steel Resources Ltd. in case of breach of contract the penalty could be imposed up to 5% of the contract value but no such information was disclosed in the audited balance sheet of financial year 2017-2018 and thus came to the conclusion that the amount of Rs. 8.85 Crore invested in the subsidiary Rio Resource has been siphoned off as no credible evidence has been produced by the Directors against the findings of the forensic auditor. 

# 35. Ld. Adjudicating Authority has also noticed that falsification of books of the accounts has also been made by the Suspended Board of Director by concealing the transaction of sale of shareholding in Rio Resource as they continue to show the investment of Rs. 8,84,91,725/- in Rio Resource while it was sold much earlier and also notice that after the issuance of notice under Section 13 (2) of the SARFAESI Act on 29.08.2018, sensing the insolvency this fraudulent transaction has been shown as there was no reasonable prospect of avoiding the CIRP. 

# 36. The Ld. Adjudicating Authority also noticed that so much so the consideration of the sales of the shareholding in Rio Resource was not brought into the CD and to keep that amount out of the CD and away from the reach of the creditors of the CD an agreement is shown to have been executed with Aero Steel Resources UAE and the transaction made by Bellwether to Aero Steel allegedly in discharge of penalty was never brought on record and the same was revealed for the first time after the admission of the CD into CIRP and thus hold that the entire transaction with respect to the Aero Steel is fake and false so as to take away the funds away from the CD to the detriment of its creditors. 

# 37. Keeping in view all the facts and circumstances of this case and the material which is available on record it is reflected that the CD was having investment in Rio Resource Singapore (its subsidiary) of 51% shareholding (19,00,000 shares) and this investment was shown in the audited balance sheet of the CD up to financial year 2021-2022 however this investment is shown to have been sold by the Suspended Directors of the CD on 31.12.2018 and significantly the investment of Rs. 8.85 Crore in the Rio Resource was continuously shown by the CD in its financials. 

# 38. It is also evident that during the whole of the CIRP period the conduct of the Suspended Board of Directors has remained non-co-operative and in this regard an application under Section 19 was also filed by the RP and it was despite many queries and reminders of the IRP the information pertaining to the sale of 19 lakhs shareholding in Rio Resource was not provided by the Suspended Directors. 

# 39. It is crystal clear that despite the sale of the shareholding in Rio Resource the Suspended Directors continuously showing their investment in Rio Resource of Rs. 8.85 Crores in their balance sheets and it was only when the information was revealed by the IRP the Suspended Directors informed to have sold their shareholding way back in 2018 to Bellwether. Thus we concur with the findings recorded by the Ld. Adjudicating Authority in terms that showing the investment of Rs. 8.85 crores in the financials of the CD till 2022 despite the same was sold way back in 2018 was nothing  but an act of misguiding the creditors of the CD so that the consideration of the sale of the shareholding be kept away from the reach of the creditors of the CD. 

# 40. It is also conspicuously reflected that the agreement with the Aero Steel of the supply of 100000 metric tons of Soya @ 360 USD per metric ton, is shown to have been executed on15.10.2017, however there is no mention of the same in the financials of the CD and the consideration of the shareholding sold to Bellwether in Rio Resource is shown to have been transferred to the Aero Steel Resources UAE allegedly in settlement of a penalty of Rs. 1.37 million USD. 

# 41. It also appears to be an admitted position that this transaction of payment of the penalty of 1.37 million USD by Bellwether to Aero Steel has never been brought on record, before the CD was placed under insolvency. 

# 42. During the course of deliberations, we made a pointed query to Ld. Counsel for the appellant as to whether any transaction has been held by the CD with the Aero Steel in the past and we did not get any satisfactory answer. No satisfactory explanation has been given by the Suspended Director of the CD pertaining to the payment of the penalty from the proceeds of the sales of share to the Bellwether to the Aero Steel. 

# 43. We are of the considered view that the initial onus to prove the facts attracting Section 66 of the Code is on the RP/IRP but when this burden has been discharged by the IRP/RP the onus shifts to the Suspended Directors to explain the transactions which have been labelled as fraudulent and it is on the basis of the evidence/material brought on record by the parties just adjudication could be made by the Adjudicating Authority. Keeping the sale proceeds of the shareholding in Rio Resource (Singapore) out of the reach of the CD in the facts and circumstances of the case appears to be an attempt on the part of the Suspended Directors of the CD to keep that amount away from the CD so that it remains out of the reach of the creditors of the CD as at that point of time the Directors of the CD might have sensed the approaching sound of insolvency as the proceedings under the SARFAESI Act had already initiated. 

# 44. We are of the considered view that which was only a suspicion at the stage of selling of the shareholding by the Appellant in the Rio Resource to the Bellwether and not showing it in the financials of the CD and to the contrary, despite selling of the shareholding in the Rio Resource, continuously showing as an investment of Rs. 8.85 Crores in the audited balance sheet of the CD, become a proof of fraudulent transaction when the consideration of the sale of shareholding in Rio Resource to Bellwether, was shown to have been directly transferred to the Aero Steel and it has been claimed that the whole consideration has been transferred to the Aero Steel by the Bellwether in settlement of penalty of 1.37 million USD which was imposed by the Aero Steel for non-completion of the contract. 

# 45. At the cost of repetition, we reiterate that the agreement shown to have been executed between the Aero Steel and the CD was nothing but an agreement which may be drafted subsequently in order to siphon the receivables of the CD. 

# 46. So far as the other transaction of sale of Rs. 19,70,000/- to M/s SR Minerals is concerned it has been explained by the Suspended Director of the CD that the said sale was never made and was cancelled however this explanation is not substantiated by any documentary evidence and it also appears to have been executed to misappropriate Rs. 19,70,000/-. 

# 47. So far as the direction of the Ld. Adjudicating Authority pertaining to referring the matter to be investigated by SFIO is concerned, it is submitted by Ld. Counsel for the Appellant that such direction could not be passed by Ld. Adjudicating Authority. It is further submitted that such direction under Section 212 of the Companies Act, 2013 could only be passed by Central Government, only when Central Government forms an opinion that it is necessary to investigate into the affairs of the company by the SFIO. Reliance has been placed on Maharashtra Tourism Development Corporation (supra). Ld. Counsel for the Respondent Liquidator however submits that keeping in view the fraudulent transactions executed by the appellant, such directions were necessary in the facts and circumstances of the case. We notice that by passing the impugned order apart from directing the appellants to contribute (19.95 Crore to the asset of the CD, which in our considered opinion is justified) direction has also been passed to investigate the matter by SFIO and the copy of the order has also been forwarded to SFIO for compliance. We are in agreement with the submissions made by Ld. Counsel for the Appellant. Admittedly the procedure for investigation in the affairs of the company has been provided under Section 212 and 213 of the Companies act, 2013 and keeping in view the provisions contained under Section 213 of the Companies Act, 2013 the discretion to get the matter investigated by the SFIO only vests in Central Govt., and if after the investigation ordered by the Central Govt., it is of the opinion that the matter further required to be investigated by SFIO, it can do so. However, the discretion lies solely with the Central Govt. and the Tribunal cannot order straightaway investigation by SFIO. We do not want to devote pages on this issue as the matter has been sent at rest by a coordinate Bench of this Appellate Tribunal in Maharashtra Tourism Development Corporation (supra) as under:  

• “In view of the aforesaid position of law also, the procedure laid down under Section 213 of the Companies Act, 2013 can be exercised by the Tribunal/Adjudicating Authority, as held above. 

• Further, after the investigation by the Inspector, if case is made out and the Central Government feels that the matter also requires investigation by the ‘Serious Fraud Investigation Office’ under Section 212 of the Companies Act, 2013, it is open to the Central Government to decide whether is such case the matter may be referred to the ‘Serious Fraud Investigation Office’ or not. This will depend on the gravity of charges as may be found during the investigation by the Inspector.

• In view of the aforesaid position of law, we are of the view that the Adjudicating Authority was not competent to straight away direct any investigation to be conducted by the ‘Serious Fraud Investigation Office’. However, the Adjudicating Authority (Tribunal) being competent to pass order under Section 213 of the Companies Act, 2013, it was always open to the Adjudicating Authority/Tribunal to give a notice with regard to the aforesaid charges to the promoters and others, including the appellants herein and after following the procedure as laid down in Section 213, if prima facie case was made out, it could refer the matter to the Central Govt. for investigation by the Inspector or Inspectors and on such investigation, if any, actionable material is made out and if the Central Govt. feels that the matter requires investigation through the ‘Serious Fraud Investigation’, it can proceed in accordance with the provisions as discussed above. Impugned order shows parties have been heard on the charges claimed by the ‘resolution professional’. 

• We, accordingly, modify the impugned order dated April 16, 2019 and refer the matter to the Central Government for investigation through any Inspector or Inspectors”. 

# 48. Keeping in view all the facts and circumstances of the case and for the reasons given herein before we do not find any good ground to interfere in the impugned judgment passed by the Ld. Adjudicating Authority in paragraph no. 43 of the same, pertaining to the contribution to be made by the appellants to the asset of the CD, except the direction given to investigate the matter by the SFIO. Therefore, with regard to the direction of the Adjudicating Authority to investigate the matter through SFIO, we modify the impugned order and refer the matter to the Central Govt. for investigation through Inspector or Inspectors. The matter is thus referred to the Secretary, Ministry of Corporate Affairs for investigation by Inspector/Inspectors strictly in accordance with law. 

# 49. In view of above the appeal is partly allowed. 

# 50. There is no order as to the costs. 

# 51. Pending IA’s if any are also closed. 

# 52. The Registry is directed to transmit a copy of the impugned order and also of this order to the Secretary Ministry of Corporate Affairs for compliance. 

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Kishore K. Avarsekar and Anr. Vs. Alok Saksena (Liquidator) - The remedies under Section 66 of the Code are against those contributing to wrongful trading, prioritizing creditor protection over personal benefit proofs. Thus, promoters and suspended directors remain accountable, if intent is established through circumstantial evidence like fund diversions, regardless of direct benefits.

  NCLAT (2025.12.11) in Kishore K. Avarsekar and Anr. Vs. Alok Saksena (Liquidator)  [(2025) ibclaw.in 1071 NCLAT, Comp. App. (AT) (Ins) No. 971 of 2024] held that; 

• On this point, it can be mentioned that Section 66 of the Code is not dependent on usage of the term ‘related party’. At best, it may give more evidence about the intent of the persons involved to defraud.

• We note that in the absence of purchase documents, transportation receipts, or related proofs, the Corporate Debtor’s records raise red flags for fraudulent or avoidance transactions, even if significant amounts were received back by the CD from suppliers, like Magnum in the present case, (possibly indicating refunds, advances, or round-tripped funds). Such gaps suggest non-genuine trades, as legitimate purchases require verifiable evidence like invoices, delivery proofs, and payment trails. To mitigate, CDs should have maintained comprehensive records ensuring eligibility and performance proofs.

• 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.

•  It has been brought out on record that the Letter of Credit (LC) were opened on the basis of fictitious documents of purchases. The said fictitious purchases were not accounted in the books of accounts of Corporate Debtor. The Appellants failed to bring on record any supporting document for transactions with Magnum. The financial statements of the relevant year show that purchases of a miniscule amount of Rs. 6.52 Crores were made from Magnum. Thus, the transactions are ex-facie not convincing.

• Importantly, direct personal benefits to the promoters or suspended directors is not a prerequisite for liability under Section 66(1) of the Code.

• The remedies under Section 66 of the Code are against those contributing to wrongful trading, prioritizing creditor protection over personal benefit proofs. Thus, promoters and suspended directors remain accountable, if intent is established through circumstantial evidence like fund diversions, regardless of direct benefits.

• 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.

Blogger’s Comments; Liability under section 66(1) [Fraudulent business/transactions] falls on any persons who were knowingly parties to the carrying on of the business in such manner, whereas the liability  under section 66(2) [wrongful trading] falls on the shoulders of the directors/partners.

• Section 66(1)   . . . . . .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 the present case, the liability of fraudulent transactions under section 66(1) has been put on the shoulders of directors and the beneficiary of the adjudged fraudulent transactions has been left scot-free. 

Thus, strangely for an offence under section 66(1), liability has been fixed under the provisions of  section 66(2).

Excerpts of the Order;

# 1. The present appeal has been filed by the Appellants i.e., Mr. Kishore K. Avarsekar and Mr. Abhijeet K. Avarsekar, who are the promoters and suspended directors of the Corporate Debtor i.e., Unity infra projects limited, under Section 61 of the Insolvency and Bankruptcy Code, 2016 (‘Code’) against the Impugned Order dated 19.04.2024 passed by the National Company Law Tribunal, Mumbai Bench-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 pleadings imputing a role to them. Furthermore, it is submitted by the Appellants that MA 423 of 2020 was couched in vague language, deliberately sidestepping the precise elements mandated under Section 66 of the Code.

# 4. The Appellants submitted that it is a well-settled canon of jurisprudence that no person may be coerced into reimbursing, compensating, or contributing to the estate of the Corporate Debtor without solid substantiation of fraudulent conduct attributable to such person. The Appellants, bereft of any such targeted imputations, cannot be saddled with vicarious liability merely by virtue of their association with the Corporate Debtor.

# 5. The Appellants strenuously urge that the Legislature, in enacting Section 66 of the Code, has intentionally erected a stringent threshold of proof, as discernible from a juxtaposed analysis with Section 339 of the Companies Act, 2013. Whereas the latter provision invokes liability upon mere appearance of complicity, Section 66 circumscribes its ambit to those individuals who were verifiably and knowingly parties to the impugned transaction. Therefore, mere designation as a director, manager, or officer suffices not to engraft liability; rather, the pleading and establishment of a delineated role in the malfeasance is an indispensable prerequisite for invoking Section 66. The Legislature’s judicious choice of the term “found” in Section 66 of the Code contrasted with the permissive “appears” in Section 339 of the Companies Act, 2013 crystallizes that, absent concrete delineations of wrongdoing, no fetters of liability may be imposed upon the Appellants.

# 6. The Appellants averred that the Impugned Order has imprecisely alluded to disbursements effectuated to Magnum Infra Projects Limited (“Magnum”) through Letters of Credit (“LCs”), whilst wholly disregarding the fact that most of the money remitted by the Corporate Debtor to Magnum was repaid to the lending banks in discharge of their loan obligations.

# 7. The Appellants further contended that the Adjudicating Authority has overlooked the commercial complexion of these LC transactions, wherein banks customarily levy discounting charges or fees approximating 8-9% of the sanctioned LC quantum, a practice symbolic of standard banking norms, which works out to Rs.115 crores.

# 8. The Appellants submitted that the Impugned Order is based on an obvious 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 it completely ignores several key defences: First, the letter of credit limits was released not by one bank but by a group of banks, making it unlikely they all failed to get basic supporting documents before handing over the funds. Second, the forensic audit report used only a very small sample of data, which is clearly not enough to draw conclusions about the full transaction. Third, the report itself openly admits that its findings are based on circumstantial evidence and partially concluded in the absence of adequate supporting documents.

# 11. The Appellants claimed that neither the forensic auditor nor the resolution professional explained why they selected that small sample without first reviewing the overall details and scale of the transaction. If the court’s interpretation holds, then every case of rejected materials would automatically be treated as a round-trip scheme—a claim that’s clearly contradicted by the fact that money received from Magnum was properly sent back to the creditor banks, with not even a single rupee diverted to any other purpose, let alone to the appellants.

# 12. The Appellants argued that there’s no solid evidence or specific examples in the records about any supposed problems with the “transport details,” which prevents them from properly defending themselves. Even none of the claims mention the Appellants’ involvement in the deal.

# 13. The Appellants claimed that the Impugned order’s requirement for them to pay money into the company’s assets is flawed because it lacks any specific claim about what role they played. Importantly, the Forensic Audit Report which is the main basis for both the application MA 423 of 2020 and the challenged Impugned order, doesn’t mention the specific roles or instances of the Appellants.

# 14. The Appellants submitted that the Forensic Audit Report admits on its own that its analysis is only preliminary and based on indirect evidence. The Appellant highlighted that this built-in uncertainty means the report doesn’t meet the proof of standard needed to force individuals to make personal payments under Section 66 of the Code.

# 15. The Appellants further argued that both the Forensic Auditor and Respondent wrongly overlooked the independent legal nature of LC transactions, which necessarily involve banks acting under current laws and guidelines. The complete 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 provide them to the Auditor. Despite this gap, the Auditor blamed the Appellants for not responding to requests for comments on the Report, even though the Appellants had sent their comments by email on 04.09.2019, a response that was simply ignored. This shows a biased approach in how the audit was conducted and the Report was prepared.

# 18. The Appellants further argued that important details, such as the terms of the LCs/bank guarantees and information about the recipients, were either not obtained or not checked and without these essential elements, the Auditor’s and Respondent’s claims of fraud or fund diversion by the Appellants have no basis. The Appellants pleaded that the banks and lenders who claim to be harmed did not provide crucial documents to the Auditor, which raises serious doubts about the strength of Respondent’s application and suggests the full truth might come out from those withheld documents.

# 19. The Appellants submitted that in the Executive Summary of the Forensic Audit Report, under the section on “related party transactions,” the auditors have pointed out several entities as having “indirect relations” with the Corporate Debtor and called them “interested entities.” However, the term “related party” is clearly defined in Section 5(24) of the Code, and “related party transactions” are defined in Section 188 of the Companies Act, 2013. Notably, “interested entities” has no legal basis in either law, and the Report itself does not even explain what it means. This seems like an attempt to create a false idea of fraud out of nothing to fit a story.

# 20. The Appellants argued that many of the entities listed by the auditors clearly do not qualify as “related parties” under the law, which highlights how the auditors invented the term “interested entities” as a way to unfairly criticize the transactions without any legal support. This one-sided view focusing only on payments made while ignoring money received is clearly unfair. For example, the Report mentions payments of Rs. 1636.81 Crores to Magnum through LCs, balanced by unexplained receipts of Rs.1411.69 Crores from Magnum, resulting in a net difference of Rs. 225 Crores, along with missing purchase records in the books. Even though the Report recognizes this back-and-forth, Respondent’s application in the insolvency case demands Rs. 1946.15 Crores from the Appellants, 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 Respondent’s management.

# 23. The Appellants submitted that in the “end use of funds” section of the Forensic Audit Report, the auditors describe cases where term loans from banks or financial institutions were apparently adjusted in customer accounts using journal entries. However, this claim lacks specific examples of how the funds moved and was not followed up with any questions to the Corporate Debtor. The Appellants explained that these term loans were set aside for specific projects with conditions from the lenders, and journal entries are a standard and legal way to record accounts, providing no basis for Respondent’s application.

# 24. The Appellants argued that Respondent, relying on this clearly preliminary and incomplete Forensic Audit Report, filed MA 423 of 2020, a filing that lacks any basic mention of the Appellants’ role. In response, the Appellants filed counter-affidavits and additional affidavits challenging the emptiness and weakness of the application.

# 25. The Appellants submitted that despite these strong objections, the Adjudicating Authority dismissed the Appellants’ arguments without proper review, partially allowing MA 423 of 2020 through the Impugned Order dated 19.04.2024. The Impugned order requires the Appellants to pay Rs. 231.64 Crores plus 12% interest per year, a decision flawed by its clear failure to consider the Appellants’ points and one that calls for reversal on appeal.

# 26. Concluding their arguments, the Appellants requested this Appellate Tribunal to allow the present appeal and set aside the Impugned Order.

# 27. Per contra, the Respondent denied all the averments made by the Appellants as misleading and baseless.

# 28. The Respondent submitted that this Appellate Tribunal issued notice on 15.05.2024, noting the Appellants’ submissions regarding the alleged error in classifying the Magnum transactions as fraudulent, the repayment of Rs. 1454.62 crores out of Rs. 1643.33 crores, and the Forensic Audit Report’s disclaimer on fund diversion/siphoning in the absence of complete documentation. The Respondent asserted that these contentions were raised before the Adjudicating Authority, who fully considered, as evidenced by the Impugned Order’s analysis of the Forensic Audit Report and the parties’ submissions.

# 29. The Respondent further contended that the Impugned Order explicitly 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 misleading, as Magnum repaid only Rs. 1454.62 crores against Rs. 1643.33 crores paid plus Rs. 42.93 crores interest, resulting in a clear loss from these circular transactions. The Appellants failed to disclose transaction details with Magnum, further casting doubt on their veracity.

# 32. The Respondent submitted that the Appellants mislead this Appellate Tribunal by claiming Rs. 115 crores deduction as bank discounting charges upon fund release to Magnum, inconsistently stating elsewhere that Magnum retained this amount. Pertinently, such charges pertain solely to Magnum and its banks, bearing no relation to the Corporate Debtor.

# 33. The Respondent submitted the following brief factual background: The CIRP commenced in June 2017 via C.P. (IB) No. 1058 of 2017, admitted on 20.06.2017 with Mr. Arun Kapoor as Interim Resolution Professional. He engaged M/s. MGRS & Associates on 29.06.2017 for due diligence, yielding a report dated 25.07.2017 excluding forensic audit, as it fell outside the approved scope. The Respondent further submitted that he was appointed Resolution Professional on 01.09.2017. Bids to revive the Corporate Debtor were rejected by creditors, leading to M.A. No. 227 of 2018 filed on 20.03.2018 under Section 33(1) for liquidation. On 05.10.2018, the Respondent appointed BDO India LLP as Forensic Auditor.

# 34. The Respondent contended that the Forensic Audit Report dated 25.09.2019 flagged transactions with interested parties totalling Rs. 1946.15 crores as fraudulent, including Rs. 1643.33 crores issued to Magnum without supporting purchase documents, against only Rs. 6.52 crores recorded in the Corporate Debtor’s books.

# 35. The Respondent submitted that the Appellants, promoters of the Corporate Debtor since 1997 and its Managing Directors, cannot feign ignorance of these transactions. Appellant No. 1’s reply dated 30.11.2021 claiming a “memory test” is untenable, as Managing Directors would know of disbursements amounting to 72% of funds to interested parties, supported by documentary proof.

# 36. The Respondent further contended that the Appellants were former directors of Innowave IT alongside Rakesh Mehta, a director of Magnum (with Nikesh Tontai), whose FORM-32 email (nikesht@unityinfra.com) evidences connection to the Corporate Debtor.

37. The Respondent submitted that the Appellants managed day-to-day affairs since 2009 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 Section 66 averments. The Respondent contended that Section 66 empowers the Adjudicating Authority, on Resolution Professional’s application, to order contributions from persons knowingly party to business carried with intent to defraud creditors or fraudulently, as reproduced in the Report.

# 41. The Respondent further submitted that the Hon’ble Supreme Court in Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd. (2021) 3 SCC 475 affirmed such recovery orders as contributions to Corporate Debtor assets. As Managing Directors running day-to-day affairs, the Appellants are liable for prima facie fraudulent transactions.

42. The Respondent submits that as the Managing Directors involved in day-to-day affairs, the Appellants cannot disclaim role; M.A. No. 423 of 2020 followed examination revealing only Rs. 6.52 crores purchases recorded against Rs. 1643.33 crores to Magnum without documents, with Rs. 1454.62 crores returned circularly sans interest, leaving Rs. 225 crores deficit plus bogus purchases, yielding Rs. 231.64 crores liability per the Adjudicating Authority, corroborated by the Forensic Audit Report labelling Magnum an interested party and evidencing intent to defraud via round-tripping reducing assets (72% of interested party funds).

# 43. The Respondent further contended that the “each penny repaid” claim misleads as Magnum did not fully repay, leaving Rs. 225 crores deficit (Rs. 231.64 crores post-bogus adjustment); no documents evidence commercial nature, and Rs. 115 crores discounting charges are irrelevant to Corporate Debtor, being between Magnum and banks. The Appellants failed to provide underlying documents. The Respondent contended that no collusion explanation for Rs. 225 crores owed, nor transaction details; contradictory Rs. 115 crores claim (deducted vs. retained) require strict proof, unsupported by documents; reiterated, charges are Magnum-bank matter.

# 44. The Respondent further submitted that the Impugned Order rightly held eight LC sample cases that lacked transport documentation, with repeated truck numbers unverified on E-Vahan Portal; LCs for purported goods purchases were fraudulent, unaccounted beyond Rs. 6.52 crores vs. Rs. 1643.33 crores; reliance on disclaimer misconceived for Magnum (fraud apparent from documents); financial statements confirm fraudulent trading absent supporting evidence.

# 45. The 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 assertions, and that the allegations of fraud raised notwithstanding the clear findings of the Report remain wholly unsubstantiated. The Respondent further contended that the Appellants have failed to demonstrate any bona fides in their conduct, and that the glaring discrepancies evident on record fully justify and underpin the Impugned Order.

# 48. The Respondent further submitted that the Innowave IT linkage through Rakesh Mehta, the directorships in Magnum, and the use of the unityinfra.com email domain by Nikesh Tontai collectively establish the relevant connections; moreover, Section 66 does not require the parties to be related where the transactions are undertaken with a fraudulent purpose.

# 49. The Respondent contended, as the amount of Rs. 1946.15 crores were sought in respect of multiple entities, namely Unity Axellia, Mahindra Brothers, and Pandhe Infracons and not merely Magnum, and the Impugned Order was partly allowed only after considering these entities as well.

# 50. The Respondent submitted that the vague assertion regarding bank verification is unsupported by any documentary evidence, and no presumption of fraud can arise merely from the issuance of LCs. The Respondent further contended that all available documents were provided to the Auditor, whereas the Appellants failed to furnish any documents to the Respondent.

# 51. The Respondent submitted that the Magnum transactions forming the basis of the Impugned Order are clearly ascertainable from the financial statements and books of account, which reveal round-tripping. The Respondent contended that submitting the Report is based on adequate analysis and is corroborated by the books of account, while the Appellants’ affidavits suppress the Respondent’s rejoinder and submissions and fail to contradict the Report or the application with any documentary material.

# 52. The Respondent submitted that as Managing Directors, the Appellants were duty-bound to safeguard the interests of all stakeholders, and their conduct carried out with fraudulent intent squarely fulfils the ingredients of Section 66 of the Code. The Respondent further contended that as M.A. No. 423 of 2020 clearly demonstrated the Appellants’ complicity as Managing Directors, and their reply failed to deny their role or knowledge, instead feigning ignorance through what they termed a “memory test.”

# 53. The Respondent further 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 outstanding from Magnum, and the Appellants have provided no “commercial” material to support their assertions. The Respondent submitted that the payment of Rs. 1643.33 crores through fraudulent and non- existent transactions itself establishes fraud.# 55. The Respondent contended that the alleged Rs. 115 crores as bank charges, at the best, pertain to the dealings between Magnum and the bank. The Respondent further submitted that the Impugned Order is not based solely on discrepancies in transport records. The Respondent contended that the vague assertion of bank verification is unsupported by documents, and no presumption of fraud can arise merely from the issuance of Letters of Credit. Further, LCs were issued for goods without supporting documents, only Rs. 6.52 crores were recorded against Rs. 1643.33 crores claimed, eight sample instances were relied upon, and the Appellants have not contradicted the Report.

# 56. The Respondent submitted that the disclaimer by Forensic Auditor relied upon by the Appellants does not apply to the Magnum transactions and that fraud is clearly established from the documents and books of account, which reflect only Rs. 6.52 crores against Rs. 1643.33 crores (erroneously noted as Rs. 1943.33 crores), rendering the transactions ex facie fraudulent. The Respondent contended that the Appellants’ rejection of the findings is wholly unsubstantiated and unsupported by any records.

# 57. The Respondent contended that the Impugned Order is factually sound and lawful in every respect. The Impugned Order has duly considered the facts of the application as well as the observations contained in the Report after examining the books of account. The Respondent further reiterated that the disclaimer relied upon by the Appellants is inapplicable and that fraud is evident from the books, which reflect only Rs. 6.52 crores as against Rs. 1643.33 crores, an ex facie fraudulent gap.

# 58. Concluding his arguments, the Respondent requested this Appellate Tribunal to dismiss the present appeal with exemplary cost.

Findings

# 59. We note that the Respondent, Mr. Alok Saksena, is the Liquidator of the Corporate Debtor, having been appointed as Resolution Professional vide order dated 01.09.2017 passed by the Adjudicating Authority in the aforementioned Company Petition filed by the Corporate Debtor itself under Section 10 of the Code. The Corporate 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 minuscule purchase of Rs.6.52 crores in the books of accounts of the Corporate Debtor. The main contentions of the Appellant is regarding directions given by the Adjudicating Authority in the Impugned Order dated 19.04.2024 where the Appellant have been asked to contribute jointly or severely to pay a sum of Rs. 231.64 Crores within 30 days along with interest @ 12% p.a compounded annually, if paid beyond 30 days.

# 62. We note that the Company Petition (IB) No. 1058/MB/ 2017 was moved by the Corporate Debtor itself under Section 10 of the Code and the same was allowed by the Adjudicating Authority. It is significant to note that the Appellants were themselves the Former Managing Directors of the Corporate Debtor.

# 63. We have noted that during the course of CIRP, the due diligence was carried out by the Resolution Professional and Forensic Auditor, i.e. BDO India LLP, was appointed to give detailed report. After examination of Forensic Audit Report, the Resolution Professional moved an application before the Adjudicating Authority under Section 66 (1) and 68 of the Code requesting the Adjudicating Authority to pass necessary orders under Section 66(1) of the Code directing Respondent to make contribution for fraudulent transactions and pass an appropriate orders under Section 68 of the Code against the Appellants for committing act of fraudulent siphoning off and removing the property of the Corporate Debtor.

# 64. We take into consideration the fact that the Unity Infra Project Ltd. (Corporate Debtor) was in the business of real estate and during the course of operation of the Corporate Debtor, the Corporate Debtor undertook certain transactions with Magnum Infra Projects Ltd. All parties were identified as interested parties by the Forensic Auditor. At this stage, we also take into consideration that the Forensic Auditor has used the generic word ‘interested party’ instead of specific term, i.e. related party. We further take into consideration that the Appellants have taken objections about treating interested party as related party on the ground that there is no concept of the word ‘interested party’ in the Code. On this point, it can be mentioned that Section 66 of the Code is not dependent on usage of the term ‘related party’. At best, it may give more evidence about the intent of the persons involved to defraud.

# 65. The Appellants have also challenged 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/majority of the money was refunded by Magnum Infra Projects Ltd. As regard, non-availability of documentation, it is the case of the Appellants that since, transactions were done long back and in ordinary course of business, the Appellants, having no records, could not be put to “memory test” by the Adjudicating Authority.

# 69. Further, the Appellants have also brought out that the Adjudicating Authority relied on limited sample size and further ignored the fact that all payment to Magnum Infra Projects Ltd. was made through the banking channel by means of LC’s or direct payments, and it cannot be expected that so many banks will commit error, and therefore, the Impugned Order is illegal and perverse.

# 70. We have taken into consideration several judgements brought to our notice by the Appellants, on the issues like onus of proving fraud is on the one alleging it, higher degree of proof is required to establish fraud, Forensic Auditors Report alone cannot be applied in deciding a fraudulent application, Test for applicability of 66(1) of the Code. Further, the Appellants also cited judgements to buttress the point that any order passed by a court or tribunal should be a reasoned and speaking order. The Appellants also referred to the judgements on the plea that the allegations against the Director must be specific and supported by evidence and finally stated that no vicarious liability for directors. The relevant judicial precedents have been duly considered. However, in the interest of maintaining brevity and avoiding unnecessary prolixity, it is not considered appropriate to discuss each of these judgments in detail.

# 71. Having noted the contentions of the Appellants, we shall deal with the issues raised by the Appellants.

# 72. On the other hand, it is the case of the Respondent that it was clear case of fraud committed by the Appellants since, they were the Promoters & the Managing Directors of the Corporate Debtor and were clearly in knowledge and control of operations of the Corporate Debtor.

# 73. The Respondent further pointed out that the very fact that Section 10 of the Code was moved by the Corporate Debtor just to enrich themselves at the cost of other creditors and based on the fraudulent transactions by which hundreds of crores of rupees were siphoned off. We also take into consideration that the Respondent brought out that they have 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-vis Section 66(2) of the Code and pleaded that applicability of Section 66(1) of the Code is justified against the Promoters and Suspended Directors even if no direct benefit arises to said directors.

# 78. The Respondent also denied the plea taken by the Appellant regarding alleged deemed charging of interest or discount by banks on issue of LCs to the extend of rupees assumed figure of Rs. 115 Crores (assume by the Appellant without any documentary evidence).

# 79. The Respondent then also brought to our notice that merely because the payment was made by the LCs mechanism, through banks, cannot be said that no fraud could have taken place. The Respondent argued that the fraud was committed by the Appellants themselves and not by the Banks by making fabrication of documents vis-à-vis LCs issued by banks

# 80. The Respondent further argued that even part of the money as received from Magnum Infra Projects Ltd. however, the fact remains that Rs. 231.64 Cores was a loss that was caused to the Corporate Debtor, since the money never came back in the books of the Corporate Debtor.

# 81. We also take into consideration the relevant part of the Forensic Audit Report which brings out that the Corporate Debtor made the payment of Rs. 1643.32 Crores to Magnum Infra Projects Ltd. i.e., Rs. 1317.18 Crores through LCs and Rs. 326.14 Crore through direct payment. This table also give bank wise detail for such payment through LCs. The table reads as under: –

# 82. We note that in the absence of purchase documents, transportation receipts, or related proofs, the Corporate Debtor’s records raise red flags for fraudulent or avoidance transactions, even if significant amounts were received back by the CD from suppliers, like Magnum in the present case, (possibly indicating refunds, advances, or round-tripped funds). Such gaps suggest non-genuine trades, as legitimate purchases require verifiable evidence like invoices, delivery proofs, and payment trails. To mitigate, CDs should have maintained comprehensive records ensuring eligibility and performance proofs.

# 83. We take up the issue regarding round tripping that was brought to our notice by both the parties, during pleadings. We are conscious that the round tripping process creates an adverse impact on the Corporate Debtor which has been alleged by the Respondent. We take into consideration the fact that round 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 documentations. It is very significant to note that the documents reflect only purchase transaction of Rs. 6.52 Crores against huge amount of outflow to Magnum to the extent of Rs. 1643.33 Crores, which is nothing else except round tripping. By no commercial or financial standard, this can be treated a transaction done in the ordinary course of business. During hearing, we put the pointed to the Appellants to justify, even at this stage, of such transactions. However, no satisfactory answer could be furnished by the Appellants.

# 85. The Appellants’ reliance on the disclaimer in the Forensic Audit Report is misconceived. As far as transactions with Magnum, the fraudulent nature is apparent from the available documents. The Appellants contend that the transactions with Magnum were in the nature of commercial transactions. However, there are no underlying purchases or supporting documents evidencing the transactions. It has been brought out on record that the Letter of Credit (LC) were opened on the basis of fictitious documents of purchases. The said fictitious purchases were not accounted in the books of accounts of Corporate Debtor. The Appellants failed to bring on record any supporting document for transactions with Magnum. The financial statements of the relevant year show that purchases of a miniscule amount of Rs. 6.52 Crores were made from Magnum. Thus, the transactions are ex-facie not convincing.

# 86. As regard the plea taken by the Appellants the recorded disclaimers used in Forensic Audit Report, we note that Disclaimers in forensic audit reports serve as to limit the auditor’s liability. Further, disclaimers also specify limited scope of the investigation, and clarify assumptions or restrictions on the report’s use. Such disclaimers are common due to the investigative nature of forensic audits, which focus on detecting fraud since full records are rarely available, as in the present case.

# 87. It is also a fact that in many other cases, the Suspended Director do not fully co-operate and support and furnish the desired document. We note that in the present case also, similar things happened and for the same reason, the Forensic Auditor carves out such disclaimers in the report.

# 88. During pleading before us, the Appellants contended that the amount was returned to the Corporate Debtor and the banks. However, we find that this submission 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 fraudulent purpose during the relevant period. This provision targets directors, promoters, and others involved in management, including suspended directors during CIRP. Importantly, direct personal benefits to the promoters or suspended directors is not a prerequisite for liability under Section 66(1) of the Code. The focus is on the harm to creditors and the fraudulent nature of the company’s actions, not individual gains. Judicial precedents emphasize that if ex-directors facilitated asset transfers or operations knowing of likely defaults, then such directors/promoters can be held accountable, even without personal enrichment. The remedies under Section 66 of the Code are against those contributing to wrongful trading, prioritizing creditor protection over personal benefit proofs. Thus, promoters and suspended directors remain accountable, if intent is established through circumstantial evidence like fund diversions, regardless of direct benefits.

The Appellants were Managing Directors of the Corporate Debtor, thereby they had a duty to ensure the interests of the stakeholders are secured and to ensure that the business of the Corporate Debtor is not carried with an intention to defraud the creditors. Thus, Appellants failed to protect the interest of the stakeholders and thereby, the ingredients of Section 66 of the Code are fulfilled.

# 90. The Appellants as Managing Director carried out these transactions fraudulently as apparent from the financial books of the Corporate Debtor. The Impugned Order further states, “Section 66 deals with the carrying on a business for any fraudulent purpose. The facts culled on in the Report, which have not been recruited by the Respondents in their Reply clearly demonstrate that transaction of LC was merely a accommodation transactions and not for the purpose of any business of Corporate Debtor and such transactions resulted into inflated borrowings in the form of LC maturity amounts not fully refunded back by Magnum.”

# 91. In the present case, the Forensic Audit Report, MA 423 of 2020 filed by the Resolution Professional and the Impugned Order by the Adjudicating Authority clearly establish responsibility of the Corporate Debtor.

# 92. Thus, we do not find any error in the Impugned Order on this ground whereby the Adjudicating Authority has asked the Appellant to refund Rs. 231.64 Crores.

# 93. For the CD issuing 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 and development for decades and promoted the Corporate Debtor in 1997. The Appellants were the Managing Directors of the Corporate Debtor and Appellant No.1 in his reply dated 30.11.2021, to M.A. No. 423 of 2020 before the Adjudicating Authority has said to have been stated that he has been exposed to ‘memory test’ and cannot recollect any single transaction when no specific transaction wise details were provided to them. This seems unconvincing since the Appellants, being Managing Directors of the Corporate Debtor, would be aware of an amount worth such quantum of more than thousands of crores of Rupees, and was required to establish transactions based on the documentary proof provided. The sum paid to Magnum amounting to Rs. 1643.33 Crores, comes to 72% of the sum provided to interested/related parties, by Corporate Debtor. Even if we take that Magnum is an independent entity and not interested/related party, still non-documentation cannot prove such documentations to be genuine.

# 95. The Appellants Mr. Kishore Krishnarao Avarsekar And Abhijit Kishore Avarsekar were Managing Directors and managing the day-to-day affairs of Corporate Debtor since 2009 as per MCA Records and cannot claim that they were not aware of the said transactions, since they were running the day-to-day affairs and the transactions flagged by the Forensic Auditor were well within their knowledge. During the process of the forensic audit, the Forensic Auditor, sought explanation from Appellants by way of email dated 09 July 2019, with respect to fraudulent transactions. The Forensic Auditor had carried out detailed examination of the Corporate Debtor with relevant financials and Forensic Audit Report was prepared only after giving opportunity of representation to the Appellants. The Appellants, however, in their email dated 23.12.2020, raised one plea that they could not inspect the “documents that were actually examined by the auditor/s while preparing the report”. Such submissions are untenable as it has been noticed that in any event, after the said inspection, the Appellants did not raise any requests for any further inspection of documents.

# 96. The Appellants were aware of the inspection being carried out by the Forensic Auditor since, opportunity of representation was duly given to them. It has been brought out that it is only when the application under Section 66 of the Code 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 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.” (Emphasis Supplied)

# 99. The Hon’ble Supreme Court in Phoenix Arc Private Limited v. Spade Financial Services Limited (2021) 3 SCC 475, has held that for recovering from fraudulent transactions, the Adjudicating Authority can pass an order for recovery as contribution to the assets of Corporate Debtor. The Appellants were managing directors of Corporate Debtor and they were running day to day affairs, therefore liable for the transactions which are held by the Adjudicating Authority prima facie fraudulent in nature, in the Impugned Order. The Respondent filed the M.A. No. 423 of 2020 after examining that only a miniscule purchase of Rs.6.52 crores were reflected in the book of accounts of the Corporate Debtor, while a sum of Rs. 1643.33 crores were issued by Corporate Debtor to Magnum without any supporting purchase document. An amount of Rs. 1454.62 crores had been received back from Magnum in circular transaction. No interest was levied and repaid on such sum being accommodated by Magnum, thus even after adjustment, a sum of Rs. 225 Crores was still recoverable from Magnum, and after considering that the purchases were not genuine, the Adjudicating Authority has arrived at liability of Appellants at Rs. 231.64 Crores. This observation is also corroborated by the Forensic Audit Report, which identified certain transactions carried out by Corporate Debtor and Magnum. Thus, it is clear that there was an intention to defraud the creditors by carrying out round-tripping transactions with Magnum to reduce the assets of the Corporate Debtor. The sum paid to Magnum amounted to 72% of the amount provided by Corporate Debtor, to various entities. Thus, it is untenable to state that Appellants, despite being Managing Directors had no role in carrying out such fraudulent transactions.

# 100. The Appellants’ statement that “each and every penny” which was received by the Corporate Debtor from Magnum, was repaid to respective bank does not seem correct as Magnum itself has not paid the entire money to Corporate Debtor. As stated above, there was a deficit of Rs. 225 Crores 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 discount bills under LCs deducting interest for the usance period. The process is non-recourse in many cases, meaning the bank absorbs default risk.

The contention that Rs. 115 Crores would have been charges as discounting charges and deducted by bank terms in misleading as the Appellants have provided contradictory statement, as in para 7 (vii) (e) Appellants mention that Rs.115 Crores would have been deducted by bank and in para 7 (vii) (f) Appellants mention that Rs.115 Crores has been retained by Magnum. The Appellants have merely stated the retention of amount due to bank charges etc. without providing any supporting document. The contention that Rs. 115 Crores would have been charges as discounting charged and deducted by bank is not convincing as the said charges has nothing to do with Corporate Debtor and bank charges / discounting charges is between Magnum and its bank.

# 102. As regard, allegation by the Appellant that Low Sample Size was taken by the Respondent, we note that the Impugned Order has rightly held that, “in all 8 sample cases pertaining to LC Documentation; there was no transport documentation to evidence actual movements of the goods and in some cases, even truck number was used for multiple trips in a day and even truck numbers was not found on E-Vahan Portal.” The letter of credit was purportedly issued for purchase of goods. The supporting purchase documents were questionable, and the said purchases were never accounted in the book of accounts of Corporate Debtor. Since there was no genuine purchase, all the transport documents are also prima-facie fraudulent in nature. The books of accounts of Corporate Debtor only reflected a sum of Rs.6.52 crores worth of purchase instead of Rs.1643.33 crores paid to Magnum. The Adjudicating Authority relied not on one but eight sample cases. In any event, the Appellants did not place anything on record to contradict the findings of the Forensic Audit Report.

# 103. We may add that there is no presumption that merely because a letter of credit is issued by a bank, the transactions can never be fraudulent. Even otherwise, a fraudulent transaction can be carried out by a valid letter of credit issued by a bank. The Forensic Auditor had carried out their audit after compiling documents from the Corporate Debtor as well as relevant Banks.

# 104. There is no violation of principles of natural 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.

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