2023 (3) TMI 74 - AT - Insolvency and Bankruptcy

Fraudulent transactions (entries of Rs. 21.37 crores shown in the Audited Financial Statement for the year 2018) - distribution under Section 53 of the Insolvency and Bankruptcy Code 2016 (liability to pay to liquidator) - HELD THAT - Section 66 of the I B Code 2016 gives powers to the Adjudicating Authority to pass suitable orders if it is found that any person has carried on the business of the Corporate Debtor with an intention to defraud its Creditors or other stakeholders. Section 66 also give powers to the Adjudicating Authority to give directions for making contribution to the assets of the Corporate Debtor. This also includes Directors of the Corporate Debtor and their personal liability towards contribution provided such Directors did not exercise due diligence or failed to take reasonable steps to minimize potential losses to the creditors when there was no possibility of avoiding the commencement of Corporate Insolvency Resolution Process. However a director can be deemed to have exercised due diligence if such diligence was exercised as expected reasonably of a director carrying out a business in ordinary course of business. Thus for establishing the fraudulent purpose it must be shown that the Ex-Directors of the Corporate Debtor knew that the Company was insolvent but continued to run business with dishonest intentions. On a broader sense concealment of true financial position of the Corporate Debtor can also be covered under such provisions. This Appellate Tribunal after going through the averments of both the parties and the record made available comes to the conclusion that onus was on the Appellants and difficult to accept that details of large number of 4, 000 customers were not available. Similarly it also not convincing that no payment has been received from any of such customers. On face of it the finding of the Adjudicating Authority seems to be correct and no error is found in the impugned order on this account. This Appellate Tribunal is of the considered opinion that the Appellants have not turned out to be clean in their explanations and submissions and therefore cannot avoid their responsibilities towards non-available / non-verifiable Assets of Rs. 21.37 crores as shown in the Balance Sheet for the Financial Year 2018. These Assets have proved to be Fictitious / Fraudulent in nature and seems to have been created in the Books of Accounts with an intent to Defraud the Creditors - Appeal dismissed.

Summary

Issues Involved:
1. Whether the entries of Rs. 21.37 crore in the audited financial statement for 2018 were fraudulent transactions.
2. Whether the appellants (Directors of the Corporate Debtor) were liable for the loss of Rs. 21.37 crore.

Issue-Wise Detailed Analysis:

1. Fraudulent Transactions:
The Liquidator filed an application under Section 66 of the Insolvency and Bankruptcy Code, 2016 (I&B Code, 2016), seeking to declare the entries of Rs. 21.37 crore in the audited financial statement for 2018 as fraudulent transactions. The Adjudicating Authority agreed with the Liquidator, declaring the entries as fraudulent and holding the appellants liable to pay this amount for distribution under Section 53 of the I&B Code, 2016. The Appellants challenged this order, arguing that the impugned order was passed without substantial findings and that the basic requirements of Section 66 were not proven. They contended that the drastic fall in turnover and destruction of assets due to floods were not considered. The Liquidator, however, provided evidence that many branches were not affected by floods and that the appellants failed to provide item-wise details, location, and asset registers for verification. The Appellate Tribunal found that the appellants could not furnish details of assets, locations, or asset registers for fixed assets valuing Rs. 5.33 crore, leading to the conclusion that such assets were fictitious.

2. Liability for Loss:
The appellants argued that they had no intention to defraud any creditor and that the business was affected by natural calamities. They also claimed that they made efforts to revive the business and settle dues. The Liquidator countered that the appellants entered into fraudulent transactions with the intent to defraud creditors and failed to exercise due diligence. The Liquidator highlighted that the appellants could not provide details of fixed assets, inventory, trade receivables, and loans and advances, leading to the conclusion that these were fictitious. The Appellate Tribunal noted that the appellants did not cooperate with the Liquidator and failed to provide necessary details, supporting the conclusion that the assets were fictitious and created to defraud creditors.

Conclusion:
The Appellate Tribunal upheld the Adjudicating Authority's order, finding no error in the impugned order dated 13.07.2021. The appeal was dismissed, and the appellants were held liable for the loss of Rs. 21.37 crore, as the assets were found to be fictitious and created with the intent to defraud creditors.