2025 (7) TMI 354 - AT - IBC

Fraudulent transactions - Disallowance of application of the Resolution Professional under Section 66 of IBC for refund of amount in respect of transactions entered into between the suspended management and Respondent No. 7 8 - failure to appreciate the fraudulent nature of the transactions entered into by the Corporate Debtor. Transaction No. I with M/s Dev Land Housing Pvt. Ltd. - HELD THAT - Clause 9 gives an absolute right to the Respondent No. 7 to terminate the MoU on its discretion and to forfeit the entire amount paid by the Corporate Debtor by then. The Corporate Debtor was also bound by MoU not to take any action for initiating any proceedings against the Respondent No. 7 and further the Corporate Debtor was also disentitled to file any claim for any right title or interest in the said property. It is found that the said Clause 9 to be rather unusual which gives unrestrictive and unfettered rights only in favour of the Respondent No. 7. It needs to be appreciated that normally when commercial transactions takes place the rights and obligations of both the parties are clearly stipulated and evenly balanced and not made in favour of any single party at the cost of other party. In this present case no efforts were made for any negotiation dialogue or any effort for rearranging the timelines or reducing the said forfeiture amount or taking efforts to take over the property by the Corporate Debtor. The reasons and circumstances of the said default on the part of the Corporate Debtor have also not been explained in details especially using terms extraneous reasons which is not found to be convincing - This Appellate Tribunal is aware that every petition filed under section 7 of the Code and Section 9 or even under Section 94 and 95 and also under Section 66 are strongly contested on substantial as well as technical grounds. The deed of cancelation also do not gives any rights to the Corporate Debtor to protect itself by way of negotiation nor by way of any legal proceedings - the transaction No. 1 falls squarely under Section 66 of the Code and be treated as fraudulent. Transaction No. 3 w.r.t. C. Bhansali Developers Pvt. Ltd. - HELD THAT - Section 66 of the Code is provided precisely to deal with such cases. It is noted that the Resolution Professional duly authorised by the CoC appointed forensic auditor i.e. M/s BDO India LLP who gave its detailed report on 15.11.2021 and clearly held that all four transactions were fraudulent in nature. The Resolution Professional also gave its opinion for the same. While dealing the Section 66 of the Code the intent of the parties become paramount and the courts/ tribunals are supposed to look into fundamental aspects including the intention of the parties the structures or of the agreements end objectives to identify the methodology of fraudulent transactions reckless indifference of the Corporate Debtor in letting go its due money which may be done with the intention to defraud its creditors - the arguments of the Respondents for the transactions pertaining to the period prior to two year of CIRP. We hold that there is no restrictions on look back period for cases under Section 66 of the Code rejected. The Impugned Order to the extent of disallowing Transaction Nos. 1 3 w.r.t. the Respondent Nos. 7 8 respectively is set aside - Appeal allowed.

Summary

Issues Presented and Considered

The core legal questions considered by the Appellate Tribunal in this appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 ("Code") are:

• Whether the transactions entered into by the Corporate Debtor with Respondent Nos. 7 and 8, involving amounts of Rs. 29.35 Crores and Rs. 3.24 Crores respectively, are fraudulent under Section 66 of the Code and liable to be set aside or refunded to the Corporate Debtor.
• Whether the Memorandum of Understanding (MoU) dated 18.08.2015 and the Deed of Cancellation dated 20.03.2020 related to the transaction with Respondent No. 7 are legally valid and enforceable, particularly considering their unregistered status and alleged one-sided forfeiture clause.
• Whether the write-off of advances and loans in the books of the Corporate Debtor prior to the initiation of Corporate Insolvency Resolution Process (CIRP) amounts to wrongful trading or fraudulent conduct under Section 66.
• Whether the Appellants, holding only 32.19% voting share in the Committee of Creditors (CoC), have locus standi to file the appeal.
• Whether transactions predating the CIRP admission date by more than two years can be scrutinized and set aside under Section 66 of the Code.
• Whether the forensic audit report relied upon by the Resolution Professional is a reliable and sufficient basis to establish fraudulent transactions under Section 66.
• Whether third parties such as Respondent No. 7 can be subjected to proceedings under Section 66 of the Code.

Issue-Wise Detailed Analysis

1. Fraudulent Nature of Transactions with Respondent No. 7 (Transaction No. 1)

Legal Framework and Precedents: Section 66 of the Code empowers the Resolution Professional to apply to the Adjudicating Authority for recovery of any property transferred or disposed of by the Corporate Debtor with intent to defraud creditors or for wrongful trading. The burden of proof initially lies with the Resolution Professional, but once a prima facie case is established, the burden shifts to the respondents to prove legitimacy (Jaypee Infratech Ltd. v. Axis Bank Ltd.). The Transfer of Property Act, 1882 mandates registration of agreements for sale of immovable property exceeding Rs. 100, which impacts the enforceability of the MoU.

Court's Interpretation and Reasoning: The Tribunal observed that Rs. 29.35 Crores was paid as an advance by the Corporate Debtor to Respondent No. 7 for purchase of property as per the MoU dated 18.08.2015. However, the entire amount was written off on 31.03.2020 without any evidence of property acquisition. The MoU was printed on a Rs. 100 stamp paper, unregistered and notarized, and lacked a payment schedule and the signature of the suspended director, raising doubts about authenticity. Clause 9 of the MoU allowed unilateral forfeiture of the entire amount by Respondent No. 7 without recourse for the Corporate Debtor, which the Tribunal found commercially unreasonable and one-sided.

The Deed of Cancellation dated 20.03.2020 was also unregistered, unsigned by the suspended director, and vaguely cited "extraneous reasons" for non-payment without elaboration. No board resolution authorized or ratified this cancellation. The timing of the write-off and cancellation, shortly before CIRP initiation, suggested an intent to defraud creditors. The Tribunal noted the common directorship between the parties, indicating possible collusion.

Key Evidence and Findings: Forensic Audit Report by BDO India LLP identified the transaction as suspicious and fraudulent. Absence of property acquisition, lack of negotiation or efforts by the Corporate Debtor to protect its interest, and the arbitrary forfeiture clause supported the fraudulent intent. The Appellants' contention that the MoU was unenforceable under the Transfer of Property Act was accepted.

Application of Law to Facts: The Tribunal held that the transaction fell squarely within Section 66 of the Code as a fraudulent transaction. The lack of credible documentation, the timing of the write-off, and the one-sided nature of the MoU indicated wrongful trading and defrauding of creditors.

Treatment of Competing Arguments: The Respondents argued that the transaction was a bona fide commercial deal in the ordinary course of business, supported by industry practices of executing preliminary MoUs on stamp paper without registration, followed by registered agreements later. They contended the forfeiture clause was mutually agreed and the cancellation deed was valid. The Appellants' lack of full CoC representation was also raised. The Tribunal rejected these arguments, holding that the Code or regulations do not require 100% CoC representation to maintain the appeal and found the transaction suspicious and not in good faith.

Conclusion: The Tribunal set aside the Adjudicating Authority's order to the extent it disallowed the application under Section 66 for Transaction No. 1 and held the transaction fraudulent, directing further proceedings accordingly.

2. Fraudulent Nature of Transaction with Respondent No. 8 (Transaction No. 3)

Legal Framework and Precedents: Section 66 of the Code applies irrespective of any look-back period, and related-party transactions warrant heightened scrutiny due to potential conflicts of interest (Swiss Ribbons Pvt. Ltd. v. Union of India). Directors owe fiduciary duties to act prudently and protect creditors' interests.

Court's Interpretation and Reasoning: The Tribunal noted that the transaction with Respondent No. 8 was recorded as a loan with interest in the Corporate Debtor's ledger, contradicting the Adjudicating Authority's finding that it was an investment. The write-off of Rs. 3.24 Crores was characterized as an accounting adjustment for "excess provision of interest," but no documents explained the nature of the transaction. The common directorship of the suspended director in both entities raised suspicion of conflict of interest and breach of fiduciary duty.

Key Evidence and Findings: The absence of documentation and the write-off occurring after the filing of the Section 7 petition indicated potential fraudulent intent. The forensic audit report classified the transaction as fraudulent. The Tribunal found the Adjudicating Authority's reasoning insufficient and unsupported by detailed analysis.

Application of Law to Facts: The Tribunal held that the transaction fell within the ambit of Section 66, as the conduct of the suspended director showed lack of due diligence and prudence. The write-off without justification and related-party involvement supported the inference of wrongful trading.

Treatment of Competing Arguments: Respondents contended the transaction was an inter-corporate deposit treated as an investment, with no loss to the Corporate Debtor, and that the write-off was a legitimate accounting correction predating CIRP. The Tribunal rejected the two-year look-back limitation argument and found the transaction suspicious due to lack of documentation and conflict of interest.

Conclusion: The Tribunal set aside the Adjudicating Authority's order disallowing the Section 66 application for this transaction and remanded the matter for further action.

3. Maintainability of Appeal by Appellants Holding Less than 100% CoC Voting Share

Legal Framework: The Code and related regulations do not mandate that an appellant must represent 100% of the CoC voting share to file an appeal.

Court's Interpretation and Reasoning: The Tribunal rejected the Respondents' contention that the Appellants lacked locus standi due to holding only 32.19% voting share. No authority or regulation requires full CoC representation for filing an appeal under Section 61.

Conclusion: The appeal was held maintainable notwithstanding the Appellants' partial CoC representation.

4. Applicability of Section 66 to Transactions Predating CIRP by More than Two Years

Legal Framework: Section 66 does not prescribe any look-back period. The provision applies to any transaction entered into with intent to defraud creditors or wrongful trading, irrespective of timing.

Court's Interpretation and Reasoning: The Tribunal rejected the Respondents' argument that transactions predating CIRP admission by more than two years are immune from scrutiny under Section 66. The absence of any statutory limitation period under Section 66 was noted.

Conclusion: Transactions predating CIRP by more than two years can be examined and set aside if found fraudulent under Section 66.

5. Reliability and Sufficiency of Forensic Audit Report

Legal Framework: While forensic audit reports may not constitute conclusive proof, they serve as important evidence to establish suspicion or prima facie case of fraud, shifting burden to respondents.

Court's Interpretation and Reasoning: The Tribunal acknowledged that the Forensic Audit Report by BDO India LLP, though not a statutory audit, identified suspicious transactions and supported the Resolution Professional's application under Section 66. The Respondents' contention that the report was inconclusive and not prepared according to Indian auditing standards was rejected as insufficient to discredit the report entirely.

Conclusion: The forensic audit report was held to be a credible basis for initiating proceedings under Section 66.

6. Applicability of Section 66 Proceedings Against Third Parties

Legal Framework: Section 66 targets transactions by the Corporate Debtor and persons responsible for wrongful trading. Supreme Court decisions have clarified that third parties not connected with management may not be liable under Section 66, and civil remedies may be pursued separately.

Court's Interpretation and Reasoning: The Respondent No. 7 argued that as a third party, it cannot be subjected to Section 66 proceedings. However, the Tribunal noted the common directorship and related-party nature of the transactions, which negated the third-party status and justified scrutiny under Section 66.

Conclusion: Where third parties are related or connected through management, Section 66 proceedings are maintainable.

Significant Holdings

"The entire amount of Rs. 29.35 Crores paid by the Corporate Debtor to Respondent No. 7 was advanced under a forged and unregistered MoU which contained a one-sided forfeiture clause, lacking any commercial logic and negotiation efforts, and was subsequently written off without any property acquisition, indicating fraudulent intent falling squarely within the ambit of Section 66 of the Code."

"The transaction with Respondent No. 8, recorded as a loan with interest and involving common directorship, was written off without justification and documentation, evidencing wrongful trading and breach of fiduciary duty under Section 66."

"Section 66 of the Code does not prescribe any look-back period; therefore, transactions predating CIRP admission by more than two years are amenable to scrutiny and setting aside if found fraudulent."

"The Appellants' locus standi is not negated by holding less than 100% voting share in the CoC; no such requirement exists under the Code or regulations."

"Forensic audit reports, though not statutory audits, constitute credible evidence to establish prima facie fraudulent transactions under Section 66, thereby shifting the burden of proof to the respondents."

"Section 66 proceedings can be initiated against third parties who are related or connected through management or control, negating their status as independent third parties."

Accordingly, the Tribunal allowed the appeal in part, setting aside the Adjudicating Authority's order to the extent it disallowed the Section 66 application concerning transactions with Respondent Nos. 7 and 8, and restored the original petition for further proceedings in accordance with law.