2022 (10) TMI 523 - AT - Insolvency and Bankruptcy

Fraudulent Trading/Wrongful Trading - crystalline stand of the Appellant is that the Adjudicating Authority (National Company Law Tribunal Division Bench II Chennai) had not considered the Relevant Documents notwithstanding the Forensic and Transactions Audit Report - HELD THAT - A High Level Proof is very much required in regard to a Fraudulent Intent. Even for an Isolated / Single Fraud against an Individual the action in Civil Wrong (Tort) will lie. Furthermore a Creditor who was Defaulter has a viable effective an efficacious alternate remedy in Civil Law. In this connection this Tribunal pertinently points out that it is not open to the Directors of a Company accused of Fraudulent Trading to allege that the Company s Claim for recovery in Tort are barred. The Yardstick / Tape i.e. to be pressed in to service to determine the Liability is whether a Director had exercised the General Knowledge Skill and Experience to be expected of a person in carrying out the functions of his duties. The aspect of Fraud is the cementing platform for a Liability. An element of Dishonesty is to be Proved and the Aspect of Dishonesty cannot be inferred when the Conduct of the concerned Individuals is Receptive of more than one explanation. It must be borne in mind that for Fraudulent Trading / Wrongful Trading Relevant Facts / Acceptable Materials are to be pleaded by a Party by providing requisite details / adequate facts to fall within the parameters of Section 66 of the I B Code 2016. The stand taken by the respective parties comes to a Resultant Conclusion that the Transfer of Assets among the Group Companies ex-facie is not a Fraudulent Trading as per Section 66 (1) of the Insolvency Bankruptcy Code 2016. Moreover because of the fact that all Transactions between the Companies as well as the Asset details were maintained in a Transparent Manner on an SAP System (including the Fixed Assets Register) and further the Transactions of the Corporate Debtor and the 1st Respondent were Audited every year the Plea of Fraudulent Trading as projected by the Appellant / Applicant is not proved to the subjective satisfaction of this Tribunal in a convincing manner. This Tribunal comes to an inevitable and irresistible conclusion that the view arrived at by the Adjudicating Authority ( National Company Law Tribunal Division Bench II Chennai) in dismissing application does not suffer from any material irregularity or patent legality in the eye of Law - Appeal dismissed.

Summary

Issues Involved:
1. Allegation of fraudulent trading under Section 66(1) of the Insolvency and Bankruptcy Code (IBC), 2016.
2. Non-disclosure of the transaction audit report and violation of principles of natural justice.
3. Consideration of relevant documents and forensic audit report by the Adjudicating Authority.
4. Transfer of assets within group companies and its characterization as fraudulent trading.

Issue-wise Detailed Analysis:

1. Allegation of fraudulent trading under Section 66(1) of the Insolvency and Bankruptcy Code (IBC), 2016:
The Appellant, a Resolution Professional, alleged that the Respondents engaged in fraudulent trading by transferring assets within group companies with the intent to defraud creditors. The Adjudicating Authority observed that the Appellant failed to prove the dishonest intention of the Respondents. It was noted that the transfer of assets within group companies does not per se constitute fraudulent trading under Section 66(1) of IBC, 2016. The Tribunal emphasized that allegations alone, without documentary proof, are insufficient to establish fraudulent trading. The Tribunal concluded that the transfer of assets was plausible and not done with an intent to defraud creditors.

2. Non-disclosure of the transaction audit report and violation of principles of natural justice:
The Adjudicating Authority noted that the Appellant did not serve the entire transaction audit report to the Respondents, leaving them unable to respond to the allegations properly. The Tribunal relied on the Supreme Court decision in T. Takano v. Securities and Exchange Board of India & Anr., which held that nondisclosure of such reports violates principles of natural justice. The Tribunal found that the non-disclosure of the audit report was a gross violation of natural justice, sufficient to dismiss the application.

3. Consideration of relevant documents and forensic audit report by the Adjudicating Authority:
The Appellant contended that the Adjudicating Authority failed to consider various documents, including audited financial statements, fixed assets register, bank statements, sale deed, and record of rights, along with the forensic and transaction audit report. The Tribunal noted that the Adjudicating Authority had relied heavily on the forensic and audit report without adequately considering the statutory documents. However, the Tribunal found that the Appellant did not provide sufficient evidence to substantiate the allegations of fraudulent trading.

4. Transfer of assets within group companies and its characterization as fraudulent trading:
The Tribunal examined whether the transfer of assets within group companies could be characterized as fraudulent trading. It was argued that the land purchased with the Corporate Debtor's funds was registered in the name of the 1st Respondent, a related party. The Tribunal noted that the Respondents had maintained transparency in transactions and asset details through the SAP system, and no personal gain was derived from the transactions. The Tribunal concluded that the transfer of assets within group companies does not constitute fraudulent trading under Section 66(1) of IBC, 2016, as there was no fraudulent intent or dishonest purpose.

Result:
The Tribunal upheld the Adjudicating Authority's decision, dismissing the application for lack of evidence of fraudulent trading. The Tribunal found that the transfer of assets within group companies was transparent and did not indicate any fraudulent intent. Consequently, the appeal was dismissed, and the connected stay application was closed.