2022 (1) TMI 1241 - Tri - Insolvency and Bankruptcy

Fraudulent trading or wrongful trading - Seeking directions be issued to the respondents to provide for and make good to the corporate debtor for the losses caused due to the respondent's indulgence in fraudulent transactions - seeking reference of matter to IBBI in view of the provisions under section 236 of the Insolvency and Bankruptcy code, 2016 - section 66 of the Insolvency and Bankruptcy code, 2016 - HELD THAT - The contention of the respondent Nos. 1 to 4 is that these shareholding transfer never come within the purview of Section 66 of the IBC, 2016. In terms of Section 66, there are two ingredients, which constitute the fraudulent trading or wrongful trading; first one is the business of the Corporate Debtor has been carried on, the creditors are intended to be defrauded of the Corporate Debtor or second one for any fraudulent purpose. On consideration of averments and the reply of respondent Nos. 1 to 4 in terms of Section 66, then it is found that the respondent Nos. 1 to 4 have not explained any reason to sell their shares to a Company, which is own and managed by them and they have also not explained the reason, why the said Committed Care Kargo Limited again resold the shares to these respondents. If the respondent Nos. 1 to 4 claims that these transactions do not come within the purview of Section 66 of the IBC, 2016 then onus is upon them to establish that said transaction was not with intent to de-fraud the creditors. But the respondent Nos. 1 to 4 have failed to establish this, therefore, these shareholding transactions were made with intent to defraud the creditors of the corporate debtor comes under the purview of Section 66 of the IBC, 2016. On the basis of this bank statement, the respondent Nos. 1 to 4 had although tendered their resignation but still they were having their control over the management and finance of the Corporate Debtor and the resignation was tendered only with intent to de-fraud with the creditors or for the fraudulent purposes. And that is the reason, the bad debts were written off at the instance of Respondent No. 1 to 4 even after their resignation. The cash transactions receiving cash from debtors admittedly Vyke Logistics and Vyke International, the respondent No. 9 owes the debts and they have debtors of the Corporate Debtor, as per the books of Corporate Debtor, total amount is of Rs. 20,12,383/- and Rs. 22,20,651/- and the claim of these respondents are they have settled the amount on full and final payment after making payment of Rs. 3 lakhs as cash. A total debt of Rs. 42,33,034/- was settled only after making payment of Rs. 3 lakhs that has not been disclosed either by the respondent Nos. 1 to 4 and respondent No. 9 - The respondent Nos. 9 and 10 by filing their reply claimed that they never owe any debt and they are not the debtor of the Corporate Debtor. The respondent No. 9 further claimed that the amount had already been settled after making the payment of Rs. 3 lakhs. We failed to understand how the Rs. 42,33,304/- will be settled only on the payment of Rs. 3 lakhs. Therefore, these transactions also comes under the category of the fraudulent transactions. The cash transactions and the written off debt made with respondent Nos. 9 and 10 comes under the category of fraudulent transaction and same was done during the tenure of Respondent No. 1 to 4 and even after their resignation, they were having financial control in the affairs of the corporate debtor, therefore they are liable for these transactions - the respondent Nos. 1 to 4, the Suspended Board of Directors/Promoters of the Corporate Debtor have been carried on business with intent to de-fraud the creditors of the Corporate Debtor or with fraudulent purpose and in this way, they have written off the debt of respondent No. 9 10 and also settled the amount on the payment of Rs. 3 lakhs against the total debt of Rs. 42,33,304/-. Hence, they are liable to make contributions the amount which was misuse or misappropriated by the Suspended Board of Directors/Promoters with intent to de-fraud the Creditors. Application allowed.

Summary

Issues Involved:
1. Fraudulent transactions and intent to defraud creditors.
2. Sale of shareholding.
3. Bad debt write-offs.
4. Cash transactions and receiving cash from debtors.
5. Identical business operations by associated entities.
6. Directors' control and management post-resignation.
7. Liability of various respondents under Section 66 of IBC.

Issue-Wise Detailed Analysis:

1. Fraudulent Transactions and Intent to Defraud Creditors:
The Tribunal found that the respondents carried on the business of the corporate debtor with intent to defraud creditors, which falls under Section 66 of the IBC, 2016. The respondents failed to provide satisfactory explanations for their actions, including the sale of shares and the writing off of substantial debts, indicating fraudulent intent.

2. Sale of Shareholding:
The respondents sold their shares to Committed Cargo Care Ltd., a company they controlled, and later repurchased them. The Tribunal held that these transactions were carried out with the intent to defraud creditors. The respondents failed to establish that the transactions were legitimate and not intended to defraud creditors, thus falling within the purview of Section 66 of the IBC, 2016.

3. Bad Debt Write-Offs:
The corporate debtor wrote off debts amounting to Rs. 1,25,37,262/-, significantly higher than in previous years. The Tribunal noted that these write-offs were done without proper justification and during a period of financial distress, indicating an intent to defraud creditors. The respondents were found to have control over the financial operations even after their resignation, further supporting the fraudulent nature of these write-offs.

4. Cash Transactions and Receiving Cash from Debtors:
The Tribunal found that the respondents settled substantial debts for a fraction of their value in cash, indicating fraudulent transactions. For instance, debts totaling Rs. 42,33,034/- were settled for Rs. 3 lakhs in cash. The Tribunal held that these transactions were fraudulent and intended to defraud creditors.

5. Identical Business Operations by Associated Entities:
The Tribunal noted that the respondents started an identical line of business through an associated entity, Committed Cargo Care Pvt. Ltd., which could negatively impact the corporate debtor's receivables and creditors' interests. This activity was seen as an attempt to benefit themselves at the expense of the corporate debtor's creditors, falling under Section 66(1) of the IBC, 2016.

6. Directors' Control and Management Post-Resignation:
Despite resigning as directors, the respondents continued to operate the corporate debtor's bank accounts and manage its financial affairs. The Tribunal found that this control was exercised to defraud creditors and for fraudulent purposes, as evidenced by transactions and bank statements showing their continued involvement.

7. Liability of Various Respondents under Section 66 of IBC:
The Tribunal held respondents 1 to 4 liable for fraudulent activities and directed them to contribute Rs. 1,33,68,262/- to the corporate debtor's assets. Respondents 9 and 10 were also directed to contribute Rs. 42,33,040/- and Rs. 23,77,952/-, respectively. If respondents 9 and 10 failed to pay, the amount would be recovered from respondents 1 to 4 jointly or severally. The Tribunal also directed the applicant to institute prosecution under Section 69 of the IBC, 2016, against respondents 1 to 4, 9, and 10.

Conclusion:
The Tribunal concluded that respondents 1 to 4 carried on the business with intent to defraud creditors, wrote off debts fraudulently, and continued to control the corporate debtor post-resignation. Respondents 9 and 10 were also found to have engaged in fraudulent transactions. The respondents were directed to make financial contributions to the corporate debtor's assets and face prosecution for their actions. The application was allowed, and the Tribunal emphasized the need for strict compliance and recovery through legal processes if necessary.