2023 (7) TMI 958 - AT - Insolvency and Bankruptcy

CIRP - Fraudulent Transactions or transaction in the normal course of business with the Corporate Debtor - appellant submits that they have availed financial assistance to overcome their financial distress and therefore transactions should have been treated as normal commercial transaction - existence of malafide intention or wilful misconduct or not - Section 66 of the I B Code, 2016 - HELD THAT - As per Section 66, the Adjudicating Authority can pass suitable orders, if it is found that any person has carried on the business of the Corporate Debtor with intent to defraud its creditors and such persons can be directed to make contributions to the assets of the Corporate Debtor . It can also be inferred that the fraud can, interalia, consist of such debts which debtor has no intention of paying or does not expect to be able to pay or such fraud may also happen by way of false representation and without intention to pay back. The expression any person includes a knowing party to the carrying out fraudulent transactions. Section 66 of the I B Code, 2016, therefore, clearly provides that if it is found that any business of the Corporate Debtor has been carried on with an intent to defraud the creditors of the Corporate Debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the Resolution Professional pass an order to make liable to such contribution to the assets of the Corporate Debtor as may deemed fit. This Appellate Tribunal notes that the business of the Corporate Debtor was related to trading in Bullion i.e. import/ export/ dealing in local markets by way of sale/purchase of gold and the Corporate Debtor was not at all connected with business of financial services or lending money - this Appellate Tribunal finds it quite unusual on the part of the Corporate Debtor to lend such huge amount of Rs. 41.03 crores and similarly unusual on point of the Appellant to have benefitted of this largesse without any explainable rhyme or reason. From the averments made during the hearing as well as records available, it transpires that the Appellant made two different and contradictory submissions regarding nature of its relationship with the Corporate Debtor and nature of the transaction based on which the Appellant received such huge amount of Rs. 41.03. crores from the Corporate Debtor . It is noted that initially the Appellant explained this transaction as Long Term Borrowing (Loan) and not credit from trading activities before the Adjudicating Authority in Para 6(b) of the Reply filed by the Appellant . The Appellant has now taken the stand in rejoinder before this Appellate Tribunal that money pertains to regular business transactions which is evident from Para 5 of the Rejoinder - Such contradictory statements also do not auger well and raises doubts in the mind of the Appellate Tribunal regarding the real nature of the transaction along with true relationship between the Appellant and the Corporate Debtor . It cannot be the case of the Appellant s that the Appellant is not a party to the subject fraudulent and wrongful trading, despite being the sole beneficiary of the same and beyond any acceptable logical conclusion. It is seen that the intent to defraud the creditors , under Section 66(1) of the I B Code, 2016 is further established by the fact that the Respondent Nos. 2 3 had provided different books of accounts in different proceedings before the Adjudicating Authority with a clear intent to fraudulently deprive the creditors of the Corporate Debtor from the admitted amounts - This Appellate Tribunal observed that the Appellant is a principal beneficiary of fraudulent and wrongful trading and therefore the Adjudicating Authority has rightly held this transaction as fraudulent under Section 66 of the I B Code, 2016. Thus, this Appellate Tribunal comes to definitive conclusion that there is no error in the impugned order dated 29.01.2021 - appeal dismissed.

Summary

Issues Involved:
1. Legitimacy of the transactions between the Appellant and the Corporate Debtor.
2. Compliance with Section 66 of the Insolvency & Bankruptcy Code, 2016.
3. Requirement of forensic audit for establishing fraudulent transactions.

Summary of Judgment:

Legitimacy of Transactions:
The Appellant, engaged in Non-Banking Financial Services (NBFC), contended that the financial transactions with the Corporate Debtor were normal commercial transactions and not fraudulent. The Appellant argued that the transactions were recorded in the ledger accounts and were conducted to overcome financial distress. However, the Appellate Tribunal noted that the Corporate Debtor, involved in bullion trading, was not in the business of lending money. The Tribunal found it unusual for the Corporate Debtor to lend Rs. 41.03 crores without any explainable reason, raising doubts about the nature of the transactions.

Compliance with Section 66 of I & B Code, 2016:
The Tribunal examined the provisions of Section 66, which allows the Adjudicating Authority to pass orders if it finds that the business of the Corporate Debtor was carried on with intent to defraud creditors. The Tribunal noted that the Adjudicating Authority had correctly classified the transactions as fraudulent under Section 66, considering the suspicious nature of the transactions and the contradictory statements made by the Appellant regarding the nature of the relationship and transactions with the Corporate Debtor.

Requirement of Forensic Audit:
The Appellant argued that the Resolution Professional did not conduct a forensic audit to establish the fraudulent nature of the transactions. The Tribunal referred to its earlier judgment in the case of Nitin Bharal, Ex-Director & Ors. vs. Stockflow Express Private Limited, which stated that a forensic audit is not mandatory for establishing fraudulent transactions. The Tribunal found merit in the Resolution Professional's prima facie suspicion of fraudulent transactions and noted that the Appellant's non-cooperation in providing information further supported the finding of fraud.

Conclusion:
The Appellate Tribunal upheld the Adjudicating Authority's order, directing the Appellant to remit Rs. 41.03 crores to the Corporate Debtor's account. The Tribunal concluded that the transactions were fraudulent, done with the intent to defraud the creditors of the Corporate Debtor, and met the requirements of Section 66 of the I & B Code, 2016. The appeal was dismissed, and the impugned order dated 29.01.2021 was affirmed.