The NCLAT Chennai held that If the whole business of the Corporate Debtor is to defraud, then the ingredients of section 66 IBC are fulfilled. Assessment of all facts and circumstances, the fraudulent intent or fraudulent purpose is made out, liability must follow.
The National Company Law Appellate Tribunal (NCLAT), Chennai bench comprising Justice M. Venugopal and Naresh Salecha, Technical Member were on Monday hearing an Appeal filed under section 61 of IBC, and held that The NCLAT Chennai held that If the whole business of the Corporate Debtor is to defraud, then the ingredients of section 66 IBC are fulfilled. Assessment of all facts and circumstances, the fraudulent intent or fraudulent purpose is made out, liability must follow.
Facts:
The Appellants/ Respondents have preferred an instant CA, as the Affected Persons, on being dissatisfied with the Impugned Order, dated 02.06.2022, passed by the Adjudicating Authority, National Company Law Tribunal, Kochi Bench.
The Adjudicationg Authority found, on the basis of Forensic Report, that the Corporate Debtor entered in an agreement for sale of mortgaged land without the consent of the Creditors. It was found that these transactions were deliberately entered into by the suspected Managing Director of the Corporate Debtor, for keeping assets of the Corporate Debtor beyond the reach of the Secured Creditor ie Federal Bank, as this land property was mortgaged as security with the Bank.
Another allegation was found in the Forensic Report was that the suspected diversion of funds accounted as advance paid for land purchase. An amount of Rs. 1,73,45,000 was outstanding as land purchase advance in the audited financial statements as on 31st March 2021. There was no evidence available in the office to prove that the payments have been made for such a purpose. Rs. 1,00,000 each have been paid continuously from 31st January 2009 to 31st March 2009, which was an unusual method of payment in a normal land sale. Moreover, all these payments have been made by cash. There was a suspected diversion of fund by accounting as advance for purchase of land. There were no land properties made for this advance paid.
It was noticed that a there was found a Share Purchase Agreement with M/s. Sri Ramani Resorts and Hotels Pvt. Ltd to sell 100% shares of the Company. The Share Purchase Agreement executed by the Corporate Debtor was void ab initio and the intention of the suspended Managing Director, and the COO of CD, for entering into such an agreement was suspected to deceive the Corporate Debtor and the buyer.
There was found another Share Purchase Agreement with M/s. Basel Products India Private Limited to sell 100% shares of the Company. This Share Purchase Agreement executed by the Corporate Debtor was also void ab initio as in this agreement also the CD agreed to sell the shares not owned by it but by the shareholders of the company. Entering into another SPA when a SPA was existing and active on the date with M/s Sri Ramani Resorts and Hotels Pvt. Ltd is an intentional violation of the clauses of the original SPA. The intention of the suspended Managing Director for entering into such an agreement is suspected to deceive the Corporate Debtor and the buyers.
Appellants' Submission:
The stand of the Appellants was that the Adjudicating Authority had failed to distinguish between Section 66(1) of the I&B Code, 2016 for fraudulent trading and Section 66(2) of the I&B Code, 2016 for wrongful trading, while holding the Directors, jointly or severally, liable without reference to any particular Sub-Section of Section 66 or the conditions to be satisfied, while invoking each particular Sub-Section.
The Learned Counsel for the Appellants contended that the ‘impugned order’, passed by the Adjudicating Authority was nothing but a ‘Non-Speaking Order’, and also an unreasonable one, in negation of the principles of natural Justice.
The Learned Counsel for the Appellants pointed out that the transactions, which were consummated ‘Nine to Sixteen Years’, before the Insolvency Commencement Date, should not have been considered by the Adjudicating Authority at all.
The Learned Counsel for the Appellants raised an argument that the finding of Mens Rea intention to defraud the Creditors of the Corporate Debtor or any knowledge of the transactions, was to be found against each person, upon whom liability was ought to be fastened under Section 66 of the I&B Code, 2016.
Analysis:
It must be borne in mind that Section 66 of the I&B Code, 2016 does not specify any ‘time limit’ of ‘Two Years’, for the Resolution Professional, to examine the fraudulent transactions, and filing a Petition, before the Adjudicating Authority.
The Appellate Tribunal noted that the Resolution Professional, is empowered to file/ initiate proceedings for fraudulent’ or wrongful trading. Furthermore, if the whole business of Company, is to defraud, then, the ingredients of Section 66 of the I&B Code, 2016 are fulfilled. Undoubtedly, the Resolution Professional is to prove that the business of the Corporate Debtor was carried out with an intent to defraud the Creditors of the Corporate Debtor or for any fraudulent purposes. In fact, the intent to defraud, is to be judged by its effect on the individual, who is an object of conduct, in question. To attract the ingredients of Section 66 of the I&B Code, 2016, it is not an essential factor, that there should be a Debtor and Creditor, relationship.
The Appellate Tribunal, worth recalled the decision of the Hon’ble High Court of Kerala, in K. Nagendra Prabhu v. Popular Bank Ltd., AIR 1970 Ker 120, wherein it was observed that, if on the assessment of all facts and circumstances, the fraudulent intent or fraudulent Purpose is made out, liability must follow.
"No wonder, a company/ other entity, which is involved in or assists, and derived Benefits from the offending business or benefits in an offending manner, and does so knowingly, and hence, dishonesty can be ascertained and held liable for a fraudulent trading. Besides this, an action, will also lie, when there is a fraudulent purpose", the Appellate Authority observed.
The Appellate Authority noted that from the contents of the ‘Forensic Auditor’s Report’, the ‘Status Report’ filed by the 1st Respondent/ the Resolution Professional, and also on the basis of facts and circumstances of the instant Case, it was latently and patently evident that Appellants/Respondents had indulged in carrying on the business of the Corporate Debtor in a dishonest and fraudulent manner, with a view to defraud the Creditors and because of the fraudulent transactions in the subject matter, in issue,, the Appellants/ Respondents were responsible in a joint and several manner, to pay a sum of Rs. 2,94,77,269/- only with an interest at 12% per annum.
The Appeal was dismissed.
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