Gopal Kalra vs Akhilesh Kumar Gupta

(Arising against the impugned order dated 11.01.2024 passed by the Hon'ble National Company Law Tribunal, New Delhi Bench-II in I.A. No. 5545/ND/2021 in CP No. (IB) - 794(ND)/2018)

IN THE MATTER OF:

Mr. Gopal Kalra

Add:- 222, Nilgiri Apartment, Alaknanda, ...Appellant New Delhi -110019.

Versus

Mr. Akhilesh Kumar Gupta Liquidator For Easytech Global Private Limited IBBI/IPA-001/ IP-P00780/2017-2018/ 11353 LGF, A-16/9, Vasant Vihar, ...Respondent

New Delhi-110057.

Present:

For Appellant: Mr. Rahul Kumar, Advocate. For Respondent: Mr. Varun Sharma, Ms. Vanshika Gupta & Ms. Vaishnavi Gupta, Advocates.

Mr. Akhliesh Kumar Gupta, (Liquidator in-person).

J U D G M EN T (3rd July, 2025)

INDEVAR PANDEY, MEMBER (T)

The present appeal under Section 61 of the Insolvency and Bankruptcy

Code, 2016 ("Code") is preferred by Mr. Gopal Kalra/Appellant against the

impugned Order dated 11.01.2024 passed in I.A. No. 5545/ND/2021 in CP

No. (IB) - 794(ND)/2018 passed by the National Company Law Tribunal, New

Cont'd..../ -2-

Delhi Bench II ("Adjudicating Authority") deciding on fraudulent transactions

being carried out by the Appellant.

Brief facts of the case

2. Brief facts of the case are given below:

i. M/s Easytech Global Private Limited (hereinafter referred to as the

"Corporate Debtor") is a company incorporated in India on June 06,

2014 under the relevant provisions of Companies Act, 2013 having its

Corporate Identification Number as CIN U51505DL2014PTC267884 and

registered address as E-92, 2nd Floor, Masjid Moth, Greater Kailash-III,

New Delhi- 110048. The Appellant- Mr. Gopal Kalra is the erstwhile

Director of the CD.

ii. Vide Order dated October 04, 2018, the Hon'ble National Law Company

Tribunal admitted the captioned company petition filed by M/ s

Insynergy Supply Chain Solutions Private Limited/ Operational Creditor

against the Corporate Debtor under Section 9 of the Code. As the

Corporate Insolvency could not be resolved, Adjudicating Authority vide

order dated April 03, 2019, allowed the application for liquidation of the

Corporate Debtor under Section 33(2) of the Code. Mr. Akhilesh Kumar

Gupta was appointed as Liquidator and is the Respondent in this

appeal.

iii. A forensic audit of the Corporate Debtor was conducted based on the

decision of the Committee of Creditors (CoC). M/s Ravi Ranjan and

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Company, Chartered Accountants were appointed as a Forensic Auditor

to carry the forensic audit of the Corporate Debtor. The Auditor

concluded the forensic audit of the Corporate Debtor for the period

between 10.10.2016 to 15.10.2018 and submitted the final report on

12.09.2019.

iv. The scope of the forensic audit was to review the financial transactions

of the CD for the review period to understand the nature of transactions,

trend, transactions of substantial amounts and contracting

transactions, to review changes in unsecured loans, the

sale/mortgage/transfer/alienation of the assets/properties of the CD.

v. After a detailed review and analysis of the records of CD for the review

period and field visits, the forensic auditors recorded their findings and

made detailed observations on various transactions.

vi. The forensic auditor in its detailed report stated that several unjustified

unexplained and suspicious LED bulb trading transactions between the

CD and the fake customers/ vendors were available on record which

resulted in a loss of Rs. 4,66,55,553/- to the CD. As per the observations

made by the forensic auditors, most of the entities/ parties with whom

the aforesaid suspicious transactions were undertaken by the Appellant,

as shown in the books of accounts, do not match and raised serious

suspicion of illegal moving of money from the Corporate Debtor.

Company Appeal (AT) (Ins.) No. 567 of 2024 -4-

vii. Based on the findings of the forensic auditor the Respondent/ Liquidator

of CD filed the IA No. 5545/ND/2021. The Adjudicating Authority after

detailed examination of documents on record and hearing both the

parties held that the Respondents in the IA entered into fraudulent

transactions and the Sh. Gopal Kalra/ Respondent No.1 (Appellant

herein) in liable to contribute an amount of Rs. 3.18 crores to the

assets/CIRP account of CD. The Adjudicating Authority also issued

similar orders in respect of Respondent No. 2 and Respondent No.3 who

are not a party in the present case.

viii. Aggrieved by the order passed by Adjudicating Authority in the IA No.

5545/ND/2021 this appeal has been filed by Sh. Gopal Kalra/

Appellant.

Submission of the Appellant

3. Ld. Counsel for the Appellant submits that the present Appeal is limited

in scope in so far as whether transactions relating to LED Bulbs by the

Corporate Debtor are fraudulent in nature or not.

4. Ld. Counsel submits that the forensic audit report that has been relied

upon by the Liquidator specifically states that the transaction has caused a

"notional loss" to the corporate debtor.

5. Ld. Counsel states that during the course of arguments, the submission

of the Respondent was that the transactions in question are fraudulent on

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account of variance in debit notes and credit noted as mentioned in the

forensic audit report.

6. It is his submission that the difference in the Credit and Debit note is

on account of the fact that the goods were purchased at a different rate and

sold at a higher rate and the difference was to be the profit of the Corporate

Debtor which profit is evident from the fact that the transactions overall have

resulted in a net cash inflow for the Corporate Debtor, which was already

reeling with losses. Therefore, this was an attempt to revive the Corporate

Debtor which bore fruit for FY 14-15 and 15-16 and only in 16-17 those

certain losses occurred.

7. Ld. Counsel further submits that the Corporate Debtor overall has had

no cash loss, further strengthens the argument of the Appellant that in the

absence of any cash loss or allegation of siphoning off, the transactions in

question cannot be categorized as fraudulent. That the transaction in

question may be poor business decision in hindsight but cannot be

categorized as fraud.

8. Ld. Counsel further submits that as far as Section 66 (2)(b) of the Code

is concerned, the said provision is not applicable in the present case, as there

is no material on record to show that the Appellant himself had not done

sufficient due diligence to ensure no potential loss occurs to the creditors. In

fact, the corporate debtor had been reeling under losses and it was on account

of the present transactions that some money had made inflows into the

Company Appeal (AT) (Ins.) No. 567 of 2024 -6-

corporate debtor thereby enriching the creditors and not taking anything

away from them.

9. Ld. Counsel places reliance upon the Judgement of this Appellate

Tribunal in 'Regen Powertech Pvt. Ltd. Vs. Wind Construction Pvt. Ltd. in

Company Appeal (AT)(Ins) No.349 of 2022'. The relevant paras 33-35 are

extracted below:

"33. Be it noted, this 'Tribunal', significantly, points out that, whenever 'Fraud' on a 'Creditor' is perpetrated in the course of 'carrying on Business', it does not necessarily follow that the 'Business' is being carried on with an 'Intent to Defraud' the 'Creditor'.

34. One cannot remain 'oblivious' of the candid fact that, if the 'Directors' of a 'Company' had acted on a 'bonafide belief' that the 'Company' would 'recover' from its 'Financial Problems' / 'Difficulties', then, they will not be held liable for the 'act' / 'offence' of 'Fraudulent Trading'.

35. As a matter of fact, the 'aspect' of 'Fraudulent Trading' requires a very 'High Degree of proof', which is attached to the 'Fraudulent Intent'. To put it emphatically, a more compelling 'Material' / 'Evidence' is required to satisfy the conscience of this 'Tribunal', 'on a preponderance of probability'. Apart from that, an 'isolated' / 'solo fraud' case, against the person, then, action in 'tort' can be resorted to, as opined by this 'Tribunal'. No wonder a 'Creditor', who was defrauded, will have 'recourse' to an 'alternative remedy', under 'Civil Law'."

10. It is the submission of Ld. Counsel that money from the bank was not

used for these transactions as goods were taken on credit with the condition

of payment being that, when goods get sold payment would be made, therefore

it could not cause any loss to banks or even the Corporate Debtor. However,

Company Appeal (AT) (Ins.) No. 567 of 2024 -7-

it is undisputed that some cash inflow in terms of profit was earned for the

corporate debtor, a fact mentioned in the forensic audit report.

11. Summing up Ld. Counsel submits that in view of the above, it cannot

be said that the transactions in question are fraudulent in nature or that

proper diligence has not been done by the Appellant to minimize potential

losses to the creditor. He therefore prays for allowing the appeal.

Submission of the Respondent

12. Ld. Counsel for the Respondent stated that vide order dated January

11, 2024 the Ld. Adjudicating Authority allowed IA 5545 of 2021 filed by the

Ld. Liquidator in CP IB No. 794 (ND) of 2018 while concluding that the present

Appellant entered into fraudulent transactions with fictitious and non-

existent entities for LED business thereby causing substantial loss and

directed the Appellant to contribute a sum of Rs. 3,18,00,000/- to the assets

of the Corporate Debtor.

13. Ld. Counsel invited attention to the observations of the Forensic Auditor

regarding the LED business conducted by the Appellant with the following

entities:

 Satyam Traders

"During the field investigation of Satyam Traders, Shop No. 1, Tyagi Market,

Ghuna, Ghaziabad, investigation team did not find shop with name of M/s

Satyam Traders at the given address. A small cycle shop is running from

aforementioned address with name of Rehman Cycle works. As per the

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detailed discussion with Rehman Cycle works, he revealed he is the ultimate

beneficiary and owner of the Shop for the last 12 years and there is no other

business activity was conducted by anyone apart from cycle works.

 Garg Sales Corporation

"During the field investigation of Garg Sales Corporation, Shop No. 1,

Nandgram Road, Subhash Nagar, Ghazaibad, it was found that: (1) Rashmi

Electricals is running business on this address since 2004. (2) The owner of

shop revealed that this shop is only utilized by them with name & style as

M/s Rashmi electrical since its incorporation not by Garg Sales Corporation."

 B.S. Enterprise

"while conducting the field investigation of Plot No. 305, Shinani Village

Sihani Road, Ghaziabad, audit revealed that: (1) The plot no. 305 is being

used for godown and it was shut-off on the day of investigation. (2) As per

the detailed discussion with the nearby people of the plot no. 305, it was

revealed that the said plot is being utilized by the Jaggannath electrical as

godown for Led television. There is no such plot 305 with the name of B S

Enterprises"

 SP Trading & Co.

"Form above field investigation it was observed that address of business as

mentioned on balance confirmation and tally doesn't confirm that those

companies are running business at same place"

Company Appeal (AT) (Ins.) No. 567 of 2024 -9-

14. Ld. Counsel submitted that the Appellant has very conveniently ignored

the necessity of justifying the fraudulent transactions highlighted by the

Forensic Auditor in its Forensic Audit Report, the Respondent in its response

to the Appeal and the Ld. Adjudicating Authority in the Impugned Order. He

submits that there is no explanation provided by the Appellant throughout

the contents of appeal or its rejoinder on the suspicious sale / purchase LED

Bulb transactions, highlighted by the Forensic Auditor or the Respondent;

undertaken by him with the aforementioned entities. It is pertinent to mention

that during the submissions before this Appellate Tribunal, the Appellant

admitted the existence of these transactions with the mentioned fictitious

entities and failed to provide any justifiable explanation regarding the same.

15. Ld. Counsel states that Part 4.4 of the Forensic audit report can be

referred to understand the financial loss which the Appellant has caused/

made to incur to the Corporate Debtor as a result of conducting transactions

of sales/ purchases with fraudulent and fictitious entities.

 As per para 4.4(i), the Appellant has recorded gross purchases of LED

Bulbs of Rs. 9.33 Crores against which gross sales of Rs. 9.88 Crores

has been recorded.

4.4 Suspicious Led Bulbs Trading Transactions

i. Details of trading activities related to Led Bulb recorded in Books of

Accounts along with total trading activities in PY 2016-17 are given

below:

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Table 1: Details of trading activities during FY 16-17 (figures in INR Cr.) Nature Transactions Trading Purchases Trading Sales LED bulЬ 9.33 9.88 Total 18.28 21.41 Percentage 51% 46% Total 9.33 9.88

 As per para 4.4 (ii), Out of above purchases of INR 9.33 Crores, the

Appellant has issued Debit notes of INR 6.28 Crores to these so-called

suppliers, thereby resulting in NET purchases of Led Bulbs to INR

3.04 Crores (9.33-6.28) during financial year 2016-17. The Appellant

has also paid INR 3.43 crores to these fictitious suppliers on account

of above purchases and opening payables of INR 0.76 crores.

ii. Entities from whom the purchase transactions (51% of the trading

purchases -Led bulb i.e., INR 9.33 Crores out of total purchase INR

18.28 Crores) were undertaken in FY 2016-17 are mentioned below:

 As per para 4.4(iii), Out of total sales of INR 9.88 crores, the Appellant

has issued credit notes of INR 10.06 crores to these fictitious

customers, thereby resulting Net Sales of Led Bulbs to NIL (9.88-

10.06) during FY 2016-17. The Appellant has shown receipt of

Company Appeal (AT) (Ins.) No. 567 of 2024 -11-

INR 4.89 crores from these fictitious customers against opening

recoverable of INR 5.41 crores. Thus, against Net purchases of

INR 3.04 crores (recorded and paid by CD), no sales have been made

in FY 2016-17 and no stock of Led bulbs was available with the

Corporate Debtor.

iii. Entitles to whom sales transactions of Led Bulb (46% of the trading

sales i.e., 9.88 Crores out of the total sales INR 21.41 Crores) were

undertaken in FY 2016-17 are mentioned below:

16. It can be clearly seen from the above tables that the Appellant has just

passed book accounting entries for recording sales and purchases of Led

Bulbs with fictitious suppliers/ customers and later adjusting the

outstanding amounts by issuing credit notes against such illegitimate revered

sale transactions of the LED Bulbs and by issuing wrongful debit notes

against illegitimate reversed purchase transactions of LED Bulbs using fake

and forged vendor bills for causing wrongful loss to the Corporate Debtor. The

loss caused and recorded in the books of accounts by Appellant can be

summarised as below:

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a) Opening amount recoverable from Customers (table iii supra) 5.41 Crores Less amount recovered from Customers (table iii supra) 4.89 Crores Short fall in recoveries from these fictitious Customers 0.52 Crores

b) Opening amount Payable to Suppliers (table ii supra) 0.76 Crores Less Amount actually paid to these suppliers (table ii supra) 3.43 Crores Amount Excess paid to such fictitious suppliers 2.67 Crores Actual Loss Caused to CD due to above banking transactions (a+b) 3.19 Crores

iv. After adjustment of debit notes and credit notes, during 'Review Period'

a notional loss of Rs 3.19 Crore seems to have got generated on account of

the LED Turnover, which is depicted as below:

17. Ld. Counsel submitted that, had these transactions with fictitious

suppliers/customers not taken place, an amount of INR 3.19 crores would

have been available to financial and other creditors of the Corporate Debtor

which has been siphoned off by way of these transactions.

18. Ld. Counsel further submits that an analysis of audited financial

statements of the Corporate Debtor for the FY 2016- 2017 & 2017-2018 will

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also reveal significant discrepancies in sales and purchase returns. Sales

returns totaled to Rs. 10.34 crore, but purchase returns were only Rs. 6.43

crore, indicating that nearly Rs. 3.91 crore worth of goods returned by

customers were not credited back by suppliers. This discrepancy directly

contradicts the Appellant's claim that all unsold or returned goods were duly

returned to suppliers. Such irregularity clearly evidences the siphoning of

funds by the Appellant, carried out with the fraudulent intention to cause

wrongful loss to the Corporate Debtor and to secure wrongful personal gain.

This conduct is emblematic of deliberate mismanagement aimed at defrauding

the creditors.

19. Ld. Counsel invited attention to the Section 66(2)(b) of the Code, and

stated that the Appellant failed to exercise the due diligence required to

minimize potential loss to the Corporate Debtor. Instead, the Appellant

continued business dealings with fictitious and non-existent entities, while

manipulating of the books of accounts with the intent to mislead financial

creditors, enabling the Appellant to unlawfully continue availing loan

facilities, thereby exacerbating the Corporate Debtor's losses.

20. Ld. Counsel submits that the Appellant, through deliberate and wilful

misconduct, engaged in business transactions with entities that were

fictitious and non-existent, as conclusively established by the Forensic Audit

and on-ground verification conducted by the Forensic Auditor. He submitted

that the Appellant's conduct was not incidental or inadvertent, but rather part

of a calculated and conscious design to project an inflated financial position

Company Appeal (AT) (Ins.) No. 567 of 2024 -14-

of the Corporate Debtor. The Respondent firmly believes and submits for the

kind consideration of this Appellate Tribunal, that the primary objective

behind such fictitious transactions was to create a false portrayal of a thriving

and revenue-generating LED business. This was done by artificially recording

bogus sales in the books of accounts, thereby fabricating turnover and

revenue figures. The Appellant's intention, it is submitted, was to deceitfully

induce and mislead financial creditors into believing in the commercial

viability and profitability of the Corporate Debtor. Such manipulation of

financial records was clearly aimed at securing, continuing, or enhancing

credit facilities from banks and financial institutions under fraudulent

pretenses. The Respondent submits that such actions were undertaken by

the Appellant with the sole purpose of defrauding creditors by presenting a

misleading picture of the Corporate Debtor's business operations and

financial health. Even the Auditor in the forensic audit report has observed

that the stock audit report does not highlight any stock/receivables

specifically relating to the LED business & the turnover of LED Bulbs does

not appear to be genuine.

21. Ld. Counsel states that the Appellant during the course of proceedings

before this Appellate Tribunal also raised a baseless defence that the

transaction as admitted by the Appellant only caused a notional loss to the

Corporate Debtor and not any actual loss. This defence of the Appellant hold

no water in view of its own books of accounts as it can no longer be a notional

loss if the transactions have actually taken place, as duly admitted by the

Appellant while making his final submissions.

Company Appeal (AT) (Ins.) No. 567 of 2024 -15-

22. Ld. Counsel further submitted that the Appellant himself claims that

the Corporate Debtor was involved in the business of LED bulbs. Appellant

also agrees that there were sale and purchase transactions for the LED bulbs.

It is also evident from the Forensic Auditor's report that all the entities with

which the Corporate Debtor transacted for LED bulbs were fictitious and non-

existent. Therefore, if the Corporate Debtor itself agrees that there were

transactions for sale and purchase of LED bulbs, it cannot be a notional but

an actual loss.

23. Ld. Counsel has cited this Appellate Tribunal's Judgement in 'Jagdish

Kumar Parulkar Vs. Vinod Agarwal [Comp. App. (AT) (Ins) No. 483 of 2022]'

wherein para 6 and para 35 it held that:

Para 6 "It is further submitted that the suspended directors had

entered into fraudulent sale of stocks with fictitious debtors and

misrepresented the stock statement which attracts Section 66 of IBC.

The TA after reviewing the Balance sheet and Stock statements found

that on 27.03.2017, the total stock was Rs. 10.21 cr and debtors

were Rs. 48.11 lakhs. Subsequent stock statement dated 26.05.2017

showed that the total stock was Rs.2.59 cr and debtors became 7.52

cr. Thus, the suspended management had sold stock worth Rs.6 cr

in 2 months from 01.04.2017 to 26.05.2017 during which period

there was an increase of debtors by Rs.5 cr. It was contended that

stocks were sold by the suspended directors outside the books of

accounts and the sale proceeds were not routed through the

Corporate Debtor's accounts. The Appellant/Resolution Professional

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has therefore claimed that the Corporate Debtor has submitted that

this amounted to be fictitious sale of stocks being booked by the

suspended director while the actual stock was sold off and the

amounts received from such transactions were siphoned off by the

suspended management in some other account of the suspended

directors. Alternatively, the stock statement was inflated to mislead

the lenders to obtain their sanction. Challenging the impugned order,

it is submitted that the Adjudicating Authority had overlooked this

fraudulent manipulation of the stock statement by relying on selective

reading of a bank inspection report.

Para 35 "The last set of suspicious transactions is that of the

suspended directors having entered into fraudulent sale of stocks

with fictitious debtors. The TA after reviewing the stock statements

found that on 27.03.2017 the total stock was Rs. 10.21 cr and

debtors were Rs. 48.11 lakhs. The position changed on 26.05.2017

when total stock came down to Rs.2.59 cr and debtors rose to Rs.7.52

cr. Thus, it can be inferred that the suspended management had sold

stock worth Rs.6 cr in 2 months and during this period there was an

increase of debtors by Rs.5 cr. The Learned Counsel for the Appellant

stated that the Resolution Professional sent demand letters to the

debtors whose names appeared in the stock statement of 26.05.2017

but the debtors responded that no amount is pending to the Corporate

Debtor. It has therefore been contended by the Appellant that stocks

were sold by the suspended directors outside the books of accounts

and the sale proceeds were not routed through the Corporate Debtor's

account. The Resolution Professional has therefore claimed that this

clever maneuvering of sales and purchase transactions amounted to

Company Appeal (AT) (Ins.) No. 567 of 2024 -17-

be fictitious and fraudulent sale of stocks being booked by the

suspended director and that the actual stocks were sold off and the

amounts received from such transactions were siphoned off by the

suspended management in some other account of the suspended

directors.....Prima-facie, we are of the view that there is sufficient and

adequate reason to subscribe to the contention of the Appellant that

the Respondents had wrongfully diverted funds of the Corporate

Debtor which in turn had aggravated the financial health of the

Corporate Debtor and tantamount to fraudulent trade practice."

24. Ld. Counsel further cites this Appellate Tribunal's judgement in

'Shri Baiju Trading and Investment Private Limited vs. Arihant Nenawati & Ors.'

[Comp. App. (AT) (Ins) No. 699 of2021] wherein it was held in para 36 that:

Para 36. "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."

25. Summing up, Ld. Counsel for the Respondent submits the Impugned

Order be upheld and the present appeal be dismissed with cost in view of the

facts and submissions made by the Respondent, the finding of the Auditor in

the audit report and the detailed explanation and reasons provided by the Ld.

Adjudicating Authority.

Company Appeal (AT) (Ins.) No. 567 of 2024 -18-

Analysis and Findings

26. We have gone through the records of the case and the written

submission of both the parties. We have heard the Ld. Counsels of both the

parties in great detail. Based on these we frame following 2 issues for decision

in this case:

I. Whether the transactions undertaken by the Appellant in the LED Bulb

business during FY 2016-17 constituted fraudulent trading under

Section 66(1) of the Code?

II. Whether direction to the Appellant to contribute Rs. 3.18 crores to the

Corporate Debtor's assets is legally sustainable?

We examine each of these issues in subsequent paragraphs.

Issue I: Whether the transactions undertaken by the Appellant in the LED

Bulb business during FY 2016-17 constituted fraudulent trading within the

meaning of Section 66 of the Insolvency and Bankruptcy Code, 2016?

27. This issue forms the crux of the present appeal. The finding on whether

the transactions undertaken by the Appellant, Mr. Gopal Kalra, were

fraudulent within the meaning of Section 66(1) of the Code would also directly

determine the validity of the direction issued by the Adjudicating Authority,

requiring him to contribute Rs.3.18 crores to the assets of the Corporate

Debtor. If the transactions are held to be bona fide or commercially justifiable,

albeit unsuccessful, then no such contribution would be warranted. However,

if the transactions are found to be tainted with fraud or fictitious in nature,

Company Appeal (AT) (Ins.) No. 567 of 2024 -19-

the direction for restitution must stand. The entire appeal hinges on the

adjudication of this issue.

28. The Appellant has asserted that the transactions in question,

pertaining to the trading of LED bulbs, were undertaken during the course of

regular business in a bona fide attempt to revive the Corporate Debtor. He

states that although the Corporate Debtor was facing losses, the LED bulb

business was introduced as a measure to generate revenue. He claims that

while there may have been differences in the amounts recorded via debit and

credit notes, these reflect pricing adjustments and returns, not fraud.

29. The Appellant emphasizes that the Forensic Audit Report itself uses the

phrase "notional loss," and contends that there was no actual cash loss to the

Corporate Debtor. Moreover, he submits that no personal gain accrued to him

and that the transactions led to a net inflow of funds. He argues that at most,

the decisions may be seen as poor business judgment, but do not meet the

threshold of fraudulent intent required under Section 66(1). He also relies on

judicial observations in 'Regen Powertech Pvt. Ltd. vs. Wind Construction Pvt.

Ltd.' (supra), to argue that fraudulent trading requires a high degree of proof

and that a bona fide director cannot be penalized merely for commercial

failure.

30. The Respondent (Liquidator) disputes these contentions and submits

that the transactions were fictitious in their entirety. He relies heavily on the

Forensic Audit Report and the findings of the field investigation, which

revealed that the entities with whom the Appellant allegedly transacted, both

on the purchase and sales side, were either non-existent at their stated

Company Appeal (AT) (Ins.) No. 567 of 2024 -20-

addresses or engaged in unrelated and minor retail businesses such as a

bicycle repair shop.

31. The Respondent contends that these transactions were a part of a

deliberate scheme to project inflated revenues by creating bogus purchase

and sales entries in the books of account. The issuance of backdated debit

and credit notes served to nullify the apparent gains and reflect zero net

turnover, despite real payments being made to such fictitious vendors. The

Respondent argues that this conduct was not merely negligent or unwise, but

deliberate and fraudulent, carried out with the intent to mislead creditors and

misappropriate funds.

32. To determine whether these transactions amount to fraudulent trading,

we must apply the ingredients of Section 66(1) of the IBC, which authorizes

the Adjudicating Authority to direct any person who was knowingly a party to

carrying on business with intent to defraud creditors or for any fraudulent

purpose, to contribute to the assets of the Corporate Debtor. This requires us

to examine:

i. Whether there was an intent to defraud; and

ii. Whether the Appellant was a knowing party to such conduct.

33. Upon a detailed review of the Forensic Audit Report dated 12.09.2019,

the following facts emerge:

(i) The field investigations conducted by the forensic team revealed several

entities were non-existent i.e., the alleged vendors and customers were

fictitious. These include:

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 Satyam Traders: The premises housed a bicycle repair shop operated by an unrelated person who confirmed no such trading business was ever conducted there.

 Garg Sales Corporation: The location was found to be occupied by "Rashmi Electricals" since 2004.

 SP Trading Co. and B.S. Enterprise were similarly found to be non-

existent at the declared business locations.

The investigation thus confirmed that the entities involved in the LED transactions were fabricated and did not conduct any real business.

34. The Forensic Audit also found Suspicious Financial Entries. Purchases

worth Rs.9.33 crores and sales worth Rs.9.88 crores were shown in the books.

At the same time, Debit notes amounting to Rs.6.28 crores and credit notes

amounting to Rs.10.06 crores were issued, effectively erasing both purchase

and sales transactions from a financial impact perspective. However, despite

this accounting cancellation, actual payments totaling Rs.3.43 crores were

made to these fictitious vendors, and a shortfall of Rs.0.52 crores remained

unrecovered from fictitious customers.

35. The Forensic Audit also shows Real Financial Loss to the Corporate

Debtor. Contrary to the Appellant's claim of a "notional loss," we find that the

transactions resulted in a tangible and quantifiable cash outflow from the

Corporate Debtor's account. The total loss attributable to these fraudulent

transactions stands at Rs.3.18 crores consisting of excessive payments to fake

suppliers and recoveries not made from fake customers.

36. The issuance of debit and credit notes, in a backdated fashion, to negate

the effect of purported purchases and sales indicates that the purpose of the

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entire structure was never to conduct genuine trade, but to falsely represent

high volumes of business activity. No stock of LED bulbs was found, no

invoices could be traced to actual delivery of goods, and no plausible business

rationale was offered for dealing exclusively with untraceable parties.

37. We are mindful that every business loss cannot be labeled as fraud.

However, as held by the Hon'ble Supreme Court in 'Anuj Jain, IRP for Jaypee

Infratech Ltd. vs. Axis Bank Ltd. and Ors. [Civil Appeal No. 8512-8527 of 2019

dated 26.02.2020], fraud under IBC is a matter of inference based on the

pattern and substance of transactions. Courts are not required to have direct

proof of criminal intent; circumstantial evidence, when sufficiently

compelling, can justify a finding of fraudulent trading.

38. In our assessment, the Appellant's arguments fail to rebut the key

findings of the forensic audit. Mere assertions of commercial intent or revival

strategy cannot stand against proven evidence that no genuine trade

occurred. The fact that the Appellant paid out significant sums to entities later

proven to be fictitious and then erased these transactions from the books

using adjusting entries cannot be attributed to negligence or error it reflects

willful deception.

39. The reliance placed by Appellant on Regen Powertech (Supra) is also

misplaced. That case involved directors acting under a bona fide belief that

losses could be reversed. Here, there is no indication of such belief. Instead,

what we see is a carefully orchestrated structure of sham transactions

intended to misrepresent financial health. We also note that under general

corporate jurisprudence, directors are expected to exercise fiduciary

Company Appeal (AT) (Ins.) No. 567 of 2024 -23-

responsibility and ensure transparency in financial disclosures. The

deliberate use of fictitious parties, false addresses, and manipulated

accounting entries represents a gross violation of those principles.

40. After thoroughly evaluating the facts on record, the forensic findings,

the submissions of both parties, and applicable legal principles, we find that

the LED bulb trading transactions undertaken by the Appellant were (i)

Entered into with fictitious and non-existent parties; (ii) Executed with the

intent to inflate turnover and siphon off funds; (iii) Structured using

fabricated debit/credit notes and reversed entries to mislead stakeholders;

and (iv) Resulted in a real cash loss of Rs.3.18 crores to the Corporate Debtor.

41. We therefore hold that the business of the Corporate Debtor was carried

on, at least in part, with intent to defraud creditors and for a fraudulent

purpose, as contemplated under Section 66(1) of the IBC. The Appellant, being

a knowing and active participant in such transactions, is liable under the said

provision.

Issue II: Whether direction to the Appellant to contribute Rs.3.18 crores to the

Corporate Debtor's assets is legally sustainable?

42. This issue deals with the validity of the direction passed by the

Adjudicating Authority in exercise of powers under Section 66(1) of the IBC,

whereby the Appellant was held liable to contribute Rs.3.18 crores to the

assets of the Corporate Debtor. The legal sustainability of this direction is

pivotal because, while fraudulent conduct may be established in principle, the

remedy awarded must still be grounded in evidence, proportional to the

Company Appeal (AT) (Ins.) No. 567 of 2024 -24-

misconduct, and compliant with the boundaries of judicial discretion under

the Code.

43. The Appellant has challenged the order dated 11.01.2024 on the

grounds that the direction to contribute Rs.3.18 crores is not based on any

actual loss suffered by the Corporate Debtor, but is a reflection of "notional"

or hypothetical losses as mentioned in the Forensic Audit Report. He asserts

that no funds were misappropriated and that the transactions, though

unsuccessful, were commercially intended to benefit the Corporate Debtor.

According to him, no personal gain accrued to him from the said transactions,

and the direction to contribute the aforementioned amount is both

disproportionate and unjustified.

44. The Appellant further argues that Section 66 of the Code must be

interpreted strictly, and that a mere finding of irregularity does not

automatically translate into financial liability. In his view, the Adjudicating

Authority erred in equating accounting discrepancies with recoverable loss,

and failed to demonstrate any actual enrichment or unjust gain on the part

of the Appellant.

45. Per-contra, the Respondent contends that the impugned order is legally

tenable and based on well-substantiated documentary and forensic evidence.

He argues that the Rs.3.18 crores represent actual financial loss suffered by

the Corporate Debtor as a result of transactions with fictitious entities--loss

that is not speculative but demonstrated through bank transfers, ledger

reconciliations, and untraceable recipients. The Respondent submits that this

amount was not computed arbitrarily but was the result of meticulous

Company Appeal (AT) (Ins.) No. 567 of 2024 -25-

auditing, which traced both the inflow and outflow of funds and adjusted for

credit and debit notes fabricated to cancel out the transactions on paper.

46. Respondent also pointed out that the Adjudicating Authority had the

discretion under Section 66(1) to determine the appropriate amount that must

be restored to the Corporate Debtor's assets, and that such discretion was

exercised judiciously and with full application of mind. The Respondent relies

on the detailed reasoning recorded by the Authority, particularly with respect

to the fake entities and pattern of falsified trading entries.

47. We begin by examining the powers of the Adjudicating Authority under

Section 66(1) of the IBC. The provision empowers the Adjudicating Authority

to direct a person who knowingly carried on the business of the Corporate

Debtor with intent to defraud creditors or for a fraudulent purpose, to make

a contribution to the assets of the Corporate Debtor, as it may deem fit.

48. This discretionary power is not unbridled; it must be exercised based

on - Sufficient evidence of fraudulent conduct; An identifiable financial loss

traceable to such conduct; and a judicially rational and proportionate basis

for quantifying the liability.

49. The issue here is whether the amount of Rs 3.18 Cr determined on a

rational basis. We have seen that the Forensic Audit Report and supporting

ledgers clearly outlined the methodology through which this figure was

derived. The total figure comprises of the following components:

i. Rs. 2.67 crores -- This represents excess payments made to fictitious

suppliers beyond the legitimate payable balances. As per the ledger and

Company Appeal (AT) (Ins.) No. 567 of 2024 -26-

audit findings, while the opening balance due to these suppliers stood

at Rs.0.76 crores, actual payments of Rs.3.43 crores were made, creating

an excess outflow of Rs.2.67 crores to non-existent vendors.

ii. Rs. 0.52 crores -- This figure accounts for the shortfall in recoveries

from customers who were also found to be fictitious. Against opening

recoverable of Rs.5.41 crores, only Rs.4.89 crores were recovered, leaving

Rs.0.52 crores unrecovered due to these sham transactions.

50. Thus, the computation of Rs.3.18 crores is arithmetically precise and

is not based on assumptions. These funds exited the company's books and

were never returned--whether as goods, cash, or receivables; leaving the

Corporate Debtor, and consequently its creditors, in a worse position. We find

that the loss is actual and not "notional," contrary to the claim made by the

Appellant.

51. We have perused the impugned order dated 11.01.2024 in detail. The

Adjudicating Authority noted the Appellant's failure to rebut the existence of

fictitious parties or offer any documentation of genuine trade; and analysed

how the loss was engineered through artificial entries and adjustments using

credit/debit notes. The Authority was also mindful of its jurisdiction and did

not make any extraneous observations. It confined its direction to what was

necessary for restitution of the corporate debtor's estate. The approach was

consistent with the guiding principle under insolvency jurisprudence:

maximizing the value of the assets for the benefit of all stakeholders.

Company Appeal (AT) (Ins.) No. 567 of 2024 -27-

52. In our view, the Adjudicating Authority did not exceed its jurisdiction

or base its findings on conjecture. It performed a detailed factual and legal

evaluation, applied the statutory provision correctly, and arrived at a well-

reasoned outcome. Further, we find that the quantum of Rs.3.18 crores is

neither excessive nor punitive. It is exactly equal to the demonstrated loss

and aims at restoring the Corporate Debtor's estate--not punishing the

Appellant. Section 66(1) is remedial in nature and is meant to reinstate the

corporate debtor's financial position by undoing fraudulent depletion of

assets. The order, in this light, is proportionate, reasoned, and lawful.

53. In view of the findings above, we find no infirmity in the impugned

order. The appeal is dismissed. Pending I.As are closed. There is no order as

to costs.

[Justice Rakesh Kumar Jain] Member (Judicial)

[Mr. Naresh Salecha] Member (Technical)

[Mr. Indevar Pandey] Member (Technical)

SA/Pragya (LRA)

Company Appeal (AT) (Ins.) No. 567 of 2024