Mr. Hrushikesh Paranjape vs Shri Ajay Marathe Discharged ...

IN THE MATTER OF: Shri. Hrushikesh Balkrishna Paranjape, 1. Having Address at: A35, Brahmanwadi, Adivare, Kondsar Budruk, Rajapur, Ratnagiri, Maharashtra - 416 707 Email: hrushikesh.paranjape@gmail.com ...Appellant Versus

1. Shri. Ajay Marathe, Discharged Resolution Professional for M/s. Paranjape Agro Products India Private Limited, R/at 201, Aadhar Height, Opp. Bhagshala Maidan, Dombivali (W), Thane, Maharashtra - 421 202 Email: aiaym7@rediffmail. Com ...Respondent No.1 2. Canara Bank, through its Stressed Asset Management Branch, O/at Circle Office Building, 8th Floor, 'B' Wing, C - 14, G-Block, Bandra - Kurla Complex, Bandra (E), Mumbai, Maharashtra - 400051. Email: cb1555O@canarabank.com ...Respondent No.2

Present: For Appellant : Mr. Avinash R. Khanolkar, Advocate. For Respondent : Mr. Prakash Shinde, Advocate. JUDGMENT

(Hybrid Mode)

[Per: Justice Mohd. Faiz Alam Khan, Member (Judicial)]

The instant appeal has been preferred by the Appellant - Promoter

Director of the CD i.e M/s Paranjape Agro Products India Pvt. Ltd. against

the order passed by the NCLT, Mumbai Bench on 20.08.2024 in I.A No.

1768 of 2023 passed in CP (IB) No. 3755/MB/2019 which was moved by the

Resolution Professional of the CD under Section 43, 44, 45, 49, 50 and 66 of

the Insolvency and Bankruptcy Code, 2016 (in short 'Code') whereby a

direction of contributing Rs. 6,56,25,806 /- has been given to the Appellant.

2. Brief facts necessary for disposal of the appeal appears to be that the

CD was admitted into CIRP vide order dated 10.06.2022 on a petition i.e. CP

(IB) No. 3755/MB/2019 filed by the Canara Bank under Section 7 of the

Code and one Shri Ajay Marathe was appointed as the Resolution

Professional of the CD.

3. It is also reflected that the CoC was constituted by the RP after

collating the claims and the same was comprising of only one member i.e.

Respondent No. 2.

4. It is also reflected that in the 1st CoC meeting held on 13.07.2022,

Dharkar and Kothari, Chartered Accountant was appointed as the

transaction auditor to conduct transaction audit of the CD and to prepare

the transaction audit report of the CD for the period commencing from

01.04.2017 to 10.06.2022 in order to identify transaction which may be

preferential, undervalued or made for defrauding creditors as well as

fraudulent under Section 43, 45, 49, 50 and 66 of the Code.

Company Appeal (AT) (Ins) No. 1994 of 2024 2 of19

5. The aforesaid CA/transaction auditor conducted audit of the CD for

the aforesaid period and prepared and submitted its report dated

12.11.2022 and identified certain transactions which were in violation of

Section 43, 44, 50, 45, 49 and 66 of the Code.

6. The Transaction Auditor in its report, amongst other, found that the

CD has written off amount receivables from the Appellant to the tune of Rs.

2.04 Cr. for the financial year 2018-19 and Rs. 0.38 Cr. for the financial

year 2019-20 which according to the transaction auditor was an

undervalued transaction and the same was recorded in the annual financial

statement of the CD.

7. The transaction auditor has also found that stocks which were shown

to have been sold by the CD to M/s Shree Cashew Products (proprietorship

concern of the Appellant) were sold at a low rate than the cost of the product

as per the records maintained by the tally.

8. The transaction auditor has also found that stock in trade amounting

to Rs. 6,56,25,806/- has been written off in the books of accounts of the CD

and this write off in inventory is considered as extraordinary item and to be

disclosed separately in the financial statement as per the requirement of

schedule III of the Companies Act 2013, as in the opinion of the auditor, the

written off amount is significant and constitute 232% of total income earned

during financial year 2019-20 and also that no separate note in the financial

statement describing the reason which leads to write off the stock was

available and it was also highlighted that the value of the physical stock was

not appropriate and thus the possibility that the value of closing stock was

inflated/misreported in the financial statements and according to the

Company Appeal (AT) (Ins) No. 1994 of 2024 3 of19 transaction auditor these transactions were not in the ordinary course of the

business and nor in the interest of the CD and the said transactions have

been benefited the related parties as well as the management of the CD in a

beneficial position, therefore, are undervalued and fraudulent.

9. It is further reflected that after applying its mind, the RP took the view

to move an appropriate application before the Adjudicating Authority and

consequently I.A No. 1768 of 2023 was filed before the Tribunal under

Section 43, 44, 45, 50 and 66 of the Code with the following prayers: -

"a. That this Tribunal be pleased to take cognizance of the facts of the present application and the transaction audit report dated 12th November, 2022 and take necessary actions against the Respondent under the Code:

b. This Tribunal be pleased to declare the transaction with Respondent as undervalued transaction as under Section 45 of the Code and take necessary action under Section 47 of the Code.

c. That this Tribunal be pleased to pass orders to declare that the amount of Rs.2.04 crores and Rs. 0.38 crores is a transaction under Section 45 of the Code and direct the Respondent to return the stock and/or pay the amount of Rs.2.04 crores and Rs. 0.38 crores to the Corporate Debtor, d. That this Tribunal be pleased to pass orders to declare that the amount of Rs.6.56,25,806/-is a transaction under Section 66 of the Code and direct the Respondent to repay the amount to the Corporate Debtor:

e. That this Tribunal be pleased to pass such further and other directions as it may deem fit under the provisions of Sections 44, 45, 66. 67 and 69 of Code:"

10. The Adjudicating Authority after providing an opportunity of being

heard to the parties held that the business of the CD has been carried on

with an intent to defraud the creditors and found the case under Section 66

of the Code and directed the Respondent No. 1 to make contribution of Rs.

6,56,25,806/- to the CD.

Company Appeal (AT) (Ins) No. 1994 of 2024 4 of19

11. Aggrieved by the same, the instant appeal has been preferred by the

Appellant.

12. It is to be recalled that after hearing Ld. Counsel for the parties an

opportunity was granted to them to file written submissions till 9th January

2026, however the appellant did not file any written submissions till this

appeal is notified for pronouncement of judgment, however Ld. Counsel for

the Respondent has filed written submissions. We have already heard Ld.

Counsel for the parties in-depth.

13. Ld. Counsel for the appellant while drawing our attention towards the

impugned judgment submits that Ld. Tribunal has committed any illegality

in allowing the application moved by the Resolution Professional with regard

to the transaction pertaining to the writing off of the inventory pertaining to

Rs. 6,56,23,806/-.

14. It is further submitted that application as it stands today could not be

allowed by Ld. Tribunal as the same was required to be prosecuted by the

Resolution Professional while the same is been prosecuted by successful

resolution applicant of the CD.

15. It is further submitted that the Ld. Tribunal has completely

disregarded the fact that the Respondent No. 1 has failed to prove any

fraudulent intention of the appellant for performing the alleged transactions

and it was not even a case of the Respondent no.1 or in the transaction

audit report that the said stock was in existence with the CD and the CD

has sold the said stock in the market and proceeds of such sale has been

misappropriated.

Company Appeal (AT) (Ins) No. 1994 of 2024 5 of19

16. It is vehemently submitted that there is no evidence with regard to the

misappropriation of the said stock and the reality is that the appellant had

got an order for export of the cashew however due to the happening of the

covid and movement restrictions the said stock, being a perishable item,

deteriorated and remains of no value as the appellant could not get

sufficient fund assistance from any bank, to fulfill the export order in time

and it is in this background the inventory has been written off.

17. It is further submitted that the Ld. Tribunal has passed the impugned

order relying on the unit visit reports and stock audit report conducted by

the Respondent No. 2, however, while relying on the same a fact has been

disregarded that the stock audit report relied on in transaction audit report

is a halfhearted report as the requisite documents were not available with

the stock auditor at the relevant time and this fact can be ascertained from

a copy of email sent by the appellant to stock editor on 22.07.2019.

18. It is also submitted that the CD has filed income tax return for the

year 2019-2020 wherein a loss of Rs. 8 Cr has been shown which considers

the loss of stock in question and the said ITR has also been accepted by the

income tax department. Therefore, there was no cogent evidence which may

reflect that the inventory has been misappropriated by the appellant.

19. Ld. Counsel for the Respondent No. 1 on the other hand submits the

short issue which arises for adjudication of this appellate tribunal is, as to

whether the appellant as the Promoter and Director of the CD has indulged

in the fraudulent transaction to defraud the creditors of the CD.

20. It is submitted that after not getting any cooperation from the

appellant the Resolution Professional of the CD appointed Dharkar and

Company Appeal (AT) (Ins) No. 1994 of 2024 6 of19 Kothari, Chartered Accountants as the Transaction Auditor to conduct the

audit of the CD for the period from 01.04.2017 to 10.06.2022 and they

submitted a detailed Transaction Audit Report (TAR) on 12.11.2022 wherein

various transactions have been labeled as fraudulent and preferential.

21. It is further submitted that it has been clearly stated in the TAR that

the stock in trade amounting to Rs. 6,56,25,806/- was written off in the

books of account of the CD and this being an extraordinary item was

required to be disclosed separately in the financial statement as per the

requirement of scheduled-III the Companies Act, 2013.

22. It is further submitted that the amount shown to have been written off

constitute 232 % of the total income of the CD earned during financial year

2019-2020. However, no separate note in financial statement describing the

reason for writing off of the stock was available and the value of the physical

stock was not appropriate and thus, there is every possibility that the value

of closing stock was inflated/misreported in the financial statements.

23. It is further submitted that the Appellant being the Promoter,

Director, Directors of the Corporate Debtor during the relevant time have

indulged in the aforementioned transactions which are not in the ordinary

course of the business and are also not in the interest of the Corporate

Debtor and the creditors of the Corporate Debtor and have been done with

the intention to defraud creditors and also benefited the related parties and

put the Appellant, management in a beneficial position. Moreover, the

Appellant in the Affidavit in Reply dated 14th October 2023, filed in the IA

No. 1768 of 2023 admitted that they have carried out the Transactions

Company Appeal (AT) (Ins) No. 1994 of 2024 7 of19 during the relevant period of time. Therefore, the Appellant is liable to bring

back the amount of Rs.6,56,25,806/-.

24. Ld. counsel for the Appellant has relied on the following case Laws: -

(i) Company Appeal (AT) (Ins.) No.699 of 2021 dated: 29.03.2023, Shri Baiju

Trading and Investment Private Limited v/s. Mr. Arihant Nenawati

(Liquidator for Royal Refinery Private Limited) & Ors. Para Nos. 41, 43, 49

and 50.

(ii) Company Appeal (AT) (Ins.) No.293 of 2021, Judgment dated:

05.12.2022, Mr. Thomas George v/s. K. Easwara Pillai & Ors., Para No. 12.

25. Section 66 of the Code for convenience is reproduced as under:

"Section 66: Fraudulent trading or wrongful trading. (1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit. (2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if--

(a) before the insolvency commencement date, such director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and (b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor. Explanation. --For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a

Company Appeal (AT) (Ins) No. 1994 of 2024 8 of19 person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor."

26. In Piramal Capital and Housing Finance Limited v. Moons

Technologies Ltd. & Ors. [2025 SCC Online SC 690], Hon'ble Supreme

Court opined as under: -

"60. However, in cases of "Fraudulent or Wrongful trading" in respect of the business of the CD as contemplated Civil Appeal Nos. 1632- 1634 of 2022 Page 94 of 145 in Section 66, the properties and the persons involved may or may not be ascertainable and therefore the Adjudicating Authority is not empowered to pass orders to avoid or set aside such transactions, but is empowered to pass orders to the effect that any persons, who were knowingly parties to the carrying on of business in such manner, shall be liable to make such contributions to the assets of the CD, as it may deem fit. The Adjudicating Authority in such applications may also direct that the Director of the CD shall be liable to make such contribution to the assets of the CD as it may deem fit, as contemplated in Section 66(2). In case of Fraudulent trading or Wrongful trading, it would be a matter of inquiry to be made by the Adjudicating Authority as to whether the business of CD was carried on with intent to defraud creditors of the CD or was carried on for any fraudulent purpose.

61. In view of the above, the Applications filed in respect of "Fraudulent and Wrongful trading" carried on by the CD, could not be termed as "Avoidance Applications" used for the Applications filed under Sections 43, 45 and 50 to avoid or set aside the Preferential, Undervalued or Extortionate Civil Appeal Nos. 1632-1634 of 2022 Page 95 of 145 transactions, as the case may be. There is clear demarcation of powers of the Adjudicating Authority to pass orders in the Avoidance Applications filed by the Resolution Professional under Section 43, 45 and 50 falling under Chapter III and the Applications filed by the Resolution Professional in respect of the Fraudulent and Wrongful trading of CD, under Section 66 falling under Chapter VI of the IBC. If the Resolution Professional has filed common applications under Sections 43, 45, 50 and also under Section 66, the Adjudicating Authority shall have to distinguish the same and decide as to which provision would be attracted to which of the Applications, and then shall exercise the powers and pass the orders in terms of the provisions of IBC."

27. This Appellate Tribunal again in Shibu Job Cheeran & Ors. v. Ashok

Velamur Seshadri Liquidator of M/s. Archana Motors Ltd. (2023 SCC

OnLine NCLAT 804), held as under:

"43. It is therefore clear that for establishing the fraudulent purpose, it must be shown that the Ex-Directors of the 'Corporate Debtor' knew that the Company was insolvent but continued to run business with dishonest intentions. On a broader sense, concealment of true

Company Appeal (AT) (Ins) No. 1994 of 2024 9 of19 financial position of the 'Corporate Debtor' can also be covered under such provisions.

44.This 'Appellate Tribunal', therefore, observes that the following elements need to be established for success of Section 66 Application, namely, (i) Business of the 'Corporate Debtor' has been carried out with an intent to defraud the creditors. (ii) Directors participated in carrying on business of the 'Corporate Debtor' despite knowing likely insolvency of the 'Corporate Debtor'."

28. This appellate tribunal in Swapan Kumar Saha v. Ashok Kumar

Agarwal, (2025) ibclaw.in 911 NCLAT, held as under:

"28......b. Can Section 66(1) of the Code be interpreted or invoked or made operational without recourse to Section 66(2) of the Code? Do they operate independent of each other or jointly?"

44.We further note that the next subsection 66(2) relates to specific provisions for a Director or partner of the CD for which CIRP is going on. This subsection provides that if before the insolvency commencement date, a director or partner knew or ought to have known that CIRP could not have been avoided and failed to exercise due diligence in minimising potential loss to the creditors, AA may direct the erring director or partner to be liable and make such contributions to the assets of the CD as it may deem fit. We observe that the first provision (section 66(1)) is very broad but not the second one (Section 66(2)) ......

45. From a bare reading of Section 66(1) and Section 66(2) of the IBC we find that both have self-contained provisions, with clear mechanisms for their invocation during a CIRP. Further, a perfunctory glance at Section 67 of the IBC will make it abundantly clear that the draftsmen and legislators clearly intended for Sec 66(1) and Section 66(2) to operate independently, as the opening line of Section 67(1) and 67(2) of the IBC would reflect, ........"

29. In Company Appeal (AT) (Ins.) No.699 of 2021, Shir Baiju Trading

and Investment Private Limited v/s. Mr. Arihant Nenawati (Liquidator

for Royal Refinery Private Limited) & Ors., this Appellate Tribunal held in

Paras Nos. 43, 49 and 50 as under: -

"43. It is noted that the requirements of Section 66(1) of the I & B Code, 2016 is also satisfied as it is a settled principle of law that the beneficiaries of fraud is presumed to be a party to the fraud, as laid down by the Hon'ble Supreme Court in the case of Ram Preeti Yadav vs. U.P. Board of High School and Intermediate Education, [(2003) 8 SCC 311]as follows: - "10. It is also a matter of great suspicion as to how another marksheet was issued in his favour on 1-9-1986 with the words "WB" particularly when the Principal of the College admittedly was made known about the order dated 1-9-1985 passed by the first respondent cancelling the examination of Respondent No. 3. Thus, it is evident that a fraud was committed. Respondent No. 3 is the sole

Company Appeal (AT) (Ins) No. 1994 of 2024 10 of19 beneficiary of the said fraud and it, as much, must be presumed that he was a party thereto.: (emphasis supplied)

49. 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.

50. 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."

Section 66 of the IBC, 2016, thus deals with two different situations. Section

66(1) of IBC, 2016 deals with 'Fraudulent Trading' and Section 66(2) of IBC,

2016 deals with 'Wrongful Trading'. Section 66(1) of IBC, 2016 imposes

liability on 'any person' who were knowingly parties to the carrying on the

business with a dishonest intention to defraud the creditors, to make

contribution to the assets of the Corporate Debtor. Therefore to qualify

under Section 66(1) of IBC, 2016, the transaction should be knowingly

transacted with a dishonest intention to defraud the creditors of the CD,

while under Section 66(2) of IBC, 2016 , which deals with 'Wrongful

Trading', Liability can only be fixed upon only 'Director' or 'Partner' and for a

transaction to qualify under this Sub Section it must be shown that the

parties to such transaction knew, or ought to have concluded that there was

no reasonable prospect of avoiding insolvency proceedings and they did not

take due diligence with a view to minimizing the potential loss to the

creditors of the company. The facts alleged and evidence produced must

satisfy the ingredients of this section and the facts from which the intention

to defraud may be deduced must be proved to satisfy the conscience of the

'Tribunal' on the scale of 'preponderance of probability'. However, it will

Company Appeal (AT) (Ins) No. 1994 of 2024 11 of19 depend on the facts and evidence of each case to asses as to whether the

particular transaction may be treated as fraudulent or not.

30. Having heard Ld. Counsel for the parties and having perused the

record, we now proceed to appreciate the facts and circumstances of the

present case on the touch stone of the law laid down in above mentioned

cases. We notice that out of various transactions highlighted by transaction

auditor being preferential and fraudulent, Ld. Tribunal has granted the relief

with regard to prayer 9 (e) of IA No. 1768 of 2023 (wrongly shown as prayer

9 (d) in the opening part of the impugned order) and the said prayer is

reproduced as under:

"e. That this Hon'ble Tribunal be pleased to pass orders to declare that the amount of Rs. 6,56,25,806/- is a transaction under Section 66 of the Code and direct the Respondent to repay the amount to the Corporate Debtor."

31. It is also evident that with regard to the aforesaid prayer it is

contended in the application moved by the Resolution Professional before

the adjudicating authority that the stock in trade amounting to Rs.

6,56,25,806/- was written off in the books of accounts of CD and writing of

an inventory is considered as extraordinary item and required to be

disclosed separately in financial statement as per the requirement of

schedule-III of the Companies Act, 2013. More so, when the amount is

significant and constitute 232% of total income earned during financial year

2019-2020, however no separate note in the financial statement of the

relevant year describing the reasons leading to writing of the stock was

available. It is also contended therein that the value of the physical stock

was not appropriate and thus there is possibility that the value of closing

stock has been inflated/misreported.

Company Appeal (AT) (Ins) No. 1994 of 2024 12 of19

32. It is further stated in the application that the aforesaid transaction is

fraudulent and appellant was the Director of the CD at the relevant time and

have indulged in the above transactions which are not in the ordinary

course of business and were also not in the interest of the CD and these

transactions have benefitted the related parties and also put the

management in a beneficial position and therefore the appellant is required

to bring back this amount of Rs. 6,56,25,806/- as the said transaction

squarely falls within the ambit of Section 66 of the Code.

33. In the reply filed by the appellant it is stated that while making

aforesaid allegation of making fraudulent transactions the Resolution

Professional has not exercised due diligence and merely made an averment

that transaction of write off the perished stock is fraudulent in nature

without any existence of element of fraud as required for invocation of

Section 66 of the Code.

34. It is further contended that Section 66 (1) of the Code, itself warrants

and casts a responsibility on the Resolution Professional to demonstrate

that alleged transactions have been carried out to defraud the creditors and

the Resolution Professional has failed in establishing so and thus for want of

any fraudulent intention on the part of the appellant the application was

devoid of any force.

35. It is further stated in the reply filed by the appellant before the

Adjudicating Authority that the CD at the relevant time was managed by the

other Directors and the appellant was deliberately kept out of the

proceedings and the transaction of writing of the stock has been made

Company Appeal (AT) (Ins) No. 1994 of 2024 13 of19 pursuant to the accounting standards passed by the Board through a

Resolution.

36. It is also stated that the CD is in the business of processing,

manufacturing, export of cashews and during the period of July/August

2019 got a huge export order of cashew and in this regard huge amount of

cashew seed was procured by him and for want of sufficient fund he could

not complete the order and in the meantime Covid -19 also happened and

restricted all the movements throughout the Country and due to the

passage of time the stock of cashew seeds remained lying ideal at one place

and got perished and in this background the stock was written off.

37. Ld. Adjudicating Authority after going through the record drawn

conclusions that the writing of the stock was in order to wash non-existent

inventory and this act was for cleaning the books of accounts of the CD to

wipe of a non-existent inventory in view of CIRP Petition which was filed on

11.10.2019, as there was no reasonable prospect to avoid the CIRP and thus

directed the appellant to contribute Rs. 6,56,25,806/- to CD the relevant

part of the impugned judgment is reproduced as under:

"4.5. The management has explained that the write off arose from failure of the Corporate Debtor in execution of export order due to non-availability of credit facility for the purpose and thereafter onset of Covid-19 pandemic. We find from the order dated 10.06.2022 passed by this Tribunal admitting the Corporate Debtor in to CIRP process that the account of the Corporate Debtor was classified as NPA on 03.04.2018 after occurrence of default on 03.01.2018. On perusal of audited financial statement for year ended 31.03.2020 we find that the Corporate Debtor was carrying an inventory of Rs. 7,41,99,136.00 as on 31.03.2019 and Rs. 7,96,65,854.00 as on 31.03.2018. If we look at the explanation in the backdrop of these financial data we find it difficult to accept the contention because the Corporate Debtor was already carrying an inventory of Rs. 7,96,65,854.00 as on 31.03.2018, when

Company Appeal (AT) (Ins) No. 1994 of 2024 14 of19 its account was classified as NPA immediately thereafter, and the shelf life of the Cashew is stated to be one year while the Corporate Debtor continued to hold inventory of Rs. 7,41,99,136.00 as on 31.03.2019 also even though the total purchases during the Financial Year 2018-19 are stated to be of Rs. 36,68,982.33. An application under Section 7 was filed by the lender Canara Bank on 11.10.2019, accordingly, the stock write off was in order to wash away non-existent of inventory, which was also observed in the unit visit reports ad stock audit reports as alleged by the Transaction Auditor. In view of these facts, we have no hesitation to hold that the inventory write off was an act of cleaning the books to wipe of non-existent inventory in view of CIRP petition having been filed on 11.10.2019 and there being no reasonable prospect of avoiding of commencement of CIRP. The Hon'ble NCLAT, Chennai Bench in the case of Mr. Shibu Job Cheeran, & Ors. Vs Mr. Ashok Velamur Seshadri, Liquidator of (M/s Archana Motors Limited) has held "43. It is therefore clear that for establishing the fraudulent purpose, it must be shown that the Ex-Directors of the Corporate Debtor knew that the Company was insolvency bust continued to run business with dishonest intentions. On a broader sense, concealment of true financial position of the Corporate Debtor can be also covered under such provisions."

4.6. Accordingly, we consider it appropriate to hold that the business of the Corporate Debtor has been carried on with an intent to defraud creditor and it is a fit case to pass an order under Section 66 of the Code, directing Respondent No. 1 to make contribution of Rs.

6,50,25,806/-. The other Director is the family member of the Respondent No. 1 accordingly; we don't find any force in the argument of non-joinder canvassed by the Respondent. The Respondent shall pay this money to Corporate Debtor within 30 days from the communication of the said order".

38. At this juncture, we also notice the report of the transaction auditor

with regard to the certain transactions, which has been filed by the

transaction auditor wherein the transaction auditor has stated the response

of the management of the CD in terms that non-compliance of the

companies Act was due to the financial distress and their account was

declared NPA on 03.04.2018 and situation was severed by happening of the

Company Appeal (AT) (Ins) No. 1994 of 2024 15 of19 covid which has paralyzed their entire business and also that there

statutory audit for year 2018-2019 and 2019-2020 could only be completed

on 01.12.2020 and 03.12.2020.

39. At this juncture, it is to be recalled that the CIRP of the CD was

initiated vide order of Ld. Tribunal dated 10.06.2022. The transaction

auditor has also noticed in its report that there was difference between sales

reported in financial statement and sales reported in GST Returns and

without approval of the board the appellant has paid the liabilities of the

company and so far as the impugned transaction is concerned it was

categorically reported by the transaction auditor that as per the audited

financial statements for financial year 2019-2020 there was a reduction in

stock in trade amounting to Rs. 6,56,25,806/- and there is no separate note

regarding the reason for reduction of such stock in the financial statements

and also that the same was not matching with the stock records maintained

in tally.

40. It is also highlighted that as per the unit visit report and stock audit

report it is evident that value of physical stock was not appropriate and

there may be a possibility that the value of the closing stock was inflated or

misreported in the financial statements.

41. It is also opined that write off of the stock in trade merely in the books

of accounts without having its physical existence amounting to Rs. 6.56

Crore is considered as activity carried on with fraudulent purpose and is

squarely covered within the ambit of Section 66 of the Code.

42. It was highlighted by the transaction auditor that the stock records

which were maintained by the CD are not proper and no records were found

Company Appeal (AT) (Ins) No. 1994 of 2024 16 of19 for physical verification of the same and the same was also noticed by the

stock auditors and bankers at the time of Unit Visits and Inspection done by

them and the transaction auditor in support of this conclusion has enclosed

the unit visit reports and stock audit reports and ultimately concluded as

under:

"Write off of Stock It is apparent from the records provided by the bank that there was no physical stock present at the plant at any time after the loan was sanctioned and only value of stock was inflated in the books and records which leads writing off the excess book stock in the financial statements as on 31st March 2020. Mentioning false amount of stock in the financial statements to maintain the limits sanctioned by the bank that should be considered as fraudulent transactions u/s 66 of the IBC 2016".

43. Thus, the defense which has been taken by the appellant is that to

fulfill an export order, huge procurement of huge amount of cashew seed

was done and as the funds were not given by the banks, the export

assignment could not be fulfilled and also that the processed and non-

processes cashew seeds were kept lying in the stock for a long time and

keeping in view the low shelf life of these seeds and of no maintenance

during the covid period and lockdown imposed, the seeds become useless

and was written off.

44. We have already noticed the report of the transaction auditor wherein,

on the basis of documentary evidence and the evidence supplied by the

concerned bank it has been concluded that there was in fact no physical

stock at the plant, at any time after the loan was sanctioned and it is only

the value of stock which was inflated in the account books without

purchasing the stock and was ultimately written off in financial statements

Company Appeal (AT) (Ins) No. 1994 of 2024 17 of19 as on 31.03.2020 mentioning false amount of stock in the financial

statement.

45. We during the course of hearing, also put a pointed query to Ld.

Counsel for the appellant to the effect as to whether there is any

documentary evidence or proof of purchase of cashew seeds and it was

answered that the cashew seeds were purchased from various petty farmers

and documentary evidence is not available with regard to the same.

46. Having considered all the facts and circumstances of this case, we

find that in the audited financial statement for the year ending as on

31.03.2020 the CD was shown carrying an inventory of Rs. 7,41,99,136/- as

on 31.03.2019 and of Rs. 7,96,65,854/- as on 31.03.2018. Ld. Adjudicating

Authority find it difficult to accept the defense of the appellant as the CD

was already carrying an inventory of Rs. 7,96,65,854/- as on 31.03.2018

when its account was classified as NPA and the shelf life of the cashew seed

or cashew is stated to be of only one year and interestingly the CD

continued to hold the inventory of Rs. 7,41,99,136/- as on 31.03.2019 even

though the total purchases during the financial year 2018-2019 is shown to

be of Rs. 36,68,982/- it is to be recalled that an application under Section 7

of the Code was filed by the Canara Bank on 11.12.2019. Thus, we are in

agreement with the conclusion drawn by Adjudicating Authority that this

writing off of stock was done in order to wash away the non-existent

inventory which was only shown in the books of accounts.

47. Keeping in view the documentary evidence available on record and

lack of any acceptable explanation from the appellant with regard to the

writing off of the inventory amount of Rs. 6,56,25,806/-, we do not want to

Company Appeal (AT) (Ins) No. 1994 of 2024 18 of19 take any other view then taken by Ld. Adjudicating authority which appears

to be legally and factually sound and it is established that the writing off of

the inventory in the books of account of the CD was only for the purpose of

cleaning of the books of accounts of the CD to wash a non-existent inventory

meaning thereby no cashew seed or cashew was purchased and it was only

a paper work which is also substantiated by the evidence mentioned by the

transaction auditor to the effect that during the unit visit of the bank

officials no such inventory was ever found at the plant of the CD.

48. In view of above the appeal is devoid of merits and is dismissed as

such there is no order with regard to the costs. Pending IA's if any also

disposed of.

[Justice Mohd. Faiz Alam Khan] Member (Judicial)

[Indevar Pandey] Member (Technical)

New Delhi.

22.01.2026

sr/sc

Company Appeal (AT) (Ins) No. 1994 of 2024 19 of19