Shri Baiju Trading And Investment ... vs Nandkishor Vishnupant Deshpande ...

[Arising out of Order dated 29.01.2021 passed by the Adjudicating Authority/National Company Law Tribunal, Mumbai Bench in I.A. No. 1125 of 2020 in C.P. No. 2556/MB/2019.]

IN THE MATTER OF: Shri Baiju Trading and Investment Private Limited Through its Authorized Representative Office Address: 204, Link Plaza, CST No. 591, Veera Desai Road, Link Road, Andheri (West) Mumbai - 400053. ...Appellant

Versus

1. Mr. Arihant Nenawati (Liquidator for Royal Refinery Private Limited) & Ors. Office at: Nenawati & Associates B-202 Sherton Classic, Dr. Chand Singh Colony, Chokala Andheri East, Mumbai - 400069. Email: arihant@gmail.com ...Respondent No. 1

2. Mr. Vishal Choudhary Room No. 501, 5th Floor, Harlalka heights, 2ndFanaswadi, Mumbai - 400002. ...Respondent No. 2

3. Mr. Gaurav D. Panwar Makan No. 171/172, Anjani Dham, Barbar Road, Ratlam - 457001 (M.P.) ...Respondent No. 3

Present: For Appellant : Mr. Sanchar Anand & Mr. Kshitiz Garg, Advocates.

For Respondents : Mr. Kaustav Som and Mr. Abhijeet Singh, Advocates for R-1.

Company Appeal (AT) (Ins.) No. 699 of 2021 1 of 32 Ms. Srishti Prabhakar & Mr. Utsav Singhal, Advocates for R- 2 & 3.

(29.03.2023)

NARESH SALECHA, MEMBER (TECHNICAL)

The Present Appeal has been filed against the 'impugned order' dated

29.01.2021 passed by the 'Adjudicating Authority' [National Company Law

Tribunal, Mumbai Bench] in I.A. No. 1125 of 2020 in C.P.

No. 2556/MB/2019, whereby, the 'Adjudicating Authority' allowed the

application filed under Section 66 r/w Section 26 of the 'Insolvency &

Bankruptcy Code, 2016' (in short 'I & B Code, 2016).

2. Raksha Bullion filed an application under Section 9 of the I & B

Code, 2016 in C.P. (I.B.) 2556/MB/2019 in the matter of Raksha Bullions

Vs. Royal Refinery Pvt. Ltd. ('Corporate Debtor') on account of default of

Rs. 4,90, 01,183/- . The said application was admitted, the 'Corporate

Insolvency Resolution Process' (in short 'CIRP') against the 'Corporate

Debtor' was initiated on 13.11.2019 and Mr. Nandkishor Vishnupant

Deshpande ('Respondent No. 1') was appointed as 'Interim Resolution

Professional' (in short 'IRP').

3. The 'Adjudicating Authority' on 16.04.2021 passed the order of

liquidation of the 'Corporate Debtor' in I.A. No. 59/2021 filed by

Mr. Nandkishor Vishnupant Deshpande, Resolution Professional in C.P.

2556/I&B/MB/2019 titled as 'Raksha Bullion vs. Royal Refinery Private

Company Appeal (AT) (Ins.) No. 699 of 2021 2 of 32 Limited', and wherein Mr. Arihant Nenawati was appointed as Liquidator as

provided under Section 34(1) of the I & B Code, 2016. In the light of the

aforementioned liquidation order dated 16.04.2021 as passed by the

'Adjudicating Authority', the 'Respondent No. 1' in the present Appeal i.e.

Mr. Nandkishor Vishnupant Deshpande, Resolution Professional in C.P.

2556/I&B/MB/2019 has become "Functus officio" and therefore,

Mr. Arihant Nenawati who has been appointed as Liquidator in the above

captioned matter requested to be substituted and impleaded in the present

Appeal as 'Respondent No. 1'.

During the hearing in the present Appeal on 08.09.2021, this

'Appellate Tribunal', vide its order dated 08.09.2021 directed the 'Applicant'

herein to "substitute the Liquidator as Respondent".

4. I.A. No. 1125 of 2020 in C.P. No. 2556/MB/2019 was filed before

the 'Adjudicating Authority' by Mr. Nandkishor Vishnupant Deshpande

(Resolution Professional for Royal Refinery Pvt. Ltd.). In the said

application, following prayers were made:-

"1. This is an Application filed by this 'Applicant' seeking for the following reliefs:-

a. Direct the Respondents as detailed in this application to make such contributions to the assets of the Corporate Debtor equivalent to the sums as stated int his application, in respect of benefits wrongfully availed by from the Corporate Debtor.

Company Appeal (AT) (Ins.) No. 699 of 2021 3 of 32 b. Pass appropriate directions/ orders in terms of Section 67 of the Code including for recovery/restoration of legitimate amounts due to the 'Corporate Debtor'.

c. Intimate IBBI for initiating a complaint to the Special Court in terms of Section 236(2) of the Code, if this Hon'ble Tribunal deems fit.

d. Impose such fine under section 70 and 71 of the Code upon the Respondents as this Hon'ble Tribunal may deem fit."

After hearing Counsel for the Parties and detailed examination, the

said I.A. was allowed by the 'Adjudicating Authority' by the 'impugned

order' dated 29.01.2021.

5. Aggrieved by the same, the 'Appellant' herein i.e. Shri Baiju Trading

and Investment Private Limited has preferred the present appeal filed

under Section 61 of the I & B Code, 2016.

6. Heard Counsel for the Parties and perused the records made

available, including cited judgments of the Hon'ble Supreme Court of India

and this 'Appellate Tribunal'.

7. As per the 'Appellant', they are engaged in the business of Non-

Banking Financial Services ('NBFC') and took loan/ financial assistance

from the 'Corporate Debtor'.

8. It is the case of 'Appellant', that they came to know that 'Respondent

No. 1' has moved an application under Section 66 of the I & B Code, 2016

against the 'Appellant' alleging fraudulent transaction between the

'Appellant' and the 'Corporate Debtor' involving an amount of Rs. 41.03 Company Appeal (AT) (Ins.) No. 699 of 2021 4 of 32 crores. The 'Adjudicating Authority' issued notice dated 15.09.2020 to the

'Appellant' and they filed their 'Reply/Written Submissions' before the

'Adjudicating Authority'. The 'Appellant' stated that they also pleaded

before the 'Adjudicating Authority' that the application was misconstrued

and without any substance, however, the 'Adjudicating Authority' admitted

the application of the 'Respondent No. 1', which has placed the 'Appellant'

in jeopardy.

9. The 'Appellant' submits that the 'Respondent No. 1' has not brought

out any supporting documentary evidence to establish that transactions

between the 'Appellant' and the 'Corporate Debtor' were fraudulent in

nature. The 'Appellant' further submits that they have availed financial

assistance to overcome their financial distress and therefore transactions

should have been treated as normal commercial transaction. The

'Appellant' also submits that after 16.05.2018, no transaction took place

between the 'Appellant' and the 'Corporate Debtor' and the outstanding

dues towards the 'Corporate Debtor' was pending for more than one year.

As per the 'Appellant', they admit receipt of the money which could not be

paid due to their own financial problems which were aggravated by

pandemic.

10. As per the 'Appellant', the transactions between the 'Appellant' and

the 'Corporate Debtor' cannot and should not be treated as a case of fraud

simply because of non-payment of dues. The 'Appellant' further alleges

that in addition to failure to establish alleged frauds by suitable

Company Appeal (AT) (Ins.) No. 699 of 2021 5 of 32 documentary evidence, the 'Respondent No. 1' also did not establish the

same by additional evidence/ investigation report like forensic audit etc.

11. It is the case of the 'Appellant' that they are distinct corporate entity

different from the 'Corporate Debtor' and were carrying on different

business and there was no relationship between them. In fact, only

transaction between the 'Appellant' and the 'Corporate Debtor' was duly

reflected in the ledger accounts of both the parties as a borrowing

transaction which should have been treated as normal commercial

transaction without any intention to defraud the 'Creditors' of the

'Corporate Debtor'. The 'Appellant' further alleged that no case of malafide

intention or wilful misconduct including collusion with the 'Corporate

Debtor' has been established by the 'Respondent No. 1' and therefore, the

'Adjudicating Authority' erred in allowing application against them under

Section 66 of the I & B Code, 2016.

12. The 'Appellant' emphasised that the basic parameters as stipulated

in Section 66 of the I & B Code, 2016 were not established and therefore it

was wrong on the part of the 'Adjudicating Authority' to allow the

application under Section 66 against them.

13. The 'Appellant' cited two judgements of the Hon'ble Supreme Court of

India in the matter of Svenska Handels Bunken vs. Indian Charge

Chrome and Ors. [(1994) 1 SCC 504] and Anil Rishi vs. Gurbaksh Singh

[(2006) SCC 558]. according to which the Apex Court held that the

allegations of fraud are grave in nature and cannot be ipsi dixit of the

Company Appeal (AT) (Ins.) No. 699 of 2021 6 of 32 person raising such allegations and such allegations of fraud cannot be

merely on suspicion but need to be pleaded with strong evidence. The

'Appellant' submits that contrary to these judgments, the 'Adjudicating

Authority' accepted the application of 'Respondent No. 1'.

14. The 'Appellant' amplified that there are three milestones in Section

66 which are required to be met before admission of an application under

Section 66. First, there should be clear 'opinion' which should be followed

by suitable 'determination' as second milestone and finally there should

be concrete 'finding' as final milestone. As per the 'Appellant' these

milestones were not met herewith. The 'Appellant' further submitted that

in addition the Regulation 35A of the IBBI (Insolvency Resolution Process

for Corporate Person) Regulations, 2016 has also not been complied with

and no mens-rea was established and therefore the 'impugned order' was

illegal.

The 'Appellant' referred to Para 16 of the 'impugned order' dated

29.01.2021 wherein in the findings, the 'Adjudicating Authority' termed the

transaction as 'suspicious transaction'. Similarly, in Para 17 the

'Adjudicating Authority' has noted that the 'Appellant' is a principal

beneficiary of 'fraudulent transaction'. The 'Appellant' submitted that

these findings are without application of mind and without examining or

establishing transaction to be fraudulent and therefore on this ground

alone the 'impugned order' need to be set aside.

Company Appeal (AT) (Ins.) No. 699 of 2021 7 of 32

15. The 'Appellant' argued that 'Respondent No. 1' purely on assumption

basis has classified and treated transaction of Rs. 41.03 crores between the

'Appellant' and the 'Corporate Debtor' of fraudulent in nature, which was

also wrongly accepted by the 'Adjudicating Authority' and therefore cannot

sustain and need to be set aside.

16. The 'Appellant' stated that he is aggrieved by the impugned order'

and reiterated that the 'Appellant' herein was a borrower of the 'Corporate

Debtor' which in no way can be construed as a fraudulent transaction. As

per the 'Appellant' the borrowing by the 'Appellant' was pertaining to a

regular business transaction between the 'Appellant' and the 'Corporate

Debtor' which has been treated as a fraudulent transaction by 'Respondent

No. 1'.

17. The 'Appellant' stated that merely 'writing off' the debt of Rs. 41.03.

crores owed by the 'Appellant' to the 'Corporate Debtor', the 'Corporate

Debtor' does not harm himself and the 'Corporate Debtor' has got all the

right to recover the money in accordance with the law.

18. As per the 'Respondent Nos. 2 & 3', all the transactions in the books

of the 'Corporate Debtor' with the 'Appellant' are official transactions and

confirmed by both the parties, hence, the question of such transactions

between the 'Corporate Debtor' and the 'Appellant' being fraudulent does

not arise. The Application filed by the 'Resolution Professional' was based

on assumptions and presumptions and was not supported by any verifiable

evidence.

Company Appeal (AT) (Ins.) No. 699 of 2021 8 of 32

19. As per 'Respondent Nos. 2 & 3', the 'Appellant' informed about its

inability that the 'Appellant' was not in a position to refund the balance

amount as it was itself under financial stress. Hence, the 'Corporate

Debtor' had written of the balance in the books of accounts believing the

amount if received in future will be considered as profit of the 'Corporate

Debtor' and meanwhile, DRI problem started in May 2019 and the 'CIRP'

commenced on 13.11.2019. The amount was balance with the Appellant for

more than 1 year prior to the commencement of 'CIRP' and there were no

transaction during the 'CIRP'. This clearly establish that there was no

fraudulent intent.

20. The Respondent Nos. 2 & 3 also stated that the Financial Reports of

the 'Corporate Debtor' were audited by statutory auditor upto Financial

Year 2017-18 which establishes bonafide transactions in the Company. All

the transactions were genuine and took place in a bonafide manner.

Moreover, these transactions are also reflected in Appellant's books of

accounts and acknowledged in their Audited Financial Statement's and

Income Tax Returns. Hence, the alleged transactions don't fall under the

provisions of Section 66 of the I & B Code, 2016. The 'Respondent Nos. 2 &

3' further stated that all the transactions, between the 'Appellant' and the

'Corporate Debtor' were entered into in good faith and during the ordinary

course of business.

21. Concluding arguments, the 'Appellant' urged this 'Appellate Tribunal'

to allow the appeal and set aside the 'impugned order' dated 29.01.2021.

Company Appeal (AT) (Ins.) No. 699 of 2021 9 of 32

22. The 'Respondent No. 1' vehemently opposed all the averments made

by the 'Appellant' as misleading, mischievous, devoid of any merit and pure

abuse of process of law and therefore the 'Appeal' need to be dismissed.

23. Per-contra, the 'Corporate Debtor' was in business of trading in

Bullions' i.e. importing and exporting gold and sale/ purchase of gold in

local markets. The 'Respondent No. 1' submitted that subsequent to

initiation of the 'CIRP', he detected certain bogus and sham transactions.

The 'Corporate Debtor' was also raided by 'Department of Revenue

Intelligence' ('DRI') and operation of the 'Corporate Debtor' ceased from May

2019.

24. The 'Respondent No. 1' amplified that the 'Corporate Debtor' was in

Bullion business and not in business of lending money (short term or long

term) and in fact as per general business practice of Bullion market, they

do not offer credit facility even to the purchaser of gold item. The

'Respondent No. 1' further submitted that, amount owed by the 'Appellant'

to the 'Corporate Debtor' was long over due and admittedly the last

transaction between the parties was on 16.05.2018.

25. The 'Respondent No. 1' emphasised that these transactions were

completely fraudulent made in connivance between the 'Appellant' and

'Respondent Nos. 2 & 3' who are Suspended Directors of the 'Corporate

Debtor' by manipulating ledgers of both the parties i.e. the 'Appellant' and

the 'Corporate Debtor'. The 'Respondent No. 1' stated that the entire

money owed by the 'Appellant' to the 'Corporate Debtor' was 'written off' by

Company Appeal (AT) (Ins.) No. 699 of 2021 10 of 32 a simple journal entry 'Sundry Balances W/off'. The 'Respondent No. 1'

further stated that just one month prior to the 'Corporate Debtor' was

raided by the 'DRI', this huge amount was 'written off' which is clearly a

fraudulent transaction to favour the 'Appellant' in connivance to reap the

illegal benefits arising of writing off Rs. 41.03 crores and done with intent

to defraud the 'Creditors' of the 'Corporate Debtor'. The 'Respondent No. 1'

pointed out that this was done with clear knowledge of all concerned and

therefore all ingredients of Section 66 of the I & B Code, 2016 were met

with and the 'Adjudicating Authority' gave its verdict in favour of

'Respondent No. 1' by a reasoned and speaking 'order'.

26. The 'Respondent No. 1' further submitted that the 'Appellant' has not

disputed his liability of Rs. 41.03. crores towards the 'Corporate Debtor'

and has termed this transaction as 'Long Term Borrowing (Loan)' and 'not

credit from trading activities'. This admission of the 'Appellant' was made

before the 'Adjudicating Authority' in Para 6(b) of the 'Reply' filed by the

'Appellant' wherein it has been recorded that 'the Respondent says that the

amount disbursed as long term borrowings (loan) by the Corporate Debtor

and not credit for trading activities'. The 'Respondent No. 1' assailed the

conduct of the 'Appellant' who has now changed his stand in rejoinder

before this 'Appellate Tribunal' and stated that money pertains to 'regular

business transactions' which is evident from Para 5 of the 'Rejoinder' which

reads as "the borrowing by the Appellant was pertaining to a regular

business transaction between the Appellant and the Corporate which had

Company Appeal (AT) (Ins.) No. 699 of 2021 11 of 32 been mislabelled as a fraudulent transaction by the Respondent No. 1 in I.A.

No. 1125 of 2020 in C.P. No. 2556/I&B/MB/2019.

27. The 'Respondent No. 1' elaborated that alleged loan of Rs. 41.03

crores was given by the 'Corporate Debtor' to the 'Appellant' whereas the

'Corporate Debtor' was functioning as a Gold Bullion Trader and not in

business of lending money. The 'Respondent No. 1' further alleged that by

no stretch of imagination such huge amount can be written off without any

reasons and therefore cannot be treated anything other than the fraudulent

and sham transaction.

28. The 'Respondent No. 1' also referred to the 'impugned order' dated

29.01.2021 which mentioned that the I & B Code, 2016 does not require

pre-existence of mens-rea as wrongly pleaded by the 'Appellant'. The

'Respondent No. 1' further denied the allegation that Regulation 35A of the

IBBI (Insolvency Resolution Process for Corporate Person) Regulations,

2016 was not complied with. The 'Respondent No. 1' submitted that it only

requires the 'Resolution Professional' to file such an application once the

'Resolution Professional' forms an 'opinion' regarding the existence of such

prohibited transactions and does not require the determination of any

mens rea on the part of the parties.

29. The 'Respondent No. 1' submitted that the 'Appellant' admittedly

owed sum of Rs. 41.03 crores to the 'Corporate Debtor' and this entire

admitted dues owed by the 'Appellant' to the 'Corporate Debtor' was

fraudulently written off by the erstwhile directors (i.e. Respondent Nos. 2 &

Company Appeal (AT) (Ins.) No. 699 of 2021 12 of 32

3) of the 'Corporate Debtor'. The 'Respondent No. 1' further submitted that

as the admitted dues have been retained by the 'Appellant', it is clear that

the 'Appellant' is the principal beneficiary of the fraudulent write off of the

admitted dues owed to the 'Corporate Debtor' by the 'Appellant', therefore,

the 'Adjudicating Authority' has correctly classified these transaction as

fraudulent transaction under Section 66.

30. The 'Respondent No. 1' cited judgement of the Hon'ble Supreme

Court of India on the issue of fraud in the matter of Ram Preeti Yadav vs.

U.P. Board of High School and Intermediate Education, [(2003) 8 SCC

311], wherein it has been held that as sole beneficiary of the fraud must be

presumed that he was party thereto.

31. The 'Respondent No. 1' stated that it is an admitted position that the

Appellant owes Rs. 41.03 crore to the 'Corporate Debtor', which has

remained unpaid till date. The Appellant has admitted in the appeal that

the last transaction made between the Appellant and the 'Corporate Debtor'

was dated 16.05.2018, and that the amount of Rs. 41.03 crore has

remained unpaid since that date till the date of commencement of 'CIRP',

i.e., 13.11.2019. Hence, the 'Appellant' cannot at all be aggrieved by the

order of the 'Adjudicating Authority' which effectively directs contribution

towards dues that are admittedly owed by it to the 'Corporate Debtor'. This

would also assist in the process of liquidation since it would increase the

pool of assets available for liquidation, which would benefit all

stakeholders.

Company Appeal (AT) (Ins.) No. 699 of 2021 13 of 32

32. The 'Respondent No. 1' concluded his pleadings with request to

dismiss the present appeal in view that consent transactions have been

clearly entered into clandestinely with an intent to defraud the creditors

knowing well the nature of transaction and therefore meeting all the

ingredients of Section 66 of the I & B Code, 2016.

33. In order to examine issues raised in the 'appeal', it will be desirable

to look into the provisions of Section 66 r/w Section 26 of the I & B Code,

2016 and Regulation 35A of the IBBI (Insolvency Resolution Process for

Corporate Person) Regulations, 2016. These are as under:-

"26. Application for avoidance of transactions not to affect proceedings. -

The filing of an avoidance application under clause (j) of sub-section (2) of section 25 by the resolution professional shall not affect the proceedings of the corporate insolvency resolution process."

"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.

Company Appeal (AT) (Ins.) No. 699 of 2021 14 of 32 (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 the 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.

[(3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10A.]

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 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."

Company Appeal (AT) (Ins.) No. 699 of 2021 15 of 32 Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Person) Regulations, 2016:-

"[35A. Preferential and other transactions.

(1) On or before the seventy-fifth day of the insolvency commencement date, the resolution professional shall form an opinion whether the corporate debtor has been subjected to any transaction covered under sections 43, 45, 50 or 66.

(2) Where the resolution professional is of the opinion that the corporate debtor has been subjected to any transactions covered under sections 43, 45, 50 or 66, he shall make a determination on or before the one hundred and fifteenth day of the insolvency commencement date [***].

(3) Where the resolution professional makes a determination under sub-regulation (2), he shall apply to the Adjudicating Authority for appropriate relief on or before the one hundred and thirty-fifth day of the insolvency commencement date.]"

(emphasis supplied)

34. This 'Appellate Tribunal' notes from the findings in the 'impugned

order' in this regard which are reproduced below for the sake of

Convenience :

21. Therefore, the Bench is beset that 4 sets of Ledger account as appearing in the books of accounts of i) Corporate Debtor collected from the DRI in May, 2019 where it shows as Rs. 41.24 crores, ii) ledger account produced by R1 where it shows the same amount as

Company Appeal (AT) (Ins.) No. 699 of 2021 16 of 32 unpaid and ii) ledger account produced by R2 and R3 where the due amount is about Rs 41.03 crore but the same has been written off by making a write off entry and

iv) balance sheet as submitted by the R2 and R3 (the suspended directors) as part of their reply in a separate I.A. No. 1212 of 2020 where R2 and R3 have disclosed that there is an outstanding balance from of R1 of Rs.

41.24 crore as receivable by the Corporate Debtor from."

"24. The Bench is aware that section 66 (1) of IBC imposes a liability on any person who knowingly becomes party in carrying out the business with a dishonest intent to defraud the creditors have to make a contribution to the assets of the Company. Therefore, the Bench is of the considered view that the R1 i.e. Baiju Trading investment Private Limited who is the principal beneficiary of this fraudulent transaction has to return at least Rs. 41.03 crores into the account of Corporate Debtor Company. The Bench is also of the view that R2 and R3 are the Suspended directors of the Corporate Debtor company and are covered undersection 66 (2) of the IBC with respect to their misconduct which makes them liable to make such contribution to the assets of the Corporate Debtor company. ...

..25. The Bench concludes that it is clear from the above that R1is fairly covered under provisions of section 66 (1) and R2and R3 are covered under section 66(2)(a) and 66(2)(b) of the Code. Since, the R1 is the principal beneficiary of this transaction and has clearly admitted to the dues owned tothe Corporate Debtor, the Bench directs that an amount ofRs.41.03 crore be remitted back by R1

Company Appeal (AT) (Ins.) No. 699 of 2021 17 of 32 into the bank account of the Corporate Debtor company within 7 days from the pronouncement of this order."

(emphasis supplied)

35. This 'Appellate Tribunal' notes 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.

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.

37. We also note that, similarly, as per Regulation 35A of the IBBI

(Insolvency Resolution Process for Corporate Person) Regulations, 2016,

the Resolution Professional is required to form an 'opinion' whether the

'Corporate Debtor' has been subjected to any transaction covered under

Company Appeal (AT) (Ins.) No. 699 of 2021 18 of 32 Sections 43, 45, 50 & 66 of the I & B Code, 2016 and where such opinion

has been formed the 'Resolution Applicant' shall make a 'determination'

and subsequently is required to 'apply' to the 'Adjudicating Authority' for

appropriate relief.

38. 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. It has also been brought to our notice that as per normal business

practice in gold business, the transaction and dealing occur on spot

payment basis and in such business there is hardly any scope for lending

money. It also transpires that the bullion/ gold business is conducted on

'thin margins' and cash flow of the such business is required to be

regulated/ maintained strictly in order to sustain and for growth of the

business by way of purchase of gold on continuous basis. In this

background, 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.

39. We also observe that the money was admittedly long overdue and as

per the 'Appellant' it was overdue for more than one year. From the

averments made during the hearing as well as records available, it

transpires that the 'Appellant' made two different and contradictory

Company Appeal (AT) (Ins.) No. 699 of 2021 19 of 32 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'.

The very fact that the 'Appellant' was 'NBFC' and the 'Corporate

Debtor' was in the business of bullion/ gold, therefore, there cannot be

such transactions in the normal course of business. Similarly, there is no

reason for 'Corporate Debtor' to give such loan without any basis, reason

and substance and that too, apparently as brought out, without suitable

incentives or returns for time value of money.

40. Pointed queries were put up to the 'Appellant' by this 'Appellate

Tribunal' regarding the circumstances under which the 'Appellant' took this

loan or financial assistance in any form including so-called "regular

business transaction", underlying agreement for the same, detailed terms

Company Appeal (AT) (Ins.) No. 699 of 2021 20 of 32 and conditions of such understanding/ loan, time value of the money in

terms of interest payable/ incentives to the 'Corporate Debtor', whether

such loan/ financial assistance was backed by suitable resolutions by both

parties 'Appellant' and 'Corporate Debtor' being separate corporate entities,

whether such agreement was registered. This 'Appellate Tribunal' observed

that there were no answers from the 'Appellant' on such specific queries.

The 'Appellant's only defence to these queries was that these were normal

commercial transaction done through proper banking channels and

payments were made/received through RTGS. It is further the case of the

'Appellant' that these were recorded in the ledger accounts and therefore

cannot be treated as fraudulent transaction. On the face of it, the non-

discloser and evasive replies on the part of the 'Appellant' on pointed

queries raises adequate suspicion and genuine doubts about the

transaction and prima facie cannot find fault in the 'impugned order' on

this account.

41. On a serious note, this 'Appellate Tribunal' observes that in 2019

such huge loan was all of a sudden written off by the 'Respondent Nos. 2 &

3' from the books of the 'Corporate Debtor' and evidently the 'Appellant' is

the principal/sole beneficiary. The plea of the 'Appellant' made before us

that it is a 'Corporate Debtor' who has written off and not by the 'Appellant'

and therefore the 'Appellant' should not be held liable for fraudulent

transactions under Section 66 is not convincing at all. It is a matter of

common prudence that if the money is written off from the books of the

Company Appeal (AT) (Ins.) No. 699 of 2021 21 of 32 'Corporate Debtor', there is hardly any chance for the management/

successor/ Resolution Professional to recover the same from the

'Appellant'. There is no explanation which we can take into account either

from the submissions of the 'Appellant' or Respondent Nos. 2 & 3 as to why

such write off was necessary and circumstances which led to this write off.

Such transactions of giving huge amount to unconnected/unrelated parties

and apparently without any security interest or bank guarantee as

collateral security in favour of the 'Corporate Debtor' and subsequently

'writing off' the same from the book can only be termed nothing else but as

fraudulent transactions done with the intent to defraud the creditors of the

'Corporate Debtor'. From the averments as well from the records made

available, this 'Appellate Tribunal' tend to agree with the 'Adjudicating

Authority' that the nature of the transactions are covered squarely under

Section 66 of the I & B Code, 2016.

42. This 'Appellate Tribunal' also takes into account that the 'Respondent

No. 1' made serious attempts in soliciting the information from the

Appellant as well as from the Respondent Nos. 2 & 3 by sending repeated

emails by asking for ledger accounts. As per 'Respondent No. 1', the e-mail

to the 'Appellant' were sent on 12.12.2019, 14.12.2019, 19.12.2019,

31.12.2019 & 07.01.2020, however, the 'Respondent No. 1' did not receive

any response. Subsequently, the Respondent No. 1 also addressed a letter

dated 27.02.2020 to the 'Appellant' to submit copies of ledger accounts and

also confirm to the balances upto insolvency commencement date, which

Company Appeal (AT) (Ins.) No. 699 of 2021 22 of 32 was also not replied by the 'Appellant'. All these also establishes the

overall eco system of non-cooperation by the 'Appellant' to the 'Respondent

No. 1' and makes the credentials of the 'Appellant' doubtful and the

transactions as fraudulent.

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 beneficiary of the said fraud and it, as much, must be presumed that he was a party thereto.:

(emphasis supplied)

44. 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.

45. This 'Appellate Tribunal' also examined the issue raised by the

'Appellant' regarding outside investigation/ forensic audit not done by the

'Respondent No. 1' and therefore as per the 'Appellant', their transaction

Company Appeal (AT) (Ins.) No. 699 of 2021 23 of 32 cannot be clarified as fraudulent transaction. This 'Appellate Tribunal'

notes that this aspect was suitably decided by this 'Appellate Tribunal'

earlier in case of Nitin Bharal, Ex-Director &Ors. vs. Stockflow Express

Private Limited [2022 SCC OnLine NCLAT 179]. The relevant paras read

as under:-

"21. Now we address ourselves to the contention of the Appellant Counsel that the amounts were written off as bad debts only because they could not be recovered. The Adjudicating Authority after discussing in detail the Bank Account Statements (for the sake of brevity, the same is not being reproduced here) of Yes Bank, ICICI Bank and Axis Bank has observed as follows:

"27. Now coming to the third point, 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. We further notice that there is another Creditor as per the averments made in the Application that is respondent no. 10 RJ Logistics Services LLP with Mr. Rohit Jasoria as the designated partner and RJ brother with Mr. Rohit

Company Appeal (AT) (Ins.) No. 699 of 2021

24 of 32 Jasoria owes the debt of Rs. 10,71,250/- and Rs.

13,06,702/- respectively and their debts are also written off. The respondent No. 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, we are of the considered view these transactions also comes under the category of the fraudulent transactions.

22. A perusal of the scanned copy of the Bank Statement evidences that the Adjudicating Authority has rightly concluded that there are no reasons given for how an amount of Rs. 42,33,304/- has been settled for a mere payment of Rs. 3 Lakhs/-. This fraudulent transaction took place during the time the Appellants were Directors of the 'Corporate Debtor' and squarely falls within the ambit of Section 66 of the Code.

23. Keeping in view, the copy of the Bank Statements, amounts written off as bad debts during the Financial Year when the Appellant/Promoters were the Directors, the circuitous sale of shares, this Tribunal is of the earnest view that the contention of the Learned Counsel for the Appellant that there was no Transaction Audit and hence the Adjudicating Authority ought not to have given a finding of fraudulent transaction under Section 66 of the Code is unsustainable. If the IRP/RP has prima facie suspicion of any fraudulent transactions, as defined under

Company Appeal (AT) (Ins.) No. 699 of 2021 25 of 32 the Code, have a recourse to approach the Adjudicating Authority for necessary action. At the cost of repetition, it is specifically averred by the IRP that there was no cooperation from the Appellant/Promoters and hence an Affidavit was filed by him with a detailed analysis. We find merit in the submission that not having cooperated in giving information to the IRP, the contention of the Appellants that the Adjudicating Authority has in the absence of any Audit Report, has given these findings, which cannot be relied upon, has no legs to stand. To reiterate, the debts written off to defraud the Creditors, the cash transaction post their resignation evidencing their financial control in the affairs of the 'Corporate Debtor', clearly establish that they are 'fraudulent transactions' done with a wilful intention of financial gain at the cost of negatively effecting the Creditors.

(emphasis supplied)

46. This 'Appellate Tribunal' is aware that above judgment has been

challenged in the Hon'ble Supreme Court of India in Civil Appeal No.

4496/2022 and notice was issued but no stay was granted. This read as

under:-

"Issue notice on the civil appeal as well as on the application for stay returnable in one week.

Dasti service in addition to ordinary process is permitted."

We tend to agree with above that Forensic Audit is not mandatory in

such cases and therefore do not accept pleadings of the 'Appellant' on this

aspect.

Company Appeal (AT) (Ins.) No. 699 of 2021 26 of 32

47. This 'Appellate Tribunal' notes from submissions/ pleadings of the

'Respondent No. 1' that a similar appeal was dismissed by this 'Appellate

Tribunal' in CA (AT) (Ins.) No. 95 of 2021 whereas same set of

'Respondents' were made parties as in present appeal by one another the

'Appellant' therein - 'Tridhaatu Kirti Developers LLP' who was held

responsible under Section 66 of the I & B Code, 2016. The relevant paras

read as under:-

"2. The appellant is aggrieved with the direction of the Adjudicating Authority to direct the appellant to pay an amount of Rs.8.95 crores outstanding in the ledger of the Corporate Debtor (hereinafter referred to as 'CD') to the CD and he is further aggrieved with the feeling of the Bench for defrauding the Corporate Debtor (CD) for carrying out business with dishonest intents to defraud creditors and, therefore, has to make the contribution to the assets of the CD.

3. To substantiate his claim the appellant has provided list of dates and events to prove that the Resolution Professional in the garb of the said application has attempted to unlawfully recover the money which are not even due and outstanding. The appellant has also taken the stand that mere noting of the transaction in the ledger account cannot be the basis to decide that the said amount was outstanding and liable to be repaid. As also the outstanding amount of the CD was forfeited by the appellant in terms of mutual agreement that took place between the two parties which has never been questioned or challenged. There is absence of any material evidence of

Company Appeal (AT) (Ins.) No. 699 of 2021 27 of 32 fraud against the appellant and the Resolution Professional has failed to substantiate his claim for proving fraud done by the appellant.

4. The Learned counsel for the appellant took us to the provisions of Section 66 of the Code and made an emphatic attempt to prove that the Resolution Professional has failed to establish any fraudulent or wrongful transaction. It was submitted by learned Counsel that the provisions of Section 66 (1) and 66(2) are against the director and partners of the CD and not against the third party. Section 66 of the Code is not a recovery provision to seek repayment of loan and has cited a few judgements as numerated hereunder to substantiate his claim that fraud must be not only pleaded but also be pleaded alongwith necessary evidence.

5. It was also attempted to be explained by the learned counsel of the appellant that there is no case against the appellant on fact. Learned counsel for the appellant submitted that the material facts pertaining to the dispute are briefly summarized as under:

a) On 13.11.2019, CIRP was initiated against one Royal Refinery Pvt Ltd, where Mr. Nandkishore V Despande was appointed as the Resolution Professional. The CD is now under liquidation, which order was passed during the pendency of this Appeal.

b) The Appellant is a real estate developer who intended to develop a society by the name of Kirti CHSL, in Santacruz Mumbai. The Appellant was given loans by the CD in the year 2017 much prior to any CIRP being initiated. It is pertinent to highlight that the loans were received by way

Company Appeal (AT) (Ins.) No. 699 of 2021 28 of 32 of bank transfers which are reflected in the ledger accounts maintained by both the CD and the Appellant.

Part of these loans were repaid from time to time.

c) The Appellant has no relation with the CD or its business. At no point in time has any allegation been made to that effectthat the Appellant has colluded with the CD either by RP or by any investigating agency.

d) In the year 2018, the Appellant was not being in a position to repay the loan, requested the CD to convert into the loan into an investment into the project, which was agreed by the CD. The CD agreed to invest a sum of Rs.20 crores with an understanding that the amount shall stand forfeited on failure of investment. Accordingly, on failure the amount stood forfeited.

11. We have gone through the pleading of the parties, submissions made by the learned counsel of Respondent and appellant and are having following observations:

i) It is not in dispute that the appellant and the respondent company are not a related party.

ii) It is also not in dispute that an amount of Rs.8.95 crores is due and outstanding for recovery from the Apellant to the CD as both the parties agreeing that this is existing in their Balance Sheet as per accounting norms.

iii) It is the law laid down that fraud unravels of acts. In some way it is a deception to gain by another loss.

iv) It is also well settled law that the establishment of fraudulent conduct does not require the same standard of proof as in criminal trial. It is not necessary that each instance of fund being siphoned needs to be established

Company Appeal (AT) (Ins.) No. 699 of 2021 29 of 32 from inception to the end and even one conduct of director of CD can depict an act of fraud.

15. It is very much clear from the above that it is the intention to defraud creditors at that stage Section 66 is applicable. This section empowers the Adjudicating Authority to pass an order for recovery from such fraudulent parties as contribution to the assets of the CD. The Hon'ble Apex Court in the case of Phoenix A.R.C. Vs. Spade Financial Services (2021) 3 SCC 475 vide para 51 as tabulated below has identified the applicability of this provision

"51. The IBC has made provisions for identifying, annulling or disregarding "avoidable transactions"

which distressed companies may have undertaken to hamper recovery of creditors in the event of the initiation of CIRP. Such avoid able transactions include:

i) Preferential transactions under Section 43 IBC;

ii) Undervalued transactions under Section 45(2) IBC;

iii) Transactions defrauding creditors under Section 49 IBC; and

iv) Extortionate transactions under Section 50 IBC The IBC recognises that for the success of an insolvency regime, the real nature of the transactions has to be unearthed in order to prevent any person from taking undue benefit of its provisions to the detriment of the rights of legitimate creditors."

16. In view of the above stated fact and circumstances we are constrained to uphold the hand of

Company Appeal (AT) (Ins.) No. 699 of 2021 30 of 32 the Adjudicating Authority and is not able to agree with the Appellant."

(emphasis supplied)

48. We find above finding of this 'Appellate Tribunal' as seen above as

directly connected and relevant and therefore need to be taken into

account. Incidentally, this has attained finality as it was challenged in the

Hon'ble Supreme Court of India vide Civil Appeal No. 914 of 2023 and

dismissed.

"Heard learned counsel for the appellant.

We find no merit in this appeal. Admission is refused and the civil appeal is, accordingly, dismissed."

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.

51. In view of above, detailed qualitative and quantitative examination

along with cited judgments of the Hon'ble Supreme Court of India and this

Company Appeal (AT) (Ins.) No. 699 of 2021 31 of 32 'Appellate Tribunal' own earlier judgments and legal provisions of the I & B

Code, 2016, this 'Appellate Tribunal' comes to definitive conclusion that

there is no error in the 'impugned order' dated 29.01.2021. The 'Appeal',

devoid of any merit is dismissed. No cost. The 'Interlocutory

Application(s)', if any, are closed.

[Justice Rakesh Kumar Jain] Member (Judicial)

[Naresh Salecha] Member (Technical) Simran

Company Appeal (AT) (Ins.) No. 699 of 2021 32 of 32