Bank Of India vs Mayur Balubhai Shah & Ors.

Per: Bench

The IA No.1007 of 2023 was filed on 07.09.2023 by the Applicant (earlier was filed by the Resolution Professional of the Corporate Debtor), vide Inward Dairy No. 1550 by Bank of India under Section 66 of the Insolvency and Bankruptcy Code, 2016 (hereinafter as, “the Code”) against the Erstwhile Management of the Corporate Debtor seeking following reliefs:-

a. To declare the above said Transactions for Amount of INR 16.65 Crores as Fraudulent Transaction in terms of Section 66 of the Code, and direct Respondents to pay an amount of INR 16.65 Crores to the Corporate Debtor;

b. Any other order which this Hon’ble Tribunal may find fit in the facts and circumstances of the present case.

The Applicant has placed the facts through the I.A. in the following manner: -

It is submitted that the Corporate Debtor, Maximaa Systems Limited, is a listed public company incorporated on 3rd August 1990 under the provisions of the Companies Act, 1956, bearing CIN No. L27100GJ1990PLC014129. The Corporate Debtor is engaged in the business of manufacturing of basic iron and steel. The registered office of the Corporate Debtor is situated at B-1, Yashkamal, Tithal Road, Valsad – 396001, India.

It is submitted that this National Company Law Tribunal, Ahmedabad Bench (“NCLT”) was pleased to admit the application filed by the Corporate Applicant under Section 10 of the Insolvency and Bankruptcy Code, 2016 (“Code”) for initiation of the Corporate Insolvency Resolution Process (“CIRP”) vide order dated 28th November 2022 (“CIRP Order”). Further, this Hon’ble Tribunal appointed Mr. Ajit Gyanchand Jain, bearing Registration No. IBBI/IPA-001/IP-P00368/2017-18/10625, as the Interim Resolution Professional (“IRP”) for the Corporate Applicant. A copy of the admission order dated 28th November 2022 is annexed hereto and marked as “Exhibit – 1”.

It is submitted that upon receipt of the CIRP Order dated 28th November 2022, the Interim Resolution Professional, in compliance with Regulation 6 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”), made a Public Announcement in Form A on 3rd December 2022, inviting claims from the creditors. The claims were received, CoC was constituted and the Interim Resolution Professional filed a report certifying the constitution of the Committee of Creditors along with proof of claims before this Tribunal on 21st December 2022. Later, Mr. Kamal Kishore Gurnani was appointed as the Resolution Professional.

It is submitted that the 2nd meeting of the Committee of Creditors (“CoC”) was held on 1st February 2023, wherein the Interim Resolution Professional apprised the CoC of the CIRP developments, including publication of Form G for invitation of Expression of Interest and appointment of professionals; the CoC, with 100% voting share, approved the contents of Form G and EOI, ratified the CIRP costs incurred till date, and approved the fees of registered valuers as CIRP costs, while the issue of appointment of Transaction Auditor was deferred for consideration in the subsequent CoC meeting; a copy of the minutes of the said meeting is annexed hereto and marked as “Exhibit – 4”.

It is submitted that the 3rd meeting of the Committee of Creditors (“CoC”) was held on 17th February 2023, wherein the Resolution Professional (“RP”) apprised the members of his appointment pursuant to order dated 1st February 2023, received on 4th February 2023, and proposed the appointment of a Transaction Auditor, placing quotations received from various auditors for consideration; thereafter, the CoC, with 100% voting share, approved the appointment of M/s. Raju & Prasad as the Transaction Auditor to examine and report transactions in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016 for a period of 4.8 years prior to the Insolvency Commencement Date, i.e., from 1st April 2018 to 27th November 2022.

It is submitted that pursuant to its appointment, the Transaction Auditor conducted a transaction audit for the period commencing from 1st April 2018 to 27th November 2022 (“Transaction Audit Period”) with a view to identify Preferential, Undervalued, Extortionate, Fraudulent and other avoidable transactions in terms of the provisions of the Insolvency and Bankruptcy Code, 2016, and thereafter submitted its Transaction Audit Report dated 3rd July 2023 to the Applicant; a copy of the said report is annexed hereto and marked as “Exhibit – 6”.

It is submitted that based on the findings and expert opinion of the Transaction Auditor in the Transaction Audit Report, the Resolution Professional formed an opinion that certain transactions were preferential and fraudulent in nature; accordingly, the present Application is being filed by the Resolution Professional before this Tribunal under Section 66 of the Insolvency and Bankruptcy Code, 2016, seeking appropriate reliefs in respect of such fraudulent transactions, which are detailed hereinafter.

A. Subsidiary Company (direct) 1. Proyurveda Life Science Limited B. Enterprises in which key management personnel are interested (directly or indirectly) 1. Essenza Life Science Limited 2. Maximaa Storage System LLP 3. Maximus Storage Solution Private Limited 4. Mapra Furniture Private Limited 5. Essenza Nutrition Private Limited

Non current Financial Asset- Investment for FY 2018-19:

Non current Financial Asset- Investment for FY 2019-20:

It is submitted that the Corporate Debtor had sold stocks/materials to its related parties, namely M/s Essenzaa Nutrition Private Limited and M/s Proyurveda Lifescience Private Limited, at significantly lower values ranging between 50% to 75% as compared to the prices charged to other wholesale parties; the details of such transactions are set out herein below:

It is further submitted that the aforesaid materials/stocks having an aggregate value of INR 12.47 Crores were sold for a gross consideration of only INR 1.80 Crores, resulting in substantial losses to the Corporate Debtor, as the discounts were extended on the cost price rather than the prevailing market price; the detailed working of the same is annexed as Annexure 1 to the Transaction Audit Report, and a screenshot of the relevant tally entries evidencing such transactions is set out herein below.

It is submitted that as per the books of accounts of the Storage Division of the Corporate Debtor, sales amounting to INR 14.99 Crores, constituting approximately 99% of the total sales, were made to Maximus Storage Solutions Private Limited during the period from April 2018 to October 2019; the details of such transactions are set out herein below:

The above materials having values of INR 16.42 Crores has been sold as lesser value mainly to Maximus Storage Solutions Private Limited (related entity) for INR 14.99 Crores.

Screenshot of the tally entries for above mentioned transactions are attached as below:

Screenshot of the tally entries for above mentioned transactions are attached as below:

U L Opening Balance 45,244.27 36,20,500.00

Thus, in view of the aforesaid transactions, it is submitted that funds have been siphoned off from the Corporate Debtor under false pretext, without any prior approvals or board resolutions.

Accordingly, the said transactions demonstrate the malafide intent of the erstwhile management to defraud the creditors of the Corporate Debtor and squarely fall within the ambit of Section 66 of the Code.

The details of the major parties involve in the Trade Receivables as available are as below:

Thus, the aforesaid transactions are deeply prejudicial to the interest of the creditors of the Company and have indeed already caused severe harm and injury to the creditors at large.

It is submitted by the Applicant that the aforesaid transactions are highly suspicious and, based on the limited records available with the Transaction Auditor, squarely fall within the ambit of Section 66 of the Code.

It is further submitted that the said transactions appear to have been carried out with an intent to defraud the creditors of the Corporate Debtor, and the Respondents have failed in discharging their fiduciary duties towards the Company.

In view of the above, and in order to safeguard the interests of the creditors (including financial creditors), it is humbly prayed that this Tribunal be pleased to grant the reliefs as sought. The present application is bonafide and in the interest of justice.

The Respondent No. 1 and 2 filed Affidavit in Reply on 23.10.2023 vide Inward Diary No. D4159 denying various averments made in the Interlocutory Application. The contentions of the Respondent No. 1 & 2 are mentioned hereunder:-

The present Interlocutory Application has been filed by the Resolution Professional under Section 66 of the Insolvency and Bankruptcy Code, 2016, seeking to report fraudulent/wrongful transactions and to obtain appropriate reliefs against the Respondents herein. 3.2 The present IA was filed on 23.08.2023 and registered on 14.09.2023, as per the records available on the e-filing portal of the NCLT. The matter was first listed before the Bench on 22.09.2023, vide which directions were issued for issuance of notice to the Respondents to file their reply. 3.3 It is humbly submitted that the Respondents have filed two separate applications under Section 94(1) of the Insolvency and Bankruptcy Code, 2016 for personal insolvency before the Hon'ble NCLT, Mumbai Bench. 3.4 Respondent No. 1 has filed C.P. (IB) No. 564(MB)/2023 before Court-II, filed on 05.05.2023 and registered on 04.07.2023. Respondent No. 2 has filed C.P. (IB) No. 562(MB)/2023 before Court-V, filed on 05.05.2023 and registered on 04.07.2023. Copies of the first orders dated 07.07.2023 in both matters are annexed as Annexure ‘A’ and Annexure ‘B’ respectively.

It is further submitted that pursuant to Section 96(1) of the Code, an interim moratorium has commenced from the date of filing of the said applications, whereby all legal actions or proceedings in respect of any debt are deemed to have been stayed. The relevant provision is reproduced herein below for ready reference.

In view of the aforesaid legal position, upon filing of applications by the Respondents under Section 94(1) of the Insolvency and Bankruptcy Code, 2016, the present proceedings, including the directions for filing of reply by the Respondents in the present IA, stand stayed. 3.7 In the aforesaid circumstances, it is humbly prayed that the proceedings in the present IA be stayed and no further orders be passed therein till the disposal of the applications filed by the Respondents under Section 94(1) of the Insolvency and Bankruptcy Code, 2016. It is further prayed that the Respondents be permitted to file their reply, if required, upon disposal of the said applications.

The Respondent No. 3 also filed an affidavit-in-reply on 01.02.2024 vide Inward Diary No. D892, denying all the contentions, facts and averments made in the memo of the application and further making following contentions: -

The answering Respondents submit that Regulation 35A of the Insolvency Resolution Process for Corporate Persons Regulations, 2016 mandates that an application under Section 66 be filed within 135 days from the commencement of CIRP. It is an admitted position that the present application has been filed beyond the prescribed period of 135 days, and therefore, the same is liable to be dismissed.

It is submitted that vide order dated 28.11.2022, the Adjudicating Authority admitted the Corporate Debtor into CIRP. The Applicant has thereafter filed the present application under Section 66 of the Code.

The answering Respondent submits that he has no personal knowledge of the transactions under scrutiny. It is stated that the affairs of the Company were managed by Mr. Manoj Shah, and the present Respondent was neither involved in the financial transactions nor in the day-to-day management of the Company. It is further submitted that due to internal issues, the Respondent had consciously remained disengaged from financial matters and was not part of the decision-making process of the Corporate Debtor.

It is submitted that the Respondent had duly responded to the observations raised in the Transaction Audit of Maximaa Systems Limited vide letter dated 05.07.2023 addressed to the Applicant. A copy of the said letter dated 05.07.2023 is annexed hereto and marked as Annexure R-1 to the present reply. 4.5 The Respondent No. 3 submits that the day-to-day affairs of the Corporate Debtor, Maximaa Systems Limited, were managed by Mr. Manoj Shah and Mr. Mayur Shah from the Mumbai office; further, it is stated that the factory at Dharampur was sealed by the Bank of India, which has taken physical possession of the property and dispossessed the workers, and therefore the exact stock position can be ascertained only by the Bank officials; a copy of the panchnama evidencing such possession by the Mamlatdar is annexed hereto as Annexure R-2. 4.6 It is submitted that the Transaction Auditor has overlooked a crucial aspect having material bearing on the assessment, resulting in an incomplete and inaccurate analysis of the transactions under review. It is therefore necessary that the auditor re-examines the records considering the said aspect; accordingly, the Respondent cannot be held responsible on the basis of such incomplete findings.

The contents of Para 9A(i) are denied. It is specifically denied that the present Respondent has siphoned off any amount of ₹12.1 Crores through its subsidiary/related entities. It is further submitted that Respondent No. 3 has never been appointed as a director or employee in the following entities, and therefore cannot be held liable for their transactions:

It is further submitted that no documentary proof has been produced by the Applicant in respect of any transactions pertaining to Maximaa Storage System LLP. It is also submitted that Mapra Furniture Private Limited is no longer in existence, and therefore, the Respondent cannot be held liable for any amounts received or transactions carried out with the said company.

With reference to Para 9A(ii), it is submitted that the allegations regarding investments in subsidiaries/related entities are denied, as the Applicant has no personal knowledge thereof. It is further submitted that the balance sheets as on March 2019 and March 2020 were not signed by the Respondent, and no cheque has been signed by the Respondent after 31.12.2019. Accordingly, it is evident that the Respondent had no involvement in or knowledge of the affairs and operations of Maximaa Systems Limited.

It is further submitted that, in respect of the transactions of the Proyurveda Division, a detailed reply has already been provided by Respondent No. 1 at pages 153 and 154 of the application. The answering Respondent was not handling financial matters and due to internal issues, was never part of the active management of the Company.

It is submitted that the Applicant's case is primarily based on the alleged transfer of closing stock to related parties at undervalued prices. However, it is stated that the Bank had taken possession of the running factory, dispossessed the workmen, and the stocks remained within the premises, for which a panchnama was duly prepared. Accordingly, the Transaction Audit Report is based on mere assumptions, and the present application deserves to be dismissed.

With reference to Para (iii) under the head of unsecured loans, it is submitted that the Applicant has not attended any board meetings after 2017 and, therefore, has no personal knowledge of the amounts paid to Proyurveda Lifescience Private Limited or any other entity. It is further submitted that the Respondent has not signed any cheques in respect of payments made through NKGSB Co-operative Bank Limited and Bank of Baroda, and hence cannot be held liable for the said transactions.

It is further submitted that the answering Respondent has no knowledge of the agreement executed between the Corporate Debtor and Adfac Laboratories Private Limited, or of the subsequent transfer to Essenzaa Nutrition Private Limited.

It is also submitted that, as per the Transaction Audit Report, the patent granted by Dr. Reddy to Maximaa Systems Limited in 2011 had no value after 2014; in any event, the answering Respondent cannot be held liable in respect thereof.

It is further submitted that the answering Respondent has no knowledge of the transactions in question; however, with respect to trade receivables, a reply has already been furnished by Mr. Manoj Shah. It is pertinent to note that, as per the Transaction Audit Report itself, Raj Enterprise and Kirti Steel are related parties, and the amount transferred from M/s Kirti Steel to Raj Enterprise was not payable; even otherwise, an amount of Rs. 2,80,69,787/- remains payable to M/s Kirti Steel. Further submitted that in respect of Radha Madhav Corporation Limited, the NCLT has already passed an order of admission.

With reference to Para 9(iv), it is submitted that the answering Respondent has not availed any unsecured loan from the Company. It is categorically denied that any such transaction or financial arrangement exists, and it is reiterated that no unsecured loan has ever been taken by the Respondent from the Company.

It is further submitted that the forensic report is not done as per the accounting standard and only on the basis of the assumption of transaction audit entire report was prepared and therefore in absence of evidence the report cannot be taken in to account and therefore the application deserves to be dismissed. The transaction auditor had never given any enough opportunity for the explanation and just in hurry prepared the report Therefore the application deserves to be dismissed on this grounds alone.

The Affidavit of service was received dated 21.11.2023 vide Inward Dairy No. D 4575 in compliance of order dated 18.10.2023.

Further, Additional Affidavit in compliance to the order dated 22.11.2023 was taken into record dated 05.01.2024 vide inward dairy no. D 149.

That vide order dated 12.06.2024 amendment of the parties was carried out wherein, The RP was substituted by Bank of India/Financial Creditor as the Applicant.

That vide order dated 24.03.2026 it is observed that Respondent Nos. 1 & 2, in their reply dated 23.10.2023, raised a plea that proceedings stood stayed in view of the interim moratorium under Sections 94/95 of the Code.

Pursuant to the query of this Tribunal vide order dated 17.12.2024, an additional reply was filed on 15.04.2025. The said additional reply, though taken on record, travels beyond and is contrary to the original stand. Accordingly, the same is ignored.

No precedent has been placed by the Respondents in support of their plea concerning applicability of Section 96 of the Code. On the contrary, the Hon'ble NCLAT in Praful Satra and Ors. v. Vaishali Patrikar (2025) has held that interim moratorium under Sections 96/124 does not bar proceedings under Section 66, as such proceedings are not in respect of any debt but relate to fraudulent and wrongful trading. In view thereof, the plea of interim moratorium is rejected as devoid of merit.

We have heard Ld. Counsel for the Applicant, Ld. Counsel for the Respondent No.1 to 3, and have carefully examined the pleadings, affidavits, reply, annexures, and the oral arguments advanced by both sides. The following Issues are framed for determination: -

Whether the present application is maintainable in view of the objections relating to limitation (Regulation 35A) and interim moratorium under Section 96 of the Code?

Whether the transactions carried out by the erstwhile management of the Corporate Debtor constitute fraudulent or wrongful trading under Section 66 of the Insolvency and Bankruptcy Code, 2016?

Whether the sale of assets/stock and dealings with related parties at undervalued prices amount to siphoning of funds and are liable to be declared fraudulent?

Whether the Respondents (erstwhile directors/promoters) can be held liable for the alleged fraudulent transactions and directed to contribute to the assets of the Corporate Debtor?

Findings on Issue No.1: Whether the present application is maintainable in view of the objections relating to limitation (Regulation 35A) and interim moratorium under Section 96 of the Code?

Regulation 35 A is been reproduce herein below as:-

The Respondents have contended that the present application under Section 66 of the Code has been filed beyond the period of 135 days from the insolvency commencement date, as prescribed under Regulation 35A, and is therefore liable to be dismissed as time-barred.

At the outset, it is pertinent to note that Regulation 35A prescribes timelines for the Resolution Professional to:

The timelines prescribed are intended to ensure expeditious completion of the CIRP process, but cannot be construed in a manner that defeats substantive justice. The Code is a beneficial legislation aimed at maximization of value and protection of creditors' interests.

The object of Section 66 is to identify and undo fraudulent or wrongful conduct. Such proceedings are in the nature of value recovery actions, and cannot be defeated merely on account of procedural delay, particularly when the delay is attributable to the process of audit, investigation, and collation of financial data.

In the present case, the Transaction Auditor was appointed by the Committee of Creditors, and the report was submitted on 03.07.2023. The filing of the present application is based on the findings of the said report. The time consumed in conducting a detailed transaction audit cannot be held against the Resolution Professional.

The Hon'ble NCLAT in Aditya Kumar Tibrewal (RP) v. Om Prakash Pandey and Ors., (2022) ibclaw.in 278 NCLAT decided on 06.04.2022) and in Prasant Chandra Rath v. Surya Kanta Satapathy (RP), (2022) ibclaw.in 789 NCLAT decided on 30.09.2022) has held that the timeline under Regulation 35A is directory and not mandatory, as rigid enforcement would defeat the purpose of identifying avoidance transactions dependent on factors beyond the RP's control. Similar views have been expressed in Jagdish Kumar Parulkar RP v. Vinod Agarwal Ex-Director, (2023) ibclaw.in 132 NCLAT decided on 16.02.2023 and Tenny Jose v. Prathap Pillai (RP), (2023) ibclaw.in 495 NCLAT, decided on 04.08.2023) emphasising that the provision imposes a duty but allows flexibility.

The Respondents have failed to demonstrate any prejudice caused due to the alleged delay in filing the application. In view of the above, this Authority holds that the objection raised by the Respondents on the ground of limitation under Regulation 35A is untenable and liable to be rejected.

The Respondents have further contended that they have filed applications under Section 94 of the Code for initiation of personal insolvency proceedings, and consequently, an interim moratorium under Section 96 has come into effect, thereby staying all proceedings in respect of any debt against them, including the present application.

This Authority has examined the scope and applicability of Section 96, which provides that upon filing of an application under Section 94 or 95:

However, the crucial question is whether proceedings under Section 66 fall within the ambit of “legal action in respect of any debt”.

In this regard, this Authority observes as under:

Proceedings under Section 66 are not recovery proceedings simpliciter, but are in the nature of avoidance and accountability proceedings, aimed at:

The interim moratorium under Section 96, in Part III of the IBC, 2016 applies to proceedings for recovery of debts owed by the personal debtor. However, the present application under section 66 of the Code, in Part II of the Code, is not for recovery of a personal debt, but for adjudication of fraudulent conduct and restoration of value wrongfully diverted. Section 96 protects individual’s estate and it does not protect him from Section 66 liability as a director of the Company in which the assets of the company have been reduced or diverted to defraud the creditors.

The Applicant, in the present proceedings, is not seeking enforcement of a personal debt against the Respondents. It is not a proceedings against the individual to recover his/her debt, but is invoking statutory powers under Section 66 to seek contribution of money from the delinquent directors in the assets of the Corporate Debtor on account of fraudulent trading.

Accepting the Respondents' contention would defeat the very purpose of Section 66, as persons involved in fraudulent conduct could escape liability merely by initiating personal insolvency proceedings.

This Authority is of the view that a harmonious construction of Sections 66 and 96 would require that:

The Hon'ble NCLAT in Praful Satra and Ors. v. Vaishali Patrikar (2025) has held that interim moratorium under Sections 96/124 does not bar proceedings under Section 66, as such proceedings are not in respect of any debt but relate to fraudulent and wrongful trading. In view of the foregoing discussion, this Adjudicating Authority holds as under:

Findings on Issue No. 2: Whether the transactions carried out by the erstwhile management of the Corporate Debtor constitute fraudulent or wrongful trading under Section 66 of the Insolvency and Bankruptcy Code, 2016?

We state below the chronology of events denoting the material facts leading to the filing of the present Application, as filed in the Application and available on record.

Section 66 of the code is been reproduce as:-

At the outset, it is pertinent to note that Section 66 of the Code empowers this Authority to pass appropriate orders where it is established that the business of the Corporate Debtor has been carried on with an intent to defraud creditors or for any fraudulent purpose, or where the directors knew or ought to have known that there was no reasonable prospect of avoiding insolvency and failed to exercise due diligence.

From the material available on record, particularly the Transaction Audit Report dated 03.07.2023, it emerges that multiple transactions undertaken during the relevant period exhibit a pattern indicative of siphoning of funds and diversion of assets:

The Respondents have primarily contended that:

However, this Authority finds that the Respondents have failed to provide any substantive documentary evidence to rebut the specific findings of the Transaction Auditor. Mere denial, without cogent material, cannot displace the detailed analysis reflected in the audit report.

Further, directors of a company are entrusted with fiduciary duties, and cannot evade liability merely by claiming lack of involvement, particularly when the transactions occurred during their tenure.

For invoking Section 66, it is not necessary to establish fraud beyond reasonable doubt as in criminal proceedings; rather, the standard is one of preponderance of probabilities. The cumulative effect of the transactions, their pattern, timing, and lack of commercial rationale must be considered.

In the present case, the following factors are clearly established:

In view of the foregoing analysis, this Adjudicating Authority is of the considered opinion that the transactions carried out by the erstwhile management of the Corporate Debtor were not in the ordinary course of business, but were executed with an intent to reduce the asset base or funds of the Corporate Debtor for granting benefits to related parties and defraud the creditors and siphon off funds through related entities as soon as they came to know, as stated in the chronology of events, that there was no reasonable prospect of avoiding the commencement of the CIRP in respect of the corporate debtor.

Reliance was put upon the case of Anuj Jain Interim Resolution vs Axis Bank Limited on 26 February, 2020 wherein it was stated that:-

Relevant Para...

Accordingly, the impugned transactions squarely fall within the ambit of “fraudulent trading” and “wrongful trading” as contemplated under Section 66 of the Insolvency and Bankruptcy Code, 2016.

Findings on Issue No. 3: Whether the sale of assets/stock and dealings with related parties at undervalued prices amount to siphoning of funds and are liable to be declared fraudulent?

At the outset, it is apposite to note that while examining allegations of fraudulent transactions, this Authority is not merely required to assess individual transactions in isolation, but to consider the cumulative effect, pattern, timing, and surrounding circumstances in which such transactions were undertaken. The commercial substance of the transaction must prevail over its form.

From the records placed on file, it is observed that the Corporate Debtor, through its Proyurveda Division, effected substantial sales to related entities, namely Essenzaa Nutrition Private Limited and Proyurveda Lifescience Private Limited.

The following aspects emerge:

More crucially, materials having an aggregate value of approximately Rs. 12.47 Crores were sold for a consideration of only Rs. 1.80 Crores, thereby resulting in a direct and substantial diminution of the asset base of the Corporate Debtor. This Authority finds that such transactions are not only commercially imprudent but are also indicative of deliberate undervaluation.

A similar pattern is discernible in the Storage Division, wherein:

Such overwhelming concentration of business dealings with a related party, to the exclusion of independent buyers, cannot be said to be a normal business practice. The absence of diversification of clientele and exclusive routing of transactions through related entities raises serious doubts as to the bona fides of such dealings.

This Authority notes with concern that:

The Respondents have sought to contend that:

However, this Authority finds that:

It is a settled position that mere denial without substantiation cannot displace documentary evidence. Further, the plea of non-involvement cannot absolve directors of liability, particularly when the transactions occurred during their tenure.

For a transaction to be declared fraudulent, it is sufficient to establish that it was carried out with an intent to defraud creditors or lacked bona fide commercial purpose. The standard of proof is that of preponderance of probabilities, and not proof beyond reasonable doubt.

In the present case, the following factors stand established:

These factors, taken cumulatively, clearly satisfy the ingredients of fraudulent conduct.

In light of the foregoing discussion, this Adjudicating Authority is of the considered view that the sale of assets/stock and dealings with related parties at significantly undervalued prices were not undertaken in the ordinary course of business, but were designed to siphon off funds and divert value from the Corporate Debtor.

The impugned transactions demonstrate a clear pattern of value erosion, preferential treatment to related entities, and breach of fiduciary duties, thereby causing grave prejudice to the interests of the creditors.

Accordingly, this Authority holds that the said transactions are fraudulent in nature and are liable to be declared as such under the provisions of the Insolvency and Bankruptcy Code, 2016.

Findings on Issue No.4: Whether the Respondents (erstwhile directors/promoters) can be held liable for the alleged fraudulent transactions and directed to contribute to the assets of the Corporate Debtor?

At the outset, it is pertinent to note that Section 66 of the Code empowers this Adjudicating Authority to pass orders against persons who were knowingly parties to the carrying on of the business of the Corporate Debtor with intent to defraud creditors or for any fraudulent purpose.

Further, in cases of wrongful trading, liability may be fastened where it is established that:

Thus, the provision contemplates lifting of the corporate veil and imposing personal liability upon those responsible for fraudulent or wrongful conduct.

From the records, it is evident that the Respondents were erstwhile directors/promoters of the Corporate Debtor during the relevant period when the impugned transactions were undertaken.

The material on record demonstrates that:

In corporate jurisprudence, directors cannot escape liability merely by attributing responsibility to other individuals when they collectively form part of the decision-making body of the company.

This Authority finds that the impugned transactions, including:

Given the scale, frequency, and nature of these transactions, it is implausible that the same could have been carried out without the knowledge, consent, or active participation of the Respondents.

The doctrine of “constructive knowledge” also applies, wherein directors are deemed to be aware of the financial affairs of the company, especially in matters involving substantial financial transactions.

Directors occupy a fiduciary position and are duty-bound to:

In the present case, the conduct of the Respondents demonstrates:

Such actions amount to a clear breach of fiduciary duties and cannot be justified as mere business decisions.

The Respondents have contended that:

However, this Authority is not persuaded by such submissions, for the following reasons:

It is a settled principle that directors cannot take shelter under the plea of lack of knowledge, particularly when they have failed to exercise due diligence expected of them.

The record clearly establishes that:

The material facts and chronology of events noted in this order demonstrate that the transactions identified in this Application as fraudulent trading or wrongful trading took place after the account of the Corporate Debtor became irregular and was declared NPA and the directors knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a CIRP in respect of such a corporate debtor.

There exists a direct nexus between the conduct of the Respondents and the losses suffered by the Corporate Debtor. The depletion of assets cannot be attributed to market forces or business exigencies, but to deliberate acts of mismanagement and diversion of funds of the corporate debtor.

In light of the above findings, this Authority is satisfied that:

Therefore, conditions of section 66(2) are satisfied. Accordingly, the Respondents, being Directors of the Corporate Debtor are liable to make contributions to the assets of the Corporate Debtor.

The objective of such direction is not punitive alone, but also restorative, to bring back the value that was wrongfully diverted.

In view of the foregoing analysis, this Adjudicating Authority holds that the Respondents, being erstwhile directors/promoters of the Corporate Debtor, were actively involved in and/or had knowledge of the fraudulent transactions carried out during the relevant period.

The Respondents have failed to discharge their fiduciary duties and have contributed to the depletion of the assets of the Corporate Debtor through transactions that were not in the ordinary course of business and were detrimental to the interests of the creditors. Accordingly, this Authority is of the considered opinion that the Respondents are liable under Section 66 of the Insolvency and Bankruptcy Code, 2016 and they are jointly and severally directed to contribute to the assets of the Corporate Debtor to the extent of the losses caused by their actions as discussed in this Application.

In view of the foregoing findings and discussions on Issue Nos. 1 to 4, this Adjudicating Authority is satisfied that the Respondents were knowingly parties to the fraudulent and wrongful trading carried out in the affairs of the Corporate Debtor and are liable under Section 66 of the Insolvency and Bankruptcy Code, 2016 in following terms:-

Accordingly, the IA No. 1007 (AHM) of 2023 is allowed. No order as to costs.

The Registry is directed to communicate a copy of this order to the parties concerned forthwith.