Mr. Ankur Kumar Vs. Mr. Jitendra Kikavat & others - However, we are of considered view that the net amounts received during the look back period shall only be said to be resulting into preference.

NCLT Mumbai-1 (2024.05.22) in Mr. Ankur Kumar Vs. Mr. Jitendra Kikavat & others [I.A. 2020 of 2020 In C.P.(IB) No. 2300/MB/2018] held that; 

• “There is no need to prove any fraudulent intent for a preferential transaction. When we look into the scheme of Section 43 of the Code, subsection (2), a clear statutory provision is that a corporate debtor shall be deemed to have given a preference if conditions as mentioned in paragraph ‘a’ and ‘b’ are fulfilled. 

• When a provision provides for deeming fiction, ‘deeming fiction’ come into play on fulfilment of the requirement even if in fact it may not be so. In sub-section (3) of Section 43, certain exception has been provided. Thus those transactions which fall as exception under Sub- Section (3) can be taken out of sub-section 2 of Section 43, rest shall be covered by deeming fiction”.

•  In the present case, it can not be said that it is in ordinary course of business of the recipient of the preference to realise their debts, particularly when the Corporate Debtor, a related party, is under financial stress. 

• However, we are of considered view that the net amounts received during the look back period shall only be said to be resulting into preference.

• Further, in relation to Karan J Kikavat Respondent in IA 1402/2020, the Applicant has explained that the amount withdrawn by this person was adjusted against the various Earnest Money Deposit (EMD) and tender fees paid by him on behalf of Corporate Debtor and all the EMD’s are still outstanding in the books of accounts of Corporate Debtor, hence, this appropriation was in nature of reimbursements, and do not result into preference having been given to this person.

Blogger’s Comments; Important ruling in the present case;

• # 4.3.  . . . . . . .However, we are of considered view that the net amounts received during the look back period shall only be said to be resulting into preference. Further, in relation to Karan J Kikavat Respondent in IA 1402/2020, the Applicant has explained that the amount withdrawn by this person was adjusted against the various Earnest Money Deposit (EMD) and tender fees paid by him on behalf of Corporate Debtor and all the EMD’s are still outstanding in the books of accounts of Corporate Debtor, hence, this appropriation was in nature of reimbursements, and do not result into preference having been given to this person.

I wonder if this analogy ( in the matter of Karan J Kikavat) can be applied if the loss to the guarantor (in case of enforcement of security interest by creditor - creditor having realised guarantors property under SARFAESI) is reimbursed by CD.

Excerpts of the order;

# 1. The Application(s) IA 1402/2020, 1443/2020, and IA 2020/2020 are filed by the Resolution Professional, Mr. Ankur Kumar, of M/s Mahavir Roads and Infrastructure Private Limited (Corporate Debtor) on 18.07.2020 seeking reliefs against the Respondents named in each of

Applications for transactions in terms of section 43 of Insolvency & Bankruptcy Code, 2016 (“Code”).

# 2. It is submitted that the Corporate Insolvency Resolution Process ("CIRP") of Mahavir Roads & Infrastructure Pvt. Ltd. (Corporate Debtor') was commenced by an Order of this Bench vide order no. CP (I&B) 2300/NCLT/MB/2018 dated 21 February 2019, pursuant to insolvency petition filed by the Financial Creditor under Section 7 of the Code, wherein the Applicant was appointed as the Interim Resolution Professional, and was later on appointed as Resolution Professional of Corporate Debtor by the Committee of Creditors ("COC").

2.1. The Applicant states that in compliance with section 13, section 15 and other applicable sections of the Code read with Regulation 6 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations. 2016 (CIRP Regulations'), a public announcement was made on 13th March 2019 inviting claims from the Creditors of the Corporate Debtors. The last date for submission of claims was with the Interim Resolution Professional was 26 March 2019.

2.2. The Applicant states that third COC meeting was held on 15 October 019 wherein M/s. BKA & Company, Chartered Accountants was appointed to undertake transaction audit of the Corporate Debtor for the period from 01 April 2017 to 12 March 2019. Thereafter. M/s. BKA & Company had provided the draft transaction report highlighting the transactions under section 43 and section 66 of the Code. The Applicant had placed the said draft report before the COC in the fifth COC meeting held on 19 December 2019 and seventh COC meeting held on 04 February 2020, and informed the members that there are certain transactions as mentioned below which may fall into category of preferential transactions and hence after receipt of final report necessary application will be filed with NCLT under Regulation 35A of the CIRP Regulations.

2.3. The list of related parties of the Corporate Debtor is detailed herein below for ready reference(as per Annual accounts of the corporate debtor): -

2.4. Thus, in the present case, upon scrutinizing the transactions entered into by the Corporate Debtor during the relevant time and on the basis of report of Transaction audit carried out by M/s BKA & Co. Chartered Accountants, the following is the summary of the preferential transactions entered between the Corporate Debtor with its related parties i.e. the suspended directors of the Corporate Debtor during the year 2017-2018 & 2018-2019 i.e. two years prior to commencement of the CIRP of the Corporate Debtor are supposed to fall within the ambit of Section 43 of the Code: 

Transactions in IA 1402/2020

Transactions in IA 1443/2020

Transactions in IA 2020/2020

2.5. The Applicant further submits that sub regulation 35A of the IBBI (Insolvency Resolution Process of Corporate Persons) Regulations. 2016 requires the Resolution professional to form an opinion whether the Corporate Debtor has been subjected to any transaction covered under section 43. 45. 50 or 66 of the Code. Section 43 of the chapter III deals with the preferential transactions and Section 44 casts duty upon the Resolution Professional to apply to the Adjudicating Authority under section 43(1) of the Code, in respect of preferential transactions carried out by the Corporate Debtor under sub-section (4) of section 43 of the Code.

2.6. The Applicant states that related party of the Corporate Debtor i.e. the directors of the Corporate Debtor were well aware of the fact that the Corporate Debtor was in default to various Creditors. Therefore, the directors of the Corporate Debtor were fully aware that the Corporate Debtor was in the twilight zone and insolvency was imminent. The suspended directors of the Corporate Debtor ought to have exercise due diligence in minimizing the potential loss to its Creditors. However, evidently. directors of the Corporate Debtor despite being fully aware of the dues payable to the creditors of the Corporate Debtor entered in to transactions, which prima facie are transactions to give benefit to its related parties. The said amounts could have been retained by the Corporate Debtor to generate cash that would have been sufficient to repay dues to the Creditors of the Corporate Debtor.

2.7. The Applicant, therefore submits that if the above said transactions are viewed after piercing the corporate veil, it would be found that the said transactions were preferential transaction within the meaning of sub-section (4) of section 43 of the Code.

2.8. That Section 43 (4) of the Code provides that a Corporate Debtor shall be deemed to have given preference if it is given to a related party. In the instant case, the Corporate Debtor has benefitted its related parties. The Applicant states that sub-section (1) of Section 25 of the Code casts a duty upon the Resolution Professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the Corporate Debtor. For this purpose, clause (j) of sub-section (2) of section 25 casts duty upon the Resolution Professional to apply before the Adjudicating Authority for the avoidance of any such transaction in accordance with Chapter III of the Code.

# 3. The Respondents have filed an affidavit in reply dated 15.09.2021 stating that various adjustment entries were passed by the Corporate Debtor in its normal course of business and the same have been completely overlooked by in the Transaction Audit Report dated 31.05.2020. Thereby no reflecting the true status of the books of accounts of the Corporate Debtor.

3.1. It is submitted that the said Report is solely based on bank transactions which do not explain the purpose of the transactions. Further the same are duly reflected in the notes of accounts of the Corporate Debtor for the year ending 31 March 2020. It is pertinent to note that as per the notes of accounts of the Corporate Debtor forthe year ending 31st March 2020, the amounts are is in fact due and payable to Respondents which is also confirmed by the Applicant herein. It is submitted that said Transaction have not caused any prejudice to the lender of the Corporate Debtor and were done in the normal course of business of the Corporate Debtor and therefore will not be covered under Section 43 of the Code. It is further submitted that during the period from 1st April, 2014, the Corporate Debtor was under financial crunch and the cycle of recovery from trade receivables was completely disturbed. It is during this time, that the Respondents gave unsecured loans to meet the financial crunch of the Corporate Debtor and the Corporate Debtor returned the said amounts after receiving funds from the debtors, hence the transactions are not covered under section 43 of the Code.

# 4. Heard Learned Counsel and perused the materials available on record. 4.1. Section 43 of the Code deals with preferential transactions and relevant time. Section 43 of the Code is as follows:

• “43 : Preferential transactions and relevant time.-

• (1) Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in subsection

• (2) to any persons as referred to in subsection (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44. (2) A corporate debtor shall be deemed to have given a preference, if —

• (a) there is a transfer of property or an interest thereof of the corporate debtor or the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and 

• (b) the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53. (3) For the purposes of sub-section (2), a preference shall not include the following transfers —- 

• (a) transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee;

• (b) any transfer creating a security interest in property acquired by the corporate debtor to the extent that—

• (i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest and was used by corporate debtor to acquire such property; and

• (ii) such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property:

• Provided that any transfer made in pursuance of the order of a court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor.

• Explanation.—For the purpose of sub-section (3) of this section, “new value” means money or its worth in goods, services, or new credit, or release by the transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the liquidator or the resolution professional under this Code, including proceeds of such property, but does not include a financial debt or operational debt substituted for existing financial debt or operational debt.

• (4) A preference shall be deemed to be given at a relevant time, if— 

• (a) it is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or

• (b) a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date.”

4.2. The Hon’ble NCLAT in the case of GVR Consulting Services Limited vs. Pooja Bahry 2023 SCC Online NCLAT 220 at para 23 states that “There is no need to prove any fraudulent intent for a preferential transaction. When we look into the scheme of Section 43 of the Code, subsection (2), a clear statutory provision is that a corporate debtor shall be deemed to have given a preference if conditions as mentioned in paragraph ‘a’ and ‘b’ are fulfilled. When a provision provides for deeming fiction, ‘deeming fiction’ come into play on fulfilment of the requirement even if in fact it may not be so. In sub-section (3) of Section 43, certain exception has been provided. Thus those transactions which fall as exception under Sub- Section (3) can be taken out of sub-section 2 of Section 43, rest shall be covered by deeming fiction”. 

4.3. In the present cases, the Corporate Debtor has paid the amount towards the antecedent debt during the look back period to the named Respondents and the said payments have put the Respondents in favourable position than what they would have been in case of distribution of assets in terms of section 53 of the Code. Accordingly, these transactions squarely falls within the deeming fiction provided in section 43(2) of the Code. The Section 43(3) of the Code, inter-alia, provides that the transactions undertaken in ordinary course of business shall remain out of the scope of section 43 of the Code. Further, the transaction should be in ordinary course of business of both the parties i.e. the Corporate Debtor as well as recipient of the preference. In the present case, it can not be said that it is in ordinary course of business of the recipient of the preference to realise their debts, particularly when the Corporate Debtor, a related party, is under financial stress. Hence, we do not find the explanation of the Respondent acceptable in the present case. However, we are of considered view that the net amounts received during the look back period shall only be said to be resulting into preference. Further, in relation to Karan J Kikavat Respondent in IA 1402/2020, the Applicant has explained that the amount withdrawn by this person was adjusted against the various Earnest Money Deposit (EMD) and tender fees paid by him on behalf of Corporate Debtor and all the EMD’s are still outstanding in the books of accounts of Corporate Debtor, hence, this appropriation was in nature of reimbursements, and do not result into preference having been given to this person.

4.4. In view of the foregoing, the following transactions are held to be preferential in nature, and we consider to direct these parties to refund the money received in preference to the Corporate Debtor within 30 days.

S. No. IA No. Name of Respondent Amount

1. 1402/2020 Beena Kikavat 41,502/-

2. 1402/2020 Akshita Kikavat 1,70,000/-

3. 1402/2020 Vasantlal Kikavat 8,60,200

5. 1402/2020 Pawan Kikavat 27,25,857/-

6. 1443/2020 Mahavir Link Associates 1,31,01,406/-

7. 1443/2020 P.K. Traders 86,51,068/-

8. 1443/2020 Mahavir Stone Supplying Company 3,20,63,845/-

9. 2020/2020 Jitendra Kikavat 1,39,14,085/-

10 2020/2020 Pankaj Kikavat 24,366,667/-

4.5. In view of foregoing, IA 1402/2020 is partly allowed, and IA 1443/ 2020 and IA 2020/2020 are allowed.

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Blog - Contesting Section 66(1) application

 1. Section 66 of the Code under which petitions are being filed by the IRP/RP/Liquidator reads 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.

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• 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.

2. Section 66(1) has the following caveats;

1. Business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor. 

2. business of the corporate debtor has been carried on for any fraudulent purpose

3. 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 (Adjudicating Authority) may deem fit. This provision makes it imperative to assess the adverse impact of such fraudulent business on the interests of creditors, along with identification of beneficiaries of such alleged fraudulent business/trading.

4. A director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence.

3. Thus an application under 66, to succeed, applicant (IRP/RP/Liquidator) has to satisfy all the criterias/caveats under section 66. ;

1. Intention to defraud the creditors.

2. Business/Trading of the CD  has been carried out fraudulently.

3. Assessment for extent of impact of such Fraudulent Business/Trading on the interests of the creditors, subject to the challenge by the respondents. Undue benefit has to be quantified to establish that fraud has taken place. In absence of any undue benefit at the cost of creditors, the business cannot be classified as fraudulent business/trading.

4. Identification of beneficiaries of  such Fraudulent Business/Trading, which are required to be made respondent in the petition.

5. Rebuttal to deeming provisions of the section 66, that a director or partner of the corporate debtor has exercised due diligence. 

6. Explanation to section 66 reads as “a director or partner of the corporate debtor”  signifies that the liability of a director under section 66 is not a collective liability with other directors, necessitating filing of separate applications against individual directors. Provisions of Section 66 are devoid of the concept of “Vicarious Liability”.

4. From the provisions of section 66, it is clear that the concept of “Related party” does not find any place in provisions of section 66. Even otherwise,  transactions/dealings etc  with “Related Party” are not illegal. Only certain rights of a related party are restricted under IBC, i.e. membership of CoC, eligibility to submit resolution plan etc. On the other hand “Related Party” do have equal rights as creditor, for distribution of funds in Resolution plan or under section 53, equally with other similarly placed secured/unsecured or financial/ operational creditors respectively.

4.1. Undue benefit has to be quantified to establish that fraud has taken place. In absence of any undue benefit at the cost of creditors, & identification of beneficiaries of such undue benefits, the business cannot be classified as fraudulent business/trading.  

4.2. From the above it is very clear that the averments made in the application have to satisfy all the caveats of the  provisions of section 66. Further the applicant has to submit his report of his opinion & determination as required under the provisions of the Code & Regulations [Regulation 35A r/w 40B of Liquidation Regulations],

4.3. It is trite law that the avoidance applications will survive the dissolution of CD  or closure of liquidation process [Regulation 44A of Liquidation Regulations]. As such the avoidance applications are not covered or decided under summary proceedings..

5. Reliance can be placed on the following judgements of various courts;

1. NCLAT (06.03.2024) in Md Sadique Islam & Ors. Vs. Niraj Kumar Agarwal & Ors. [Company Appeal (AT) (Ins.) No. 1081 of 2022 & I.A. No. 3178 of 2022]

2. NCLAT (04.08.2023) In Mr. Tenny Jose & Ors. Vs. Mr. Prathap Pillai Resolution Professional of M/s. Tenny Jose Limited, [Company Appeal (AT) (CH) (INS.) No. 95 / 2023]

3. NCLAT (05.06.2023) In Renuka Devi Rangaswamy,IRP of M/s. Regen Infrastructure and Services Pvt. Ltd. Vs. Mr. Madhusudan Khemka [Company Appeal (AT) (CH) (INS.) No. 356 of 2022]

4. High Court Tripura (18.01.2023) in Smt. Sudipa Nath Vs. Union of India [WP(C) (PIL) 04 of 2023].

5. NCLAT (23.09.2022) in Regen Powertech Pvt Ltd Represented by Erstwhile RP Vs. M/s. Wind Construction Private Limited, & Ors. [Company Appeal (AT)(CH)(Ins) No.349/2022]

6. NCLT, Mumbai (29.11.2021) in Venkatesan Sankaranarayanan, the Resolution Professional for RTIL Limited v. Nitin Shambhukumar Kasliwal & Ors. (CP No. 382 / I & B / MB/2018)

7. NCLT Chennai (06.02.2019) in The Resolution Professional for M/s. Orchid Pharma Limited  Vs. M/s. Hospira Healthcare India Pvt. Ltd & Others  [MA/87/IB/2018 in CP/540/IB/2017]

8. NCLT Chennai (10.01.2019) in Mr. Ramkumar SV Vs. M/s. Serum Institute of India Limited  [MA/92/ 1B/2018 in CP/540/IB/CB/2017]

9. Supreme Court (1975.12.09) In Union Of India vs M/S.Chaturbhai M. Patel & Co.  [Civil Appeals Nos. 972- 973 of 1968]

5.1.  NCLAT (06.03.2024) in Md Sadique Islam & Ors. Vs. Niraj Kumar Agarwal & Ors. [Company Appeal (AT) (Ins.) No. 1081 of 2022 & I.A. No. 3178 of 2022] held that;

• When we look into the aforesaid paras, it is clear that the Adjudicating Authority has recorded only its conclusions and that too without considering the preferential, undervalued and fraudulent, each transaction separately and there is general observation that the transactions are undervalued transactions as well as preferential and fraudulent transactions. 

• The ingredients of preferential, undervalued and fraudulent transaction are entirely different and there has to be application of mind to the ingredients of each transaction to come to conclusion that ingredients are satisfied and the transaction falls in the said category adverting to the given pleadings in the application. 

• The Adjudicating Authority ought to have adverted to the said pleadings and returned the finding regarding the fulfilment of ingredients of each provision.

5.2. NCLAT (04.08.2023) In Mr. Tenny Jose & Ors. Vs. Mr. Prathap Pillai Resolution Professional of M/s. Tenny Jose Limited, [Company Appeal (AT) (CH) (INS.) No. 95 / 2023]

• # 40. In `Law’, a `Fraudulent Intent’, is to be `proved’, after a careful examination of all materials / evidence, as the case may be. If a `Fraudulent Intent’ or `Fraudulent Purpose’, is made out, the `Liability’, must follow. An action can also lie, when there is a `Fraudulent Purpose’, upon the `Customers’ of the `Company’. The `Burden of Proof’, is the same as in a `Civil’ case, where `Serious Allegations of Misconduct’, such as, `Fraud’ are in `issue’. In an `isolated fraud’ case, an `Individual Tort Action’ (`Civil Wrong’), will lie.

5.3. NCLAT (05.06.2023) In Renuka Devi Rangaswamy,IRP of M/s. Regen Infrastructure and Services Pvt. Ltd. Vs. Mr. Madhusudan Khemka [Company Appeal (AT) (CH) (INS.) No. 356 of 2022] held that;

• # 37. `Dishonesty’, is an essential ingredient of `Fraudulent Trading’. The `Aspect of Dishonesty’, is to be established and it cannot be inferred in any manner. Whether a `Director’, had exercised his skill, experience and general knowledge, to be expected of a person, in carrying out the `duties of his functions’, is to be determined for a `Liability’, in the considered opinion of this `Tribunal’.

• # 38. The Appellant has a `duty’, to establish to the satisfaction of this `Tribunal’, that a `person’, is knowingly carrying on the business with the `Corporate Debtor’, with an `dishonest intention’, to `defraud’, the `Creditors’. For a `Fraudulent Trading’ / `Wrongful Trading’, necessary materials are to be pleaded by a `Litigant’ / `Stakeholder’, by furnishing `Requisite Facts’, so as to come within the purview of the ingredients of Section 66 of the I & B Code, 2016. Suffice it, for this `Tribunal’, to pertinently point out that the ingredients of Section 66 (1) and 66 (2) of the I & B Code, 2016, operate in a different arena.

5.4. High Court Tripura (18.01.2023) in Smt. Sudipa Nath Vs. Union of India [WP(C) (PIL) 04 of 2023]  held that;

• However, under section 66(1) of the IBC, only an application filed by resolution professional can be entertained by NCLT.

• However, under Section 66(1) of IBC, the NCLT can pass an order holding such person liable to make contribution to the assets of the corporate debtor or it may deem fit.

• firstly It {section 66) confers no jurisdiction but declaring any transaction as void, even if fraudulent, but confers jurisdiction on NCLT to fix the liabilities on the persons responsible for conducting business of corporate debtor which is fraudulent or wrongful. 

• Secondly section 66(1) contemplates an application thereunder only by the resolution professional and by none other.  

• Thirdly section 66 (1) also restricts the power of NCLT subject to being satisfy with pre-requisite that any business of the corporate debtor has been carried on with intent to defraud creditors or the corporate debtors or for any fraudulent purpose and if satisfied it powers to pass an order is only against such person who are responsible for the conduct of such fraudulent business of the corporate debtor with mens rea to make them personally liable to make such contributions to the assets of the corporate debtor as it may deem fit.

5.5. NCLAT (23.09.2022) in Regen Powertech Pvt Ltd Represented by Erstwhile RP Vs. M/s. Wind Construction Private Limited, & Ors. [Company Appeal (AT)(CH)(Ins) No.349/2022] held that;

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

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

5.6. NCLT, Mumbai (29.11.2021) in Venkatesan Sankaranarayanan, the Resolution Professional for RTIL Limited v. Nitin Shambhukumar Kasliwal & Ors. (CP No. 382 / I & B / MB/2018) held that;

• 6. ``The Bench observes that it is a fact that management of company have taken certain decision which has not worked out as intended by the management and eventually loss occurred. However, such bad commercial business decision cannot be considered to be fraudulent or wrongful trading under provisions of Section 66 of the IBC.’’

5.7. NCLT Chennai (06.02.2019) in The Resolution Professional for M/s. Orchid Pharma Limited  Vs. M/s. Hospira Healthcare India Pvt. Ltd & Others  [MA/87/IB/2018 in CP/540/IB/2017] held that;

• # 6. Before going into the factual matrix, we must make it clear that the word “fraud “coined in the section requires to reflect an element of intention to deceive another party by making a false promise without any intention to perform it or any such act or omission as the law specifically declares to be fraudulent. The elementary difference between section 66 and other avoidance transactions is, fraudulent intention to defraud the creditors has to be proved by the person asserting such allegation. Intention is the element of difference in this section. 

• # 8. But to prove that the answering Respondents 1-3 indulged in fraudulent trading or wrongful trading so as to defraud the creditor as enunciated u/s 66 of the Code, it is pertinent to note that the person filing this kind of application, with an imputation of fraud, has to give all the details disclosing how these Respondents have committed fraud in respect to the transaction impugned before this Bench, not only that, the RP has to prove that these answering Respondents committed fraud as detailed in the application. Here, in the application, it has been categorically stated that the information triggered the RP to file this application is the observation made by the forensic auditor. 

• # 15. . . . . . . .One more aspect that should not be ignored from reading of section 66 is, it is a qualified section with multiple caveats to invoke this subject matter jurisdiction, first, transaction shall be entered into with an object to defraud the creditors, second, such parties shall be in know of such intention, and to pass an order under this section, it has to be seen that director/partner of the corporate debtor is for sure aware of the fact that commencement of CIRP is inevitable and lastly, it has to be proved that such director or partner has not exercised due diligence in minimising the potential loss to the creditors of the Corporate debtor. On the top of it, in explanation to section 66 of the Code, it has been laid down that presumption lies in favour of the director/partner that he has exercised due diligence as expected from a person carrying such function, to rebut this statutory presumption, sufficient material has to be placed. One thing is evident from this section that burden is cast upon the RP to prove that fraud is committed by the director/partner, unless it is proved the presumption remains in force in favour of the director/partner. We know it is not a case goes by pleadings; it is the duty of the person asserting a fact shall prove it by showing material indicating that the business of the corporate debtor is carried out to defraud the creditors.  . . . . . . .

5.8. NCLT Chennai (10.01.2019) in Mr. Ramkumar SV Vs. M/s. Serum Institute of India Limited  [MA/92/ 1B/2018 in CP/540/IB/CB/2017] Held that;

• To say it is a preferential transaction, it has to be  tested u/s.43 of the Code, to say it is fraudulent trading, it has to be  tested u/s.66 of the Code.

• As to Section 66 is concerned, here the case is that R1 is creditor to the  Corporate Debtor company, therefore the Corporate Debtor was under  obligation to make payment to R1 herein. If at all payment has been made  other than in ordinary course of business, at the most it could be  considered as a preferential transaction but not as a fraudulent transaction  because payment was made towards the Creditor.

• Payments made to the creditors and such payments cannot be  brought under the caption of either fraudulent trading or wrongful  trading, moreover legislature normally will not provide overlapping  jurisdiction under two heads,

5.9.Supreme Court (1975.12.09) In Union Of India vs M/S.Chaturbhai M. Patel & Co.  [Civil Appeals Nos. 972- 973 of 1968] held that;

• It is well settled that fraud like any other charge of a criminal offence whether made in civil or criminal proceedings, must be established beyond reasonable doubt; per Lord Atkin in A. L. N. Narayanan Chettyar v. Official Assignee, High Court Rangoon.

• However suspicious may be the circumstances, however strange the coincidences, and however grave the doubts, suspicion alone can never take the place of proof.

6. Template pleadings;

1.  It is settled law that while alleging fraud, the burden of proof is on the party alleging the same. It has been laid down by the Supreme Court in the case of Union of India v. Chaturbhai M Patel & Co (Supra) that fraud must be established beyond reasonable doubt and the mere suspicion, however may be the circumstances, however strange the coincidences, and however grave the doubt, suspicion alone can never take the place of proof. It is therefore stated that the burden of proof lies on the person who alleges it and the same does not shift on the Respondents until the burden cast on the person alleging the same has discharged it.  

2. Secondly undue benefit has to be quantified to establish that fraud has taken place. In absence of any quantification of undue benefit at the cost of creditors, & identification of beneficiaries of such undue benefits, the business cannot be classified as fraudulent business/trading.  Thus, as in the instant case as there are no pleading whatsoever or material particulars submitted to establish the fraudulent business committed by the Respondents herein, the application is liable to be dismissed.

3. Thus, as in the instant case as there are no pleading whatsoever or material particulars submitted to establish the fraudulent business/trading committed by the Respondents herein. 

4. In this regard Section 66 of the Code vide explanation contained therein has set up a rebuttable presumption in favour of the erstwhile directors of the Corporate Debtor. This presumption can only be rebutted by providing adequate, material proofs and pleadings so as to establish fraudulent intent and knowledge of the fraudulent intent at the very inception of the transaction and no later. 

5. Respondent state that in the instant case, a mere perusal of the application would establish beyond an iota of doubt that no such averments mandatorily required to establish fraud under Section 66 of the Code have been made in the application under reply, for which reason alone this application deserves to be dismissed. For all of the reasons set out above, the present Petition requires to be dismissed in limine, without further enquiry.

Collateral Issues;

7. RP/Liquidator is required to place evidence to satisfy all of these criterias/caveats specified under section 66. Hon’ble Adjudicating Authority (NCLT Mumbai-II) in Mr. Anuj Bajpai, RP of Tollways (Ujjain) Private Limited.  Vs. Surendra Lodha, Suspended Director & Anr.. [IA/2874/2021 In CP(IB)4106/MB/2018] held that to prove the transaction to be fraudulent in nature, the degree of proof and evidence required should be of unimpeachable nature and a transaction cannot be dubbed as fraudulent, on the basis of inadequate and tentative findings, as recorded in the forensic audit report.

• We are of the view that the Applicant/RP has placed no proof on record to satisfy the ingredients of Section 66. 

• It is settled proposition of law that to prove the transaction to be fraudulent in nature, the degree of proof and evidence required should be of unimpeachable nature and 

• A transaction cannot be dubbed as fraudulent, on the basis of inadequate and tentative findings, as recorded in the forensic audit report relied upon by the applicant. 

7.1.  Further, no report can ever form the only basis for convicting a person of an offence. The prosecution has to prove the offence, by adducing evidence. Reliance is being placed on the following;

a. High Court Madras (23.02.2021) in M.Suresh Khatri & Anr. Vs. Directorate of Enforcement Rep. by the Deputy Director GOI. [CRL.O.P.Nos.20127 & 25688 of 2018] held that;

• It is these words which amply suggest that an opinion is to be formed only after due application of mind that there is sufficient basis for proceeding against the said accused and formation of such an opinion is to be stated in the order itself. The order is liable to be set aside if no reason is given therein while coming to the conclusion that there is prima facie case against the accused, though the order need not contain detailed reasons. A fortiori, the order would be bad in law if the reason given turns out to be ex facie incorrect.

• No report can ever form the only basis for convicting a person of an offence. The prosecution has to prove the offence by adducing evidence and this opportunity has to be given to the prosecution in this case too.

8. Report of opinion & determination by RP/Liquidator. It has been observed that in majority of cases the avoidance application filed by RP/Liquidator is without the report of RP/Liquidator of his opinion & determination as required under Regulation 35A of CIRP Regulations. Provisions of the Code & Regulations do not recognize any such Transaction/ Forensic Audit Report to form the basis of avoidance application under section 66 of the Code, and in no case third party (Forensic/Transaction Auditor)  opinion, even if submitted, can substitute the mandatory report of opinion & determination by Resolution Professional/ Liquidator required under provisions of the Code & Regulations (Regulation 35A of CIRP Regulations). In absence of the said report of opinion & determination by Resolution Professional/ Liquidator, the avoidance application filed by RP/Liquidator is not maintainable. Reliance is being placed on the following;

1. NCLT Kolkata (06.05.2022) in Jitendra Lohia vs. Nikhil Chowdhury and others [I.A.(IB) No. 208/KB/2021INC.P (IB) No.204/KB/2019]

2. NCLT Kolkata (30.06.2022) in Kshitiz Chhawchharia vs. Madhumalati Merchandise Private Limited & Ors [I.A. (IB) No. 346/KB/2019 In CP(IB) No. 349 /KB/2017

8.1. CIRP Regulations

# Regulation 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 thirtieth day of the insolvency commencement date. 

8.2. NCLT Kolkata (06.05.2022) in Jitendra Lohia vs. Nikhil Chowdhury and others [I.A.(IB) No. 208/KB/2021INC.P (IB) No.204/KB/2019] wherein it was held;

• # 16. ``We have carefully seen the averments of the application and corresponding reply of the respondents. We have noticed that the allegations made in application do not constitute anything actionable against the respondents. It was the duty of the RP to come to conclusive determination before filing an application with the Adjudicating Authority. Simply by repeating the extracts or observations made in the forensic auditors report, the RP could not make an independent determination about the nature of transactions as required by Regulation 35A (2) of the CIRP Regulations.’’

8.3. NCLT Kolkata (30.06.2022) in Kshitiz Chhawchharia vs. Madhumalati Merchandise Private Limited & Ors [I.A. (IB) No. 346/KB/2019 In CP(IB) No. 349 /KB/2017] held that;

6.7. ``According to regulation 35A(1) of the CIRP Regulations, 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 on or before the seventy-fifth day of the insolvency commencement date. According to the regulation 35A(2), on or before the one hundred and fifteenth day of the insolvency commencement date, the Resolution Professional is also required to make a determination to that effect.

6.8. Further, Regulation 35A(3) of the CIRP Regulations provides that upon making such determination under regulation 35A(2), the Resolution Professional shall apply to the Adjudicating Authority for the appropriate relief on or before the one hundred and thirty-fifth day of the insolvency commencement date. In this case, the one hundred and thirty fifth day is on 23 May 2018. The instant application being IA. (IBC) 346/KB/2019 has been filed on 20 March 2019, thus making it clear that the Applicant has not complied with the provisions of regulation 35A within the timeline provided therein.

6.9.  . ., we do not see any “determination” within the meaning of regulation 35A of the CIRP Regulations. Therefore, we will not act as court of first instance to determine the nature of the transactions mentioned hereinabove.

6.1 In light of the above facts and circumstances, the adjudicating Authority is satisfied that the instant application is not maintainable and the same is therefore rejected. “

9. Checklist to determine whether the applicant (RP/Liquidator) has complied with the parameters/caveats laid down under the provisions of the Code & Regulations.

S. No.	Parameter / Caveat	Yes/No
	Whether the applicant (RP/Liquidator) has submitted the report of his opinion & determination of Fraudulent Business. [Regulation 35A of CIRP Regulations].
	Whether the applicant (RP/Liquidator) has submitted the avoidance application (Section 66) within limitation as per the timeline provided under Regulations. [Regulation 35A of CIRP Regulations]
	Whether the applicant (RP/Liquidator) has filed separate applications against individual directors of the CD, as Code does not provide for collective or vicarious liability. (Explanation to section 66 of the Code - “For the purposes of this section a director or partner” ………)
	Whether the applicant (RP/Liquidator) has established the intentions of the respondents to defraud the creditors. [Section 66(1)]
	Whether the applicant (RP/Liquidator) has established that Business/Trading of the CD  has been carried out fraudulently. [Section 66(1)]
	Whether the applicant (RP/Liquidator) has submitted the evidence of fraudulent business and have satisfied the burden of proof. Law laid down by the Hon’ble Supreme Court in Union Of India vs M/S.Chaturbhai M. Patel & Co. (supra)
7.	Whether the applicant (RP/Liquidator) has assessed the  extent of impact of such Fraudulent Business/Trading on the interests of the creditors. [Section 66(1)]
8.	Whether the applicant (RP/Liquidator) has identified the beneficiaries of such Fraudulent Business/Trading done by the CD. [Section 66(1)]
9.	Whether the applicant (RP/Liquidator) has  submitted Rebuttal to deeming provisions of the section 66, that a director or partner of the corporate debtor has exercised due diligence. (Explanation to section 66 of the Code)

For avoidance application under section 66 to succeed, all the checkboxes are to be answered in affirmative. 

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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