Md Sadique Islam & Ors. Vs. Niraj Kumar Agarwal & Ors. - 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.

 NCLAT (2024.03.06) 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.

Excerpts of the order;

06.03.2024: Heard learned counsel for the Appellant as well as learned counsel appearing for the Resolution Professional. This Appeal has been filed against order dated 06.07.2022 passed by the Adjudicating Authority in I.A. No.314/KB/2022. The Appellant before us were Respondent No.3 to 7 to the I.A. No. 314/KB/2021. The Resolution Professional had filed the application under Sections 43, 45, 49 and 66 of the IBC Code seeking relief.

# 2. Learned counsel for the Appellant fairly submits that the Appellant could not file Reply to the I.A. Learned counsel for the Appellant challenging the order contends that the Adjudicating Authority in the impugned order has only noticed the opinion of the Resolution Professional and has not adjudicated about the ingredients of Section 43, 45, 49 and 66, specifically. It is sub mitted that in view of the judgment of Hon’ble Supreme Court in “Anuj Jain vs. Axis Bank Limited and Ors.” there has to be consideration for the relevant ingredients which are different for preferential transactions, undervalued transactions as well as fraudulent transactions. Learned counsel for the Appellant submits that the Adjudicating Authority relying on the opinion of the Resolution Professional proceeded to allow the application without returning any finding that ingredients are proved.

# 3. Learned counsel for the Resolution Professional refuting the submissions of learned counsel for the Appellant submits that the Resolution Professional has filed an application relying on the Transaction Audit Report and the Resolution Professional has given all details separately in the application which have been accepted by the Adjudicating Authority.

# 4. We have considered the submissions of learned counsel for the parties and perused the record.

# 5. The Adjudicating Authority in Para 26 of the order has noticed the law laid down by Hon’ble Supreme Court in the matter of “Anuj Jain vs. Axis Bank Limited and Ors.” and quoted Para 29.1 of the judgment of Hon’ble Supreme Court, which is as follows:

• “26. Now seen in the context of law laid down by the Hon'ble Supreme Court in Anuj Jain vs. Axis Bank Limited and Ors., MANU/SC/022812020, observed in paragraph 29.1 as follows:

• “29.1. However, we are implied to make one comment as regards the application made by IRP. it is noticed that in the present case, the JRP moved one composite application purportedly Under Sections 43, 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In our view, in the scheme of the Code, the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions. As noticed, the question of intent is not involved in Section 43 and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time. However, whether a transaction is undervalued requires a different enquiry as per Sections 45 and 46 of the Code and significantly, such application can also be made by the creditor Under Section 47 of the Code. The consequences of undervaluation are contained in Sections 48 and 49. Per Section 49, if' the undervalued transaction is referable to Sub-section (2) of Section 45, the Adjudicating Authority may look at the intent to examine if' such undervaluation was to defraud the creditors. On the other hand, the provisions of Section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons responsible therefor. We are not elaborating on all these aspects for being not necessary as the transactions in question are already held preferential and hence, the order for their avoidance is required to be approved; but it appears expedient to observe that the arena and scope of the requisite enquiries, to find if the transaction is undervalued or is intended to defraud the creditors or had been of wrongful /fraudulent trading are entirely different. Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. As noticed, the scope of enquiry in relation to the questions as to whether a transaction is of giving preference at a relevant time, is entirely different. Hence, it would be expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority.””

# 6. When we look into the judgment of Adjudicating Authority from Para 1 to 25, the Adjudicating Authority has only noted the facts of the case and respective contentions of both the parties. Findings of the Adjudicating Authority are only contained in Paras 27 and 28, which are as follows:

• “27. Let us now consider whether these transactions have taken place within the look back period with respect to undervalued and preferential transactions i.e. one year preceding the insolvency commencement date. From the table given in paragraph 8 above, it is pertinent to note that only the transactions that have been entered into with Respondent Nos. 3, 4, 5, 6, 7, 8, 11 fall within the look back period.

• 28. The Resolution Professional has clearly determined the undervalued transactions as well as preferential and fraudulent transactions. There transactions entered into with Respondent Nos. 3, 4, 5, 6, 7, 8, 11 by Respondents No.1 and 2 were clearly done with the intention to defraud the other creditors, hence, the Respondent Nos. 1 and 2 have entered into fraudulent transactions.”

# 7. 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. The Adjudicating Authority has only in two paras i.e. 27 and 28 has recorded his conclusion without giving any reason and without adverting to any pleadings or materials on record.

# 8. We, thus, are of the view that the order passed by the Adjudicating Authority cannot be sustained. Order impugned is set aside. The Application I.A. No.314/KB/2021 is revived before the Adjudicating Authority to be heard afresh and decided in accordance with law.

# 9. Learned counsel for the Appellant submits that the Appellant could not file reply, hence, they may be given opportunity to file reply before the Adjudicating Authority. They may file Reply within two weeks from today. The Appeal is disposed of accordingly.

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Gloster Cables Ltd. Vs. Fort Gloster Industries Ltd. & Ors. - We have found that the legislature has used the different language in Section 43 and 45 of the Code because in Section 43, the RP or the liquidator has to form an opinion whereas in Section 45 the RP or the liquidator has to examine and then determine that the transaction in question were undervalued during the relevant period.

 NCLAT (2024.01.25) in Gloster Cables Ltd. Vs. Fort Gloster Industries Ltd. & Ors.. [Comp. App (AT) (Ins) No. 1343 of 2019] held that;

• We have found that the legislature has used the different language in Section 43 and 45 of the Code because in Section 43, the RP or the liquidator has to form an opinion whereas in Section 45 the RP or the liquidator has to examine and then determine that the transaction in question were undervalued during the relevant period.

• In the case of Anuj Jain (Supra) the Hon’ble Supreme Court has also held that specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. 

Excerpts of the order;

# 15. In rebuttal, Counsel for the Appellant has argued that his whole case is based upon the supplemental trademark agreement dated 15.07.2008, the validity of which has not been challenged by Respondents before the Adjudicating Authority and no finding has been recorded in this regard except that the agreement was executed during the subsistence of the order of stay of the BIFR. It is further submitted that even if the agreement was stated to be insufficiently stamped yet it is a curable defect and the proper stamped duty has been paid. It is also reiterated that in the 5th CoC meeting, the CoC was apprised that the forensic audit report found no preferential, undervalued, fraudulent or wrongful trading transactions. In the forensic audit report, no related party preferential or fraudulent transaction whatsoever was found, therefore, the RP had rightly not filed the application under Section 43, 45, 49, 50 and 66 of the Code but the Adjudicating Authority has committed an error in suo motu passing the order and declaring the transaction between the parties being hit by Section 43 and 44 of the Code.

 

# 16. We have heard Counsel for the parties and perused the record with their able assistance.

 

# 27. The next submission of the Appellant is that the Adjudicating Authority has committed an error in holding that the transaction relied upon by the Appellant is undervalued transaction and is hit by Section 45(2)(b) and that it is also against the provisions of Section 43(2)(a) being a preferential transaction as it has been done within a period of two years preceding of commencement of CIRP and has referred to Section 43, 45 and 46 of the Code which are reproduced as under:-

 

“Section 43: Preferential transactions and relevant time.

*43. (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 sub-section (2) to any persons as referred to in sub-section (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 for 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 transfer-

(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.

 

Section 45: Avoidance of undervalued transactions.

45. (1) If the liquidator or the resolution professional, as the case may be, on an examination of the transactions of the corporate debtor referred to in sub-section (2) determines that certain transactions were made during the relevant period under section 46, which were undervalued, he shall make an application to the Adjudicating Authority to declare such transactions as void and reverse the effect of such transaction in accordance with this Chapter.

(2) A transaction shall be considered undervalued where the corporate debtor—

(a) makes a gift to a person; or

(b) enters into a transaction with a person which involves the transfer of one or more assets by the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor,

and such transaction has not taken place in the ordinary course of business of the corporate debtor.

 

Section 46. Relevant period for avoidable transactions.

(1) In an application for avoiding a transaction at undervalue, the liquidator or the resolution professional, as the case may be, shall demonstrate that—

(i) such transaction was made with any person within the period of one year preceding the insolvency commencement date; or

(ii) such transaction was made with a related party within the period of two years preceding the insolvency commencement date.

(2) The Adjudicating Authority may require an independent expert to assess evidence relating to the value of the transactions mentioned in this section”

 

# 28. It is submitted that it is an admitted case that no application has been filed by the RP for obtaining an order of the Adjudicating Authority under Section 43 and 45 and the order has been passed by the Adjudicating Authority suo motu. It is submitted that as per Section 43(1) the liquidator or the resolution professional, as the case may be, has to form an opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4) and then 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. Similarly, it is submitted that for the purpose of avoidance of undervalued transaction, it is for the liquidator or the RP to examine the transaction of the corporate debtor and determine that the transactions made during the relevant period under Section 46 were undervalued and then he shall make an application to the Adjudicating Authority to declare such transaction as void. In this regard, Counsel for the Appellant has placed reliance upon the judgment in the case of Anuj Jain (Supra) and referred to para 140 which is reproduced as under:-

• # 140.However, we are impelled to make one comment as regards the application made by IRP. It is noticed that in the present case, the IRP moved one composite application purportedly under Sections 43, 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In our view, in the scheme of the Code, the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions. As noticed, the question of intent is not involved in Section 43 and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time. However, whether a transaction is undervalued requires a different enquiry as per Sections 45 and 46 of the Code and significantly, such application can also be made by the creditor under Section 47 of the Code. The consequences of undervaluation are contained in Sections 48 and 49. Per Section 49, if the undervalued transaction is referable to sub-section (2) of Section 45, the Adjudicating Authority may look at the intent to examine if such undervaluation was to defraud the creditors. On the other hand, the provisions of Section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons 105 responsible therefor. We are not elaborating on all these aspects for being not necessary as the transactions in question are already held preferential and hence, the order for their avoidance is required to be approved; but it appears expedient to observe that the arena and scope of the requisite enquiries, to find if the transaction is undervalued or is intended to defraud the creditors or had been of wrongful/fraudulent trading are entirely different. Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. As noticed, the scope of enquiry in relation to the questions as to whether a transaction is of giving preference at a relevant time, is entirely different. Hence, it would be expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority.

 

# 29. We have found that the legislature has used the different language in Section 43 and 45 of the Code because in Section 43, the RP or the liquidator has to form an opinion whereas in Section 45 the RP or the liquidator has to examine and then determine that the transaction in question were undervalued during the relevant period. In the case of Anuj Jain (Supra) the Hon’ble Supreme Court has also held that specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. It further said that it is expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority But in any case the action could not have been taken under Section 43 and 45 without there being an application moved by the RP. In the present case, the CoC was apprised in its 5th meeting that the forensic audit report found no preferential, undervalued, fraudulent or wrongful trading transactions nor it has found any related party preferential or fraudulent transaction whatsoever, therefore, only on the basis that the trademark was hypothecated for a bigger amount and has been assigned for lesser amount would not be a criteria for the purpose of declaring it to be undervalued transaction without there being sufficient material before the Adjudicating Authority to pass such an order, therefore, in our considered opinion, the finding recorded in this regard is not in accordance with law and thus reversed.

 

30. In view of the aforesaid discussions, the present appeal is hereby allowed and the impugned order is set aside. No costs. 

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M/s Concord Infrastructure Pvt. Ltd. Vs. M/s Shubhkamna Buildtech Pvt. Ltd. - It is clear that Section 66 of the Code, 2016 contemplates that during the CIRP or liquidation process if 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.

NCLT ND-IV (12.09.2022) in M/s Concord Infrastructure Pvt. Ltd. Vs. M/s Shubhkamna Buildtech Pvt. Ltd. [C.A.1/ND/2020 in C.P. No. IB-1059/ND/2018] held that;

• It is clear that Section 66 of the Code, 2016 contemplates that during the CIRP or liquidation process if 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.

Excerpts of the order;

The instant application has been filed on behalf of Mr. Anand Sonbhadra (`applicant/resolution professional) under Section 66 of the Code, 2016 to bring fraudulent and wrongful transactions done by the suspended board directors of the corporate debtor to the notice of this Hon’ble Tribunal seeking the following relief(s):-

• a) to direct the suspended Directors of the Corporate Debtor, i.e. Mr. Piyush Tiwari, Mr. Diwakar Sharma and Mr. Deep Tiwari, to contribute INR 106. 19 crores.

• b) report the transactions to the Insolvency & Bankruptcy Board of India for making a complaint to the Special Court under section 236 of the Code.’

2. Briefly stated, the facts of this case leading to filing of this present interlocutory application, as averred by the applicant are as follows:-

a) The applicant submits that the Corporate debtor i.e., M/s. Shubhkamna Buildtech Private Limited is engaged in the business of real estate construction and development and was in the process of developing the projects on a plot of land admeasuring 22565.77 sq/mts bearing plot no. GH-05/B is situated at Sector 137, Noida.

b) The applicant submits that Corporate Insolvency Resolution Process against M/s. Shubhkamna Buildtech Private Limited (`Corporate Debtor’) had been initiated vide Hon’ble NCLT order dated 26.11.2018 in C.P.(IB)No. 1059/2018, petition under Section 9 of the Code, 2016 filed by M/s. Concord Infrastructure Private Limited (Operational Creditor’).

c) The applicant submits that the Committee of Creditors in its 2nd CoC meeting held on March 11, 2019 had approved the appointment of forensic auditor M/s. Haribhakti & Co. LLP to conduct the forensic audit of the books, records, papers, documents accounts and transactions relating to the corporate debtor.

d) The applicant submits that the forensic auditor conducted the forensic audit and submitted the report with its comments on 06.10.2019. The applicant submits that on perusal of the forensic audit report and the accounting data available with the applicant, the applicant has determined that certain transactions falling within the purview of preferential, fraudulent or undervalued transactions that have been carried out by the suspended management of the corporate debtor.

e) The applicant submits that the applicant has averred that monies siphoned off under avoidable transactions amount to INR 106.19 crores towards diversion of funds to a foreign related entity, personal expenses incurred from the account of the corporate debtor, questionable transactions carried out with supposed suppliers, potential diversion of funds to related entities, misappropriation of assets of the corporate debtor, unreasonable reduction in value of land in the books of the corporate debtor, potential diversion of monies to related/ unrelated parties in the form of interest free loan. The applicant further submits that the amount siphoned-off is summarized as below:-

Transaction	Amount (Cr,)
Diversion of funds to SBL-HK: Payments made on behalf of SBL-HK without any justification	2.72
Personal expenses incurred from the account of the Corporate Debtor: Expenses like purchase of gold, chocolates, wedding expenses etc. carried out from the account of the Corporate Debtor.	0.61
Questionable transactions carried out with supposed suppliers: Transactions visibly impossible and/or wrongful without any supporting documents carried out with suppliers of the Corporate Debtor.	51.40
Potential Diversion of Funds to related Entities: Transactions have been made with various related entities, without any record or reason, which in total has amounted to net recoverable amount by the Corporate Debtor.	27.60
Misappropriation of assets of Corporate Debtor: The Balance Sheet of the Corporate Debtor reflects several vehicles in the name of the Corporate Debtor, which have not been found by Resolution Professional and upon verification, most of the same have been found to have been registered in the name of third parties.	2.69
Unreasonable reduction in value of land: The value of land has been unreasonably reduced in the books of the Corporate Debtor	10.95
Potential diversion of monies to related/ unrelated parties in the form of interest free loans: Monies have been paid to unrelated parties, and upon recovery, paid on the same date to further transferees, without any justification.	8.61
Interest on residential properties of directors paid from the account of the Corporate Debtor: Properties are being used by Mr. Piyush Tiwari and Mr. Diwakar Sharma were paid for between the years 2011 to 2015 by the Corporate Debtor.	1.61
Total	106.19

f) The applicant submits that the fraudulent transactions as enumerated above, have been carried out by the respondents with the sole intent of siphoning off cash from the Corporate Debtor and by thus dissipating the assets of the Corporate Debtor, to leave little for distribution among the creditors of the Corporate Debtor.

g) The applicant submits that from the forensic report, it can be clearly established that the Directors/Corporate Debtor has entered into several fraudulent transactions thereby prejudicially affecting the rights and interests of the lenders / financial creditors of the Corporate Debtor and that the same are clearly in contravention of inter alia the provisions of section 66 of the Code.

# 3. We have heard Ld. Counsel for the applicant and perused the averments made in the application. The relevant documents annexed with the application have been examined in detail. The respondent had neither filed their reply nor appeared before this Adjudicating Authority for arguments in the C.A./01/ND/2020.

# 4. Before proceeding further on the matter, it would be appropriate to refer to Section 66 of the Code, 2016 relating to fraudulent transaction, which 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.”

• (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 minimizing 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.”

# 5. In order to bring the transaction within the scope of Section 66 of the Code, 2016, it is necessary to demonstrate that the business of Corporate Debtor has been carried on with the “intent to defraud” its creditor or for “any fraudulent purpose”. Further, Section 66(2) of the Code inter-alia mandates that the directors of the corporate debtor ought to have known that there was no reasonable prospect of avoiding the initiation of the CIRP and the directors did not exercise due diligence in minimizing the loss. Therefore, test is to look into the purported/alleged fraudulent transaction and to ascertain whether the alleged transactions established that the alleged transaction were made with intention to defraud and for fraudulent purpose

# 6. In support of the averments made in the application, the Ld. Counsel for the applicant had relied upon the Forensic Report dated 06.10.2019 and invited attention of this Adjudicating Authority towards diversion of funds to a foreign related entity, personal expenses incurred from the account of the corporate debtor, questionable transactions carried out with supposed suppliers, potential diversion of funds to related entities, misappropriation of assets of the corporate debtor, unreasonable reduction in value of land in the books of the corporate debtor, potential diversion of monies to related/ unrelated parties in the form of interest free loan as enumerated at Pg-31 of the Forensic Report dated 06.10.2019.

# 7. At this juncture, it is significant to refer to the decision of the Hon’ble Supreme Court in the matter of Anuj Jain IRP for Jaypee Ifratech Limited vs. Axis Bank Limited [Civil Appeal No. 8512 -8527 of 2019], wherein it was held that

• “29.1. However, we are impelled to make one comment as regards the application made by IRP. It is noticed that in the present case, the IRP moved one composite application purportedly under Sections 43, 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In our view, in the scheme of the Code, the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions. As noticed, the question of intent is not involved in Section 43 and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time. However, whether a transaction is undervalued requires a different enquiry as per Sections 45 and46 of the Code and significantly, such application can also be made by the creditor under Section 47 of the Code. The consequences of under valuation are contained in Sections 48 and 49. Per Section 49, if the undervalued transaction is referable to sub-section (2) of Section 45, the Adjudicating Authority may look at the intent to examine if such undervaluation was to defraud the creditors. On the other hand, the provisions of Section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons responsible therefor. We are not elaborating on all these aspects for being not necessary as the transactions in question are already held preferential and hence, the order for their avoidance is required to be approved; but it appears expedient to observe that the arena and scope of the requisite enquiries, to find if the transaction is undervalued or is intended to defraud the creditors or had been of wrongful/ fraudulent trading are entirely different. Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. As noticed, the scope of enquiry in relation to the questions as to whether a transaction is of giving preference at a relevant time, is entirely different. Hence, it would be expected of any resolution professional to keep such requirement in view, while making a motion to the Adjudicating Authority.

# 8. Therefore, from the Jaypee Infratech case cited above, it is clear that Section 66 of the Code, 2016 contemplates that during the CIRP or liquidation process if 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.

# 9. A perusal of the forensic report and its contents, relevant Tally entries of the books of the corporate debtor showing payments to related entities, travel expense, personal expenses of director accounted in the corporate debtor’s account, explicitly reveals the fact that the corporate debtor has clearly consequently made the payments, which were not used for the business of the Corporate Debtor but otherwise and the said act of the suspended directors of the corporate debtor will squarely attract under the provisions of Section 66 of the Code, 2016. Consequently, the respondents herein i.e., Mr. Piyush Tiwari, Mr. Diwakar Sharma and Mr. Deep Tiwari, are directed to immediately contribute a sum of INR 106.19 crores, which was siphoned-off by the respondent, while managing the affairs of the Corporate Debtor within a period of 21 business days from the pronouncement of this order. The respondents shall be jointly and severally liable to contribute a sum of INR 106.19 crores, which was siphoned-off by the respondents while managing business of the corporate debtor.

# 10. We find that the Resolution Plan approved by the COC in its 6th meeting and submitted before this Tribunal for approval specifically provides for treatment of recoveries arising out of avoidance transactions. The Clause 7.5 of Chapter VII, pg 29 of the Resolution Plan dated 12.10.2019 as approved by the COC is reproduced below

• “Chapter VII- Funding Plan and Sources of Funds

• 7.5. Passing of Benefit to Financial Creditors accruing from Avoidance Transaction:

• The CD/ RA shall extend all possible cooperation for adjudication of any transactions u/s 43, 45, 49, 66, if any. 100% of the Net Amount received through Bank Transactions (if anti) directed by the Adjudicating Authority that is received by the CD in respect of such transactions shall be passed on to the Financial Creditors in pro rata basis of the repayment of claims as proposed by the RA. If the land that has been sub-leased to AEPL comes back in the name of the CD at a later date, the Land/ FSI shall be sold and the receipts (net of cost) shall be distributed amongst the home buyers in pro-rata basis. Alternatively the FSI can be developed by the RA/ CD and the cost of FSI shall be distributed amongst the Home Buyers in pro-rata basis once the entire inventory is sold and all the proceeds are received by the RA/ CD. Further if any asset of SHUBHKAMNA which is not present in the Information memorandum / Balance sheet, is discovered in future during the resolution then 100% of the net benefit from their recovery will be passed on to the financial creditors in pro-rata basis of the repayment of claims as proposed by the RA. “

# 11. In view of the aforementioned facts and the discussion, we are of the considered view that respondents i.e. suspended board of directors were involved in running the business of the corporate debtor in a fraudulent and wrongful manner, therefore, responsible and liable under the provision of Section 66 of the Code, 2016.

# 12. Accordingly, the instant application i.e., C.A./O1/ND/2020 stands allowed, with a direction to the suspended board of directors i.e., Mr. Piyush Tiwari, Mr. Diwakar Sharma and Mr. Deep Tiwari, to deposit this aforesaid amount of Rs.106.19 crores with this Adjudicating Authority within two months from the pronouncement of this order, which shall be distributed to financial creditors proportionately.

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