AI Structured Summary
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Judgment
Particulars,Amount in Rs.
Royal India Corporation
Limited (General Ledger)","10,54,92,600/-
Royal India Corporation
Limited (Jewellery)","5,58,03,104/-
Royal India Corporation
Limited (Local)","1,41,94,60,765/-
Total,"1,58,07,56,469/-
The Applicant RP contemplates that the alleged transactions falls under the provisions of Section 66 of the Code, arising as a result of fraudulent",
or wrongful trading with an intent to defraud the creditors of the Corporate Debtor. Further, the said transactions could not have been possible without",
assistance of Respondent nos. 2 and 3 in affiliation with Respondent no.4.,
The Applicant Resolution Professional (“RPâ€) states that there has been non-cooperation from the promoters / directors of the Company to,
provide all the relevant information about the affairs of the Company, access to complete accounts, etc. right from the inception of CIRP period. Even",
after repeated reminders through emails as well as oral communications, the Directors have failed to provide relevant documents, and whatever the",
RP has managed has been through information mainly acquired from Director of Revenue Intelligence. Due to this, the Applicant Resolution",
Professional is not in a position to work effectively thereby fulfilling his duties as defined under section 25 of the Code. The instances of non -,
cooperation by the directors are being reflected in several emails that have been sent out by the RP seeking details/documents/clarifications, to which",
Respondents have either not responded appropriately, or provided evasive replies and piecemeal information, thereby creating ambiguities and",
hindrances in the CIRP Process.,
The Applicant states that at COC meetings which have taken place so far, act of non-cooperation and lack of information provided by the",
promoter/ directors and statutory auditor of the Company has been raised and discussed.,
Eventually a separate application under the provision of Section 19(2) has been filed against the Respondent nos. 2 to 4 citing instances of non-,
cooperation which is pending adjudication. Further the RP states that as mentioned earlier the Respondent no.3 herein was a key managerial person,
on the board of Corporate Debtor for the period 10 August 2018 to 09 January 2020 which further raises concerns over such high value transactions,
on credit basis with Respondent no. 1.,
The Applicant states that Respondent no.4, appointed as the statutory auditor of the Company from 07 December 2019 to 13 February 2020 also",
failed to provide details as well as audited financial statements for the period ended 31 March 2019, despite taking professional fees and further",
abruptly resigned from its position and submitted a resignation letter during the CIRP period vide email dated 19 December 2019 which was placed,
before CoC in meeting held on 10 January 2020 for necessary consideration.,
It is submitted that from the aforesaid background and findings, it can be deduced that the Respondent nos. 2 to 4 herein did not exercise due",
diligence reasonably expected of a person carrying out the respective functions and the act of undertaking the transaction in an ordinary course of,
business resulting into fraudulent/ wrongful trading, which has ultimately into closure of business of the Corporate Debtor, shows wilful misconduct",
and gross negligence with an intent to defraud its creditors.,
In view of the facts mentioned above, the Applicants pray for the following relief(s):",
a. Consider and allow the IA No. 1266 of 2020 in terms of Section 66 read with Section 26 of IBC, 2016;",
b. Direct the Respondents as detailed in this application, to make such contributions to the assets of the Corporate Debtor equivalent to the sums as",
stated in this Application, in respect of benefits wrongfully availed by from the Corporate Debtor;",
c. Pass appropriate directions / orders in terms of Section 67 of the Code including for recovery/ restoration of legitimate amounts due to the,
Corporate Debtor;,
d. Intimate IBBI for initiating a complaint to the Special Court in terms of section 236(2) of the Code, if this Hon'ble Tribunal deems fit;",
e. Impose such fine under section 70 and 71 of the Code upon the Respondents as this Hon’ble Tribunal may deem fit;,
f. And for such other/ further order(s) and/or direction (s) as the facts and circumstances of the case may warrant.,
Submissions by the R1:,
The Respondent denies and disputes all the allegations and certain contentions raised, levelled and contained by the Applicant in above",
Interlocutory Application.,
The contents of the present application are made on assumption and presumption hence not maintainable and liable to be dismissed.,
The R1 is neither Corporate Debtor in main petition or present application nor promoter/suspended director of the Corporate Debtor. The R1 is a,
separate entity and not liable for wrongful or fraudulent trading in Corporate Debtor, if any.",
The R1 submits that in general practice in the bullion market, monetary transaction between the sellers and purchasers are common. Advanced",
amounts are subject to adjustment against trading of the gold/bullion from time to time. Respondent used to maintain running trading account with the,
Corporate Debtor hence disbursement of advance and trading for long period on beneficial conditions such as booking on prevailing rate for future,
goods, discounts etc. are usual in bullion business operations. The R1 strictly denies that fraudulent preference which is carried out under ordinary",
business, thereby resulting into fraudulent/wrongful trading fortifying presence of mens-rea and aiming at processing secret advantage to R2 and R3 in",
affiliation and knowledge of R4.,
There is no related party concerned in section 66 of IBC, 2016. The R1 shouldn’t be classified as a related party because the R3 is neither",
existing key managerial person in R1, nor interchanged for procuring any advantage for the R1. It is fact that R3 was appointed as Director of R1 on",
10.08.2018 and resigned on 09.01.2019. During this period, he was not holding any position in the Corporate Debtor.",
The applicant failed to clear that where 3 ledger accounts are maintained in the name of R1 in books of accounts of which company. It depends,
on the concerned person how they maintain their books of accounts and the R1 doesn’t deal with system of other entity.,
The R1 denies and disputes the outstanding amount announced by the Applicant i.e. 1,58,07,56,469/-. The original outstanding amount is Rs.",
31,01,83,022/- as on commencement of CIRP according to the books of account of the R1.",
The letters provided by the Applicant based on incorrect data and information hence not maintainable and thus, there is no occasion to reply the",
same.,
Submissions by the R2 and R3:,
The R2 and R3 deny that there were any fraudulent or wrongful trading between R1 and the Corporate Debtor. As a matter of general practice in,
bullion market, money is advanced to parties against purchase of bullion/gold which is subject to be adjusted against future gold. All the transactions",
are trust based on the ground of goodwill of the parties. It is baseless and incorrect statement contained by the Applicant that fraudulent preference,
has been given while dealing in a business transaction which is carried out under ordinary business, thereby resulting into fraudulent/wrongful trading",
fortifying presence of mens-rea and aiming at procuring secret advantage to R2 and R3 in affiliation and knowledge of R4.,
The R2 and R3 deny that the R1 is classified as a related party. It is a fact that the R3 was appointed as director of R1 from 10.08.2018 to,
09.01.2019. during this period, he was not holding any position in the Corporate Debtor and it has been falsely alleged that alleged transactions relating",
to sale of gold have occurred between Corporate Debtor and R1. After relieving from the Corporate Debtor, R3 joined the Corporate Debtor",
independently but not being in charge.,
There are huge mismatch in amount of the Corporate Debtor hence not maintainable.,
The R2 and R3 denies the amount announced by the applicant i.e. Rs. 158,07,56,469/-. The original outstanding amount is Rs. 31,01,83,019/- as on",
commencement of CIRP.,
The R2 and R3 deny all the allegations for non-co-operation in CIRP. The R2 and R3 are fully co-operating the Applicant in CIRP of the said,
Corporate Debtor ab-initio. De-facto, the R1 have been attended maximum CoC meetings, provided all available documents and details as required by",
the Applicant through email. Due to some unavoidable circumstances which were beyond control of the R2 and R3, the R2 and R3 couldn’t",
provide certain details to the Applicant immediately but the R2 and R3 made all the efforts and continuing to provide the remaining details to the,
Applicant.,
The functions of the Corporate Debtor were affected due to seizure of various data and documents during search by the DRI, Mumbai. The R2",
and R3 always co-operated the Applicant as much as they could. There is no misconduct or negligence with intent to defraud any creditors. All the,
business transactions till commencement of CIRP placed in proper manner and not fraudulent or wrongful.,
The R2 and R3 has not been carried business of Corporate debtor to defraud creditors of the Corporate debtor or for any fraudulent purpose.,
The R2 and R3 never mis-conducted in the course of CIRP and always co-operated the Applicant as much as they could. It is baseless to say that,
there is any falsification of books of Corporate Debtor without proper audit till the filing of this application.,
Submissions by the R4:,
The Respondent No. 4 states that the fulcrum of the Application appears to be the transactions done between Respondent No. 1 and the,
Corporate Debtor during the period of 1st April 2018 to 20th May 2019 which seeks to record acts/rights/liabilities amongst the parties therein in a,
way that purportedly be a fraudulent trading or unlawful trading as contemplated under the provisions of the Insolvency and Bankruptcy Code, 2016.",
The Applicant has made allegation against the Respondent No.4 that Respondent No. 4 was appointed as statutory auditor of the Corporate,
Debtor since 7th December 2019 to 13th February 2020 and has not provided co-operation to the Applicant. The Applicant further alleges that,
Respondent No.4 did not exercise due diligence reasonably expected of a person carrying out the respective functions. Respondent No.4 humbly,
submits that the allegations as contained in the Application do not depict the true and correct picture and hence, it is imperative to place the same on",
record. Shorn of unnecessary details and to avoid repetition, the important facts are as follows:",
a. The Respondent No. 4 submits that the Corporate Debtor had engaged Manish Panwar & Co. i.e. the Respondent No. 4’s proprietary firm as,
the statutory auditors of the Corporate Debtor on 30.09.2018 vide Appointment Letter dated 01.10.2018 till the conclusion of 7th Annual Meeting.,
b. The Respondent No. 4 submits that it is a matter of record that Respondent No.4 did not issue any statutory audit report since he was not given,
access to the books of accounts of the Corporate Debtor. Respondent No. 4 humbly submits that he has never held any documents/data of the,
Corporate Debtor since the access to the books of accounts of the Corporate Debtor was given only at the registered office of the Corporate Debtor.,
c. The Respondent No. 4 submits that it was the lackadaisical attitude of the management and subsequent arrest of directors of the Corporate Debtor,
which restrained him from conducting the statutory audit of the Company. Respondent No. 4 was further informed that all the books of accounts and,
data has been ceased by the DRI. It is further submitted that the Respondent No. 4 had resigned from the position of the statutory auditor because he,
was surrendering his Certificate of Practice (“COPâ€) and wished to pursue higher studies.,
d. Therefore, the Respondent No. 4 submits that he had informed the Applicant that no audit was done by the auditors since the management had not",
provided the relevant papers of the Corporate Debtor for conducting the audit.,
e. The Respondent No. 4 submits that a statutory auditor is an external or outside office service supplier whose role is limited to conducting statutory,
audit as per the established norms provided by the Institute of Chartered Accountants of India and has no managerial role in the business of the,
Company. A statutory auditor ensures compliance with established internal control procedures and statutory obligations by examining financial data,",
reports, operating practices, and documentation provided by the management of the Company. A statutory auditor has no say with respect to decisions",
regarding transactions which are undertaken by the management of the Company at the time of transactions. Even otherwise and as is not even,
alleged by the Applicant, Respondent No.4 even during his appointment as an internal auditor of the Corporate Debtor for the FY 2016-17 & 2017-18",
has diligently performed its duties and completely in accordance with the standards and guidelines issued by the Institute of Chartered Accountant of,
India. Similarly, Respondent No. 4 was internal auditor for the Respondent No. 1 Company as well but even in that case, has diligently performed its",
duties and completely in accordance with the standards and guidelines issued by the Institute of Chartered Accountant of India. It is further pertinent,
to mention that as an internal auditor, Respondent No.4 did not undertake and/ or permit any transaction on behalf of the Corporate Debtor. It is the",
duty of the internal auditor to verify the accounting entries with the supporting relevant documents, mark out deviation from internal procedures/",
controls and issue internal audit report. Respondent No. 4 has no role to play in relation with the carrying out of business and business decisions of the,
Corporate Debtor. I crave leave to refer and rely upon the guidelines of the ICAI to substantiate the submissions.,
f. The Respondent No. 4 submits that the Applicant has baselessly tried to point out the resignation of the Respondent No. 4 as a suspicious and,
dubious act. However, it is pertinent to mention that the Respondent No. 4 had resigned for the purposes of taking admission in a course in the",
University of Canada and for which he had also received an acceptance letter. Amongst many, this was also one of the reasons why he had also",
surrendered the COP.,
g. The Respondent No. 4 submits that as and when the Applicant has required any information, he has always answered and co- operated with the",
Applicant. It is further submitted that the Applicant has also been provided with the statement of facts wherein the Respondent No. 4 has given a,
detailed explanation and provided all the information. Therefore, the Applicant is unnecessarily persecuting the Respondent No. 4 by trying to link the",
alleged transaction with him.,
h. The Respondent No. 4 further submits that the Respondent No. 4 has even searched and provided the internal audit report for the year 2016-17 and,
draft internal audit report for the year 2017-18 through his advocates to the advocates of the Applicant vide email dated 25.10.2020.,
The Respondent No. 4 submits that the Applicant has made erroneous allegations and statements against him, which are not only ill- founded and",
illusory but are also baseless. It is submitted that the Applicant has no evidentiary proof to support the bald statements made by him regarding,
Respondent No.4’s involvement in the transactions being made between the Respondent No. 1 and the Corporate Debtor.,
The Respondent No. 4 submits that the Applicant has tried to link him with the above-mentioned transactions only because he was the statutory,
auditor of the Corporate Debtor for the period of 2018-2019. However, it is pertinent to mention that Applicant has been duly informed with a detailed",
information as to how the Respondent No. 4 has neither conducted any statutory audit nor has issued any statutory audit report.,
The Respondent No.4 submits that he has provided the Applicant with the detailed statement of facts wherein the Respondent No. 4 has given a,
detailed explanation and provided all the information in relation with his role with Corporate Debtor. The Respondent No. 4 further submits that, he has",
always answered and co-operated with the Applicant and is always ready to provide all the co-operation in relation with CIRP as required by the,
Applicant. Hence, section 70 & 71 have no application as against Respondent No.4.",
Findings:,
The Resolution Professional (RP) in this present application, after making analysis of the Books of Accounts of the Corporate Debtor, the",
Respondent No.1, i.e., Royal India Corporation Ltd. and the Books of Accounts provided by Respondent No.2 and Respondent No. 3 has arrived at a",
conclusion that transaction of Rs. 158,07,56,469/- has been given by the promoter/ directors of the Corporate Debtor, resulting into prima facie",
fraudulent benefit and advantage to the Respondent No. 1. Therefore, the Applicant mentions that these transactions are squarely covered under",
provisions of Section 66 of the IBC and therefore, the Adjudicating Authority may pass necessary direction to Respondents to make good the potential",
loss suffered by the other Creditors of Rs. 158,07,56,469/-.",
This Bench, while deciding this case is banking on the ledger which has been made available by the RP as received by him from the Directorate of",
Revenue intelligence (DRI) which shows that a total amount of Rs. 158,07,56,469/- is payable by Respondent No. 1 to the Corporate Debtor. In",
arriving at the total of Rs. 158,07,56,469/-, the RP has taken into account, as received from DRI, 3 Ledger accounts of R1 as reflected in the Books of",
Accounts of the Corporate Debtor. Here, it may be mentioned that all the details as provided by the RP are based on the documents provided by DRI,",
hence are a period for not later than end- May 2019. It is due to the fact that DRI had carried out a ‘search and seizure exercise’ in the 3rd or,
4th week of May, 2019 and had confiscated all financial data, computers and other records of the Corporate Debtor. This was done because of",
various offences committed at that time under the Customs Act, 1962 by the Directors of the Corporate Debtor Company. This Bench while deciding",
the fraud in this case mainly has looked into the Ledger Account of R1 as appearing in the books of the account of the Corporate Debtor which has,
been provided by RP, R1 itself and R2 & R3 (the suspended directors). The scrutiny done by this Bench in this matter is for the period between end-",
May 2019 and 13.11.2019, the date when CIRP had commenced against the Corporate Debtor.",
The RP has provided Ledger account of R1 which mainly has 3 parts: (1) Royal India Corporation Ltd. (Local) (RICL-L)); (2) Royal India,
Corporation Ltd. (Jewellery) (RICL-J) and (3) Royal India Corporation Ltd. (General Ledger) (RICL-JL). As per the last entry of RICL Jewelry, on",
01.04.2019 the credit shown is Rs. 5.58,03,104/-, in the RICL General Ledger it is Rs. 10,54,92,600/- ending 30.03.2019 and in the RICL Local Ledger",
it is Rs. 141, 94,60,765/-. In all, as mentioned by the RP, it totals to Rs. 158,07,56,469/-. The Bench finds that the three types of different Ledger",
Accounts i.e., RCIL Local, Jewelry and General is not the normal way in which the ledger account in the books of accounts of any Company is",
maintained. As mentioned above, the Ledger account provided by the RP of R1 as appearing in the Books of Corporate Debtor has been procured by",
RP from DRI. The second set of the Ledger account of the Corporate Debtor as appearing in the books of account of Respondent No.1 has been,
provided by R1 in their reply. Here it may be mentioned that R1 has provided a consolidated Ledger. Similarly, R2 and R3 (ex- directors/ promoters)",
have provided a third set of Leger account of RICL by way of their submissions.,
Here it would be pertinent to mention that Respondent No. 4 is Manish Panwar, who was engaged by the Corporate Debtor for Performance",
Audit of the Books of Accounts, in his submissions he has mentioned that he had carried the audit of the Corporate Debtor for Financial Years 2016-",
17 and 2017-18. He also mentions that though he was appointed the statutory auditor for the year 2018-19, however, he had not signed the balance",
sheets or issued any statutory reports for the year 2018-19.,
We would like to mention that the Corporate Debtor is a Gold Refining Company which means that it imports raw gold, processes it and sends it to",
various Jewelers/ Company in form of gold bar with about 99.5% purity. It is the same arrangement which was followed by the Corporate Debtor,
with R1 (RICL). This is very evident from the table which has been produced before us by the RP with details about Invoices. A copy of the last,
page of the table in this regard is as under:-,
It can be seen from the above document that the Invoices are always raised by the R1 (RICL) seeking purchase of gold bars from the Corporate,
Debtor. It is for this reason that in the Ledger Account maintained with the Corporate Debtor, it is only the payment which comes to the Corporate",
Debtor account and what goes out is by way of sale of gold bar. This fact is very germane and we will refer to it subsequently while proving the fraud,
committed by R1, R2 and R3.",
The Ledger Account which has been produced by R1 is as under:-,
Similarly the Ledger account of R1 as provided by R2 & R3 vide their submission is as under:,
It can be seen from the boxes that the R1 which all through has been “Purchaser†of gold from the Corporate Debtor till May, 2019 has turned",
into a “Seller†of gold. Nowhere in the records since 2018 it is a “Seller†of gold. The same is also evident from the invoices since 31.03.2018,
which has been produced by the RP. This is for the simple reason that a Refinery doesn’t take gold, the Refinery’s job is to refine the raw",
gold to 99.5% purity and sell it to the jewelers. There can never be a transaction where the Jeweler sells jewelry to the Corporate Debtor, which is a",
gold Refinery. The R1 knew here that they cannot make any changes by way of fraud in the Ledger Account for the period before May 2019,
because, that account has already been seized by DRI and therefore it be almost impossible to make fraudulent entries for any amount before May",
2019. Therefore, from 27.07.2019 onwards till 31.08.2019 the R1 cooked their ledger and showed sales to the Corporate Debtor, which is a total role",
reversal. Similarly R2 and R3 also aligned themselves in this and have mentioned these as “Purchase†in the Books of account of the Corporate,
debtor. As the Bench has pointed earlier that the transaction with the Corporate Debtor of R1 was for the purchase of gold (not for sale) and in view,
of that payment was flowing into the account of Corporate Debtor. However, to reduce the credit which was in R1’s account as on 01.04.2019,",
these sale entries and a Journal entry has been fraudulently made in connivance with R2 & R3 where the R2 & R3 have shown a corresponding entry,
of Purchase in their books of account. The resultant effect of this has been that the outstanding dues of R1 by this fraud has been brought down to,
Rs. 31,01,83,022/- as on 31.08.2019 it. Similarly, in their submissions R2 and R3 also show a Purchase entry of the same amount. Again, the R2 and",
R3 who are the erstwhile directors did these fraudulent transactions in order to reduce the Credit amount. While doing so, they very well knew that",
there is no other way other than putting it as a Purchase entry and fraudulently debiting the account of the Corporate Debtor in order to reduce the,
credit due from the R1. These total fraudulent entries amounts to about Rs 158,07,56,469 as mentioned by the RP and as reflected in the credit",
Balance payable by the R1 in the three different Ledgers of R1 enclosed at Annexure 5 of the Application by the RP.,
Therefore, it is clear from the above that Respondent No.1 as well as Respondent No. 2 and 3 (suspended directors) submitted an unaudited",
amended tally data whereby the substantial amount of receivable was reduced to mere Rs. 31,01,83,022/-which is payable to the Corporate Debtor",
after passing the fraudulent entries. The Bench here observes an interesting fact that the copy of the ledgers provided by the Respondents as part of,
their Affidavit in Reply show an amount of Rs. 31,01,83,022/- as payable by Respondent No.1 to the Corporate Debtor.",
In deciding the amount of fraudulent transaction, the Bench, in order to reduce any ambiguity, has gone by the ledger accounts submitted by R1",
(the beneficiary) and R2 and R3 (erstwhile directors). This, the Bench has done because, instead of three separate ledgers as produced by the RP",
based on DRI records only single ledger has been produced by R1 and on the other hand by R2 & R3. By and large, the Bench finds that transactions",
before May 2019 are broadly in order. However, the fraudulent entries have been made only subsequent to the DRI raid i.e., from June 2019 onwards",
and till the time the Corporate Debtor went into Insolvency as on 13.11.2019. Adding up the “purchase†entry as appearing in the ledger account,
provided by R2 and R3 are almost the same as is the “sale†entry made by R1. This, as has been demonstrated in preceding paragraphs, is",
fraudulent entry which has been done by R1, R2 and R3. Therefore, the Bench has no doubt in its mind that the R1, R2 and R3 have defrauded and",
has dues to the extent of Rs. 86,06,22,740/- which is an amount due to the Corporate Debtor but has been fraudulently reduced by showing illegal",
entries of “sale†entry by R1 and concomitant “purchase†entry in the ledger by R2 and R3.,
Therefore, in view of the above this Bench, after examining the fraudulent entries comes to the following conclusion:-",
(a) That an amount of Rs.31,01,83,022/- crore is clearly receivable as showed in the ledger account of both R1 as well as R2 and R3. There is no",
dispute by any of the parties in any manner as far as this is concerned.,
(b) The fraudulent entries benefiting Respondent No.1 to the tune of Rs.1,19,08,05,762/-(86,06,22,740+31,01,83,022) with an intent to defraud the",
Corporate Debtor be returned by R1 into the Corporate Debtor’s account.,
The Bench is of the clear view that the conclusion arrived in the above Para is squarely covered by Section 66 of the Code which reads as under:-,
“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 minimising the potential loss to the creditors of the corporate debtor…â€,
The Bench also is of the clear view that the present case is squarely covered u/s 66(1) of the Code with respect to conduct and liability of,
Respondent No.1 to repay the assets and benefits of the Corporate Debtor which has wrongfully been received by Respondent No.1 in connivance,
with Respondent No.2 and 3.,
Section 66 (1) imposes a liability on any persons who were knowingly parties to the carrying on of business with a dishonest intent to,
defraud creditors, to make contributions to the assets of the corporate debtor as per the order of the Adjudicating Authority.",
The use of phrase ‘any persons’ in section 66(1) suggest that‘ outsiders’ can also be liable for fraudulent trading, as long as",
they had a dishonest intention of fraudulently carrying on such trade. The provision is not only restricted to ‘insiders’ like employees,",
directors or partners. It is wide enough to include fraud on behalf of third parties like other corporate persons and creditors. In this case,
covers the conduct of Respondent No 1.,
The words used in section 66(1) i.e. “…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 a sit may deem fit, shows that Adjudicating Authority has the power to demand contribution to the assets",
of the corporate debtor, from the defrauding party. In this case Respondent No 1 party would be responsible, without any limitation of",
liability, for the losses cause due to their fraudulent trading.â€",
Besides Respondent No.1, the Bench is of the definite view that Respondent No.2 and 3 are also squarely covered Section 66(2) with respect to",
their misconduct and also makes them liable “to make such contributions to the assets to the Corporate Debtorâ€.,
The above responsibility of a â€director†is clearly brought out and analysed by the Hon'ble Supreme Court in the case of Official Liquidator,",
Supreme Bank Ltd v/s. P. A. Tendolkar [1973] 1 SCC 602. Details of the said decision and its relevance to the present case is provided in below,
paragraphs.,
Reference is also made to the decision of Hon'ble NCLAT in the case of Vijay Pal Garg & Ors vs Pooja Bahry (Liquidator of Gee Ispat Private,
Limited) [Company Appeal (AT) (Insolvency) No. 949 of 2019] wherein the Hon'ble NCLAT was dealing with identical facts of an Application filed,
by R Punder section 66 and it was found that the records and accounts of the Corporate Debtor have been falsified and eventually proceeded to,
trigger an investigation under section 213 of the Companies Act 2013.,
Hon'ble NCLAT held as under (relevant operative part of the Order):,
“24. In the instant case, it comes to be known that the Applicant/Resolution Professional came across various instances and",
materials to exhibit that the business of Corporate Debtor was carried on with in intent to defraud its creditors and for fraudulent,
purposes by the erstwhile management of the 'Corporate Debtor'. Apart from that, the Applicant/Respondent had grounds to believe that",
CIRP of the ‘Corporate Debtor’ was initiated fraudulently and/or with malicious intent for a purpose other than for ‘Resolution of,
Insolvency’ or Liquidation of Corporate Debtor. Before the Adjudicating Authority the Applicant/Resolution Professional in the,
application had averred that directions (in suspension) of the Corporate Debtor had not deliberately disclosed the affairs of the,
'Corporate Debtor' from time to time to the Applicant / Resolution Professional and indulged in falsification and determination of,
Books and Records of the ‘Corporate Debtor’ and made wilful and material omissions relating to its affairs and further defrauded,
its creditors… In reality, the Applicant/Resolution Professional filed the application before the Adjudicating Authority in terms of Sections 60(5), 66,",
67, 70, 71, 72, 73 and 235A of the I&B Code and sought the undermentioned reliefs which run as under..",
The Resolution Professional/Applicant found discrepancies in the Accounts of Corporate Debtor i.e .(i) non-existence of Debtors and that,
the recent Balance sheet of the Corporate Debtor reflected Debtors of Rs. 191 crores (Approx.) as trade receivables etc.I n fact the Resolution,
Professional/Applicant after taking charge, grew suspicious of the genuineness / veracity of dates and receivables pursuant to the non-",
delivery of letters to the debtors. The Resolution Professional / Applicant later came to know that most of the addresses of the ‘Debtors’,
as shown in the Tally either had not existed or even if they had existed, there was no such Companies/Firms found in the ‘Addresses’",
described.,
Moreover, inspite of sending representatives to numerous debtors,90% of the addressees had not existed or the firms were not in existence at the",
given addresses, in the tally. Based on the Financial Audited Balance sheet of the year 2012-13, the discrepancies were pointed out and it",
was evident that there was falsification of the Accounts of the Corporate Debtor. Besides this, although the outstanding debts in the",
Books was Rs. 200 crores and that the Corporate Debtor being in trouble with a Debt of Rs. 500 crores, to pay the same to the",
‘Financial Creditors’. There was no record to show that the steps taken by the Directors relating to the recovery of the,
outstanding sum, payable to it.",
….,
…,
In this connection, it not out of place for this court to make significant mention that this Tribunal in the Judgement in Company Appeal",
(AT) (Insolvency) No. 574 of 2019 in the matter of Mr. Lagadapati Ramesh Vs. Mrs. Ramanathan Bhuvaneshwari at para 34 to 44,
observed as under:-â€,
(emphasis supplied),
The Hon'ble NCLAT goes on to reproduce the relevant para of the decision in Mr. Lagadapati Ramesh vs Mrs. Ramanathan Bhuvaneshwari (supra),
and gives its finding as under:,
“It cannot be lost sight of that a Company in liquidation retains its existence and it is entitled to ‘sue’ and be ‘sued’ in its name, till it is",
dissolved in the manner know to law. Under Section 430 of the Companies Act, 2013 ‘National Company Law Tribunal’ will have jurisdiction to",
deal with the disputes arising out of the Companies Act,2013….",
…,
Section 43 of the IBC deals with the ‘avoidance of preferences’ given by the ‘Corporate Debtor’. It is to be remembered that the,
intention of Debtor is a prime factor. Section 44 of the Code mentions the order that may be passed by Adjudicating Authority (‘National Company,
Law Tribunal’) on an application filed by the ‘Resolution Professional’ or Liquidator in a Section 43 proceedings. Section 46 relates to the,
relevant period for avoidable transactions. As per Section 66 of the I&B Code the ‘Resolution Professional’ is empowered to,
institute proceedings in ‘fraudulent/wrongful trading’ before the ‘Adjudicating Authority’ and the said authority is to pass,
necessary orders. As an Adjudicating Authority (‘National Company Law Tribunal’) a punishment of imprisonment cannot be,
imposed by it, except to pass orders u/s 66 of the ‘I&B’ Code. Section 71 of the Code deals with punishment for falsification of",
books of ‘Corporate Debtor’ and Section 72 of the Code speaks of punishment for wilful and material omission committed by the,
Officer of the ‘Corporate Debtor’ instatements relating to its affairs. Section 73 is concerned with the punishment of fraud and,
false representations to the Creditors subject to the proof of the same.,
In view of the above Judgments, both by the Hon'ble NCLAT and Hon'ble Supreme Court, it becomes clear that Respondent No.1 is clearly",
covered u/s of 66(1) and Respondent 2 and 3 are also covered u/s. 66(2)(a) and 66(2)(b) of the Code.,
The Bench in view of the view that R1 i.e. Royal India Corporation Limited through various fraudulent transactions and by way of fudging the,
Books of Accounts in connivance with the R2 and R3 have defrauded the Corporate Debtor company to the extent of Rs. 1,19,08,05,762/-. This",
includes the clear admitted dues of Rs 31.01 crore.,
The Bench directs that the total amount of Rs. 1,19,08,05,762/- be returned by R1 into the Corporate Debtor’s account within a period of 7",
days from the pronouncement of this Order.,
IA 1266/2020 in CP 2556/2019 is “Allowed†on the above lines and ‘disposed of.,