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;
Business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor. (Doctrine of “Mens Rea”)
business of the corporate debtor has been carried on for any fraudulent purpose
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.
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. ;
Intention to defraud the creditors.
Business/Trading of the CD has been carried out fraudulently.
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.
Identification of persons who were knowingly parties to the carrying on of the business in such manner (fraudulently).
Identification of beneficiaries of such Fraudulent Business/Trading, which are required to be made respondent in the petition.
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 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;
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]
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]
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]
High Court Tripura (18.01.2023) in Smt. Sudipa Nath Vs. Union of India [WP(C) (PIL) 04 of 2023].
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]
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)
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]
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]
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;
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.
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.
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.
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.
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;
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]
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]. |
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| 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] |
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| 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” ………) |
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| Whether the applicant (RP/Liquidator) has established the intentions of the respondents to defraud the creditors. [Section 66(1)] |
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| Whether the applicant (RP/Liquidator) has established that Business/Trading of the CD has been carried out fraudulently. [Section 66(1)] |
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| 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) |
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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)] |
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8. | Whether the applicant (RP/Liquidator) has identified the beneficiaries of such Fraudulent Business/Trading done by the CD. [Section 66(1)] |
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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) |
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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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