Case Note & Summary
The appeal was directed against an order passed by the National Company Law Tribunal, Mumbai, which found the Appellants liable for fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code, 2016. The Appellants, who were suspended directors of the Corporate Debtor, contested the findings that they had replaced hypothecated machinery with inferior equipment, thereby defrauding creditors. The Appellants argued that the allegations were based on a single disputed transaction and did not constitute fraudulent business as defined under the Code. They relied on a precedent which stated that a single act of fraud does not imply that the entire business was conducted with fraudulent intent. The Respondent, representing the Liquidator, countered that the Appellants had availed loans for specific machinery but failed to provide the same, instead substituting it with machines of significantly lower value. The Tribunal noted that the Appellants could not produce evidence to support their claims regarding the machinery's identity and that the findings of independent valuers indicated the presence of rotogravure machines instead of the financed flexographic machines. The Tribunal concluded that the Appellants acted in bad faith and defrauded creditors by replacing the machinery, thus justifying the application of Section 66. The appeal was dismissed, affirming the Adjudicating Authority's order for the Appellants to contribute to the Corporate Debtor's assets.
Headnote
A) Insolvency Law - Fraudulent Trading - Jurisdiction of Adjudicating Authority - Section 66 of the Insolvency and Bankruptcy Code, 2016 - The Adjudicating Authority was justified in directing the Appellants to contribute to the assets of the Corporate Debtor due to the removal and replacement of hypothecated machinery with lower value machinery, indicating intent to defraud creditors. Held that the evidence supported the finding of fraudulent conduct (Paras 32-44).
Issue of Consideration
Whether the Adjudicating Authority was justified in exercising jurisdiction under Section 66 of the Insolvency and Bankruptcy Code, 2016 and directing the Appellants to make contribution to the assets of the Corporate Debtor.
Final Decision
The Tribunal upheld the NCLT's order, finding that the Appellants had engaged in fraudulent trading by replacing hypothecated machinery with lower value machinery, and directed them to contribute ₹ 17,23,05,603.50 to the Corporate Debtor's assets.
Law Points
- Fraudulent trading
- wrongful trading
- corporate insolvency resolution process
- intent to defraud creditors
- burden of proof
