RP Section 66 Plea Dismissed for Lacking Evidence
Table of Contents
The RP Section 66 is appointed by the National Company Law Tribunal (NCLT) to manage the affairs of the corporate debtors as a going concern during the corporate insolvency resolution process (CIRP), acting as a critical facilitator for the transition from debtor in possession to creditor control. The RP’s role is administrative, encompassing the management of operations and verifying creditor claims, and preparing an information memorandum for resolution applicants. Sections 66 of the Insolvency and Bankruptcy Code, 2016 (IBC) is crucial as it empowers the NCLT to hold directors or partners liability for contributions to corporate debtor’s assets if they knowingly carried on business with the intent to defraud creditors. or for any fraudulent purpose. Hence, this provision ensures the maximisation of the corporate debtor’s assets by allowing the recovery of value from fraudulent transactions.
Understanding RP Section 66 of the IBC
RP Section 66 (1) of the IBC holds any person liable to contribute to the assets of a corporate debtor if it found that the business was carried on during the insolvency process with the intent to defraud creditors or for any fraudulent purpose, provided they were knowingly parties to such conduct. The burden of proof lies with the RP to establish the fraudulent intent and the person’s knowledge of it. Section 66(2) makes directors or partners liable for wrongful trading if, before the insolvency commencement date, they knew or ought to have known there was no reasonable prospect of avoiding the CIRP, and failed to exercise due diligence in minimizing potential losses to creditors. The RP bears the burden of proving these elements, and a director is deemed to have exercised due diligence if they acted with the level of care expected for their role.
Role of the Resolution Professional in Filing Section 66 Applications
- The RP has the duty to investigate the affairs of the corporate debtor, including scrutinizing financial records and transactions. to identify any conduct carried on with the intent to defraud creditors.
- RPs have the responsibility to collect evidence from books of accounts, financial statements, and potentially engage forensic auditors to assess the validity and value of transactions.
- The legal threshold for establishing fraud or wrongful trading requires proving that the business was carried on with the intent to defraud creditors or for a fraudulent purpose, or that directors knew there was no reasonable prospect of avoiding insolvency and failed to exercise due diligence in minimizing creditor losses.
Read more : CoC Approval under Section 12A of the IBC A Stumbling Block to Settlement
The Case RP’s Plea Dismissed
Taking for instance in the case of Mr. Brijendra Kumar Mishra, RP v. Chemical Brothers Private Limited, the NCLT gave the decision:
Grounds Raised by RP
The RP may allege fraudulent or wrongful trading under section 66 based on a transaction’s intent to defraud creditors, often relying on the absence of security or the unusual nature of the transaction. The RP relied on suspension without any substantive proof.
Court’s Observations
- The court observed that the plea lacked concrete evidence.
- The court emphasized that suspicion, conjecture, or assumptions are insufficient.
- The court further noted the necessity of documentary and financial proof to establish the intent.
Outcome
The applicant under RP Section 66 of the IBC was dismissed. The court emphasized that the evidentiary standards in insolvency proceedings are stringent, requiring a forensic audit report and verifiable evidence to classify transactions as fraudulent, as allegations of fraud cannot be made on mere suspicion.
Judicial Approach to Section 66 Applications
Documentary evidence, including forensic audits, bank records, and transaction trails, is crucial for establishing such intent, as courts require strong, verifiable proof rather than mere suspicion or assumptions. The NCLT has dismissed applications under section 66 when claims lack supporting evidence, such as forensic audit reports or documentary proof of mala fide intent, emphasizing the need for concrete evidence. Precedents like Amandeep Singh Bhatia v. Vitol S.A. and Edelweiss Asset Reconstruction Company Limited v. Net 4 India Limited affirmed the application of section 66 where transactions were found to be fraudulent, particularly when assets were diverted without security and the beneficiary was presumed to be a party to fraud. The courts consistently stress that the burden of proof lies with the applicant to demonstrate intent to defraud, using credible documentary evidence to substantiate claims.
Challenges in Proving Fraudulent or Wrongful Trading
There are several practical challenges in proving fraudulent or wrongful trading:
- There is difficulty in establishing the director’s intent, which requires demonstrating a deliberate act to defraud creditors or a fraudulent purpose.
- The RP faces significant hurdles due to limited access to crucial financial records and documents, especially when books of accounts are unavailable or not made accessible, hindering a thorough investigation.
- The high evidentiary burden under Section 66 requires the applicant to prove fraudulent intent, which can be particularly challenging when transactions are complex or involve interlinked entities.
Implications of the Ruling
-
For Resolution Professionals: RPs must ensure that evidence is robust and admissible in court before initiating legal proceedings, as the findings from a forensic audit are designed to prove fraud beyond a reasonable doubt.
-
For Directors and Promoters: Directors and promoters from frivolous or baseless allegations, as courts may award costs and fees to the prevailing party if a claim is deemed without probable cause. However, they remain personally liable if fraudulent conduct is proven, as fraudulent misrepresentation requires a false statement made with knowledge of its falsity or reckless disregard, intending reliance, resulting in loss.
-
For the CIRP Process: The ruling reinforces the need for creditor to file claims iwhtin the prescribed timeline, as admitting claims after the resolution plan is accepted by the CoC would make the CIRP perpetual and inefficacious, thereby avoiding unnecessary litigation and delays.
Conclusion
Section 66 is a powerful tool but requires robust evidence. Courts have consistently held that allegations of fraud are grave and cannot be made on mere suspicion, necessitating strong, concrete proof. The RP must adopt thorough investigative and evidentiary practices to substantiate claims under section 66 as the threshold for proving fraudulent intent is high. Furthermore, the Supreme Court has clarified that remedies against third parties are not available under this provision, emphasising that the RP must pursue independent civil remedies for recovery from such parties.
FAQs
-
What is Section 66 of the IBC?
RP Section 66 empowers the Adjudicating Authority to hold individuals personally liable for contributing to a corporate debtor’s assets, if they were knowingly involved in carrying on the business with intent to defraud creditors or for any fraudulent purpose during insolvency or liquidation process, or if a director or partner failed to exercise due diligence when there was no reasonable prospect of avoiding insolvency.
-
Can an RP file a Section 66 application without forensic audit evidence?
Yes, a RP can file a section 66 application without a forensic audit, as the application can be based on pleadings and other evidence, though the absence of a forensic audit may be a point of contention for the respondent.
-
Why was the RP’s plea dismissed in this case?
The RP’s plea was dismissed because it was on the basis of suspicion and no concrete evidence, such as a forensic audit report.
-
What type of proof is required to succeed in a RP Section 66 claim?
To establish fraudulent intent or wrongful conduct beyond reasonable doubt under RP Section 66 , it requires adequate, material proof, and pleadings to satisfy all the criteria specified under the section, including the intent to defraud creditors or for a fraudulent purpose, the adverse impact on creditors, and the identification of beneficiaries.
-
How do courts differentiate between suspicion and valid evidence in IBC proceedings?
Courts differentiate between suspicion and valid evidence by requiring the financial creditor to prove the existence of a default based on records or other evidence presented, not on mere suspicion, with the NCLT’s role limited to verifying the existence of the debt, not its validity.
Recent Posts
