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2026 Supreme(Online)(NCLT) 2936
NATIONAL COMPANY LAW TRIBUNAL
Rajeev Bhardwaj, MEMBER (J), Sanjay Puri, MEMBER (T)
Samala Raja Shekar SRA – Appellant
Versus
Srikanth Agarwal – Respondent
IA(IBC)/1586/2024 | IA(IBC)/1585/2024 | IA(IBC)/1588/2024 in CP(IB) No. 430/9/HDB/2018
For the Appellants/Petitioners: Samala Raja Shekar (Successful Resolution Applicant)
For the Respondents: Sri Srikanth Agarwal (Suspended Board of Director)
Mere discrepancies in accounting entries or a Transaction Audit Report, without supporting primary documents, are insufficient to establish the high degree of proof required for fraudulent or wrongful trading under Section 66 of the IBC.
Headnote:(A) Insolvency and Bankruptcy Code, 2016 - Section 66(1) and (2) - Fraudulent trading and wrongful trading - The adjudicating authority may pass orders against persons knowingly parties to carrying on business with intent to defraud creditors (Section 66(1)) or against directors who knew or ought to have known of no reasonable prospect of avoiding CIRP and failed to exercise due diligence (Section 66(2)) - Mere discrepancies in accounting entries or financial restructuring are insufficient to conclude intent to defraud - A high degree of proof is required to establish fraudulent intent, and dishonesty is an essential ingredient that must be established by cogent material, not inferred from mere discrepancies (Paras 27, 29, 30, 32, 33, 34).
(B) Evidence - Burden of proof - The applicant must place cogent and convincing material on record to demonstrate that impugned transactions were undertaken with requisite fraudulent intent - The Transaction Audit Report alone, without supporting primary documents (e.g., goods received notes, production records, journal entries), cannot form the basis for a conclusive determination under Section 66 (Paras 31, 35).
Facts of the case:
The Successful Resolution Applicant filed an application under Section 66 of the Code against a suspended director, seeking a declaration that certain transactions were fraudulent and for payment of Rs. 94,82,429/- to the Resolution Professional. The application was founded primarily on a Transaction Audit Report dated 23.08.2019, which identified discrepancies, including payments recorded under different names in the books of account compared to bank statements, and the reactivation of an inoperative bank account to route receivables and repay directors' loans. The respondent director denied the allegations and argued that the application was beyond the scope of earlier directions and lacked evidence.
Findings of Court:
The court found that the applicant failed to establish the ingredients of either Section 66(1) or Section 66(2). The discrepancies in accounting entries and routing of funds were insufficient to prove an intent to defraud creditors. No material was placed to show that the director knew or ought to have known of inevitable CIRP and failed to exercise due diligence. The Transaction Audit Report alone, in the absence of supporting primary records (e.g., goods received notes, production records, journal entries), could not form the basis for a conclusive determination. The court relied on precedents requiring a high degree of proof for fraudulent intent and emphasizing that dishonesty must be established by cogent evidence.
Issues: The main issue was whether the material on record established the existence of ‘intent to defraud creditors’ under Section 66(1) or satisfied the requirements of ‘wrongful trading’ under Section 66(2) of the Insolvency and Bankruptcy Code, 2016.
Ratio Decidendi: The court held that mere discrepancies in accounting entries or financial restructuring do not automatically establish fraudulent intent; a high degree of proof is required. For Section 66(2), it must be demonstrated that the director knew or ought to have known of no reasonable prospect of avoiding CIRP and failed to exercise due diligence. A Transaction Audit Report, without supporting primary documents, is insufficient to sustain a finding of fraudulent or wrongful trading. Result : The Application is dismissed. (Para 36)
(C) The court also noted that orders were pronounced on three related IAs, with IA(IBC)/1586/2024 and IA(IBC)/1585/2024 being dismissed, and IA(IBC)/1588/2024 being allowed. (Order Sheet)
1. This Application is filed by Samala Raja Shekar (“S uccessful Resolution Applicant”) of M/s Shree Rudra Shakti Industries Private Limited (“Corporate Debtor”) under Sections 66 of the Insolvency and Bankruptcy Code, 2016 (“Code”), praying to declare the transactions referred t o herein as Fraudulent transactions and to pass orders directing the Respondents herein to pay a sum of Rs. 94,82,429/-, being the amount received from the Corporate Debtor, to the Applicant/Resolution Professional.
Applicant’s case
2. A petition was filed under Section 9 of the Code by M/s V. N. Commercial Corporation (“ O perational Creditor ” ) for initiation of the Corporate Insolvency Resolution Process (“ C IRP ” ) against the Corporate Debtor, which was admitted by this Adjudicating Authority vide order dated 14.05.2019, appointing Mrs. Narala Varalakshmi as the Interim Resolution Professional. A moratorium was declared, and the Interim Resolution Professional was later confirmed as Resolution Professional by the Committee of Creditors (“ C oC ” ) on 31.07.2019.
3. It is submitted that the erstwhile Resolution Professional, Mrs. Narala Varalakshmi, after receipt of the audit report, filed IA Nos. 742, 743, 744, and 745 of 2019 relating to avoidance transactions under the relevant provisions of the Code.
4. Subsequently, the CoC was reconstituted upon admission of Financial Creditors, namely Mr. Naveen Kumar Kedia and M/s Bajaj Finance Limited. In the 6th CoC meeting held on 11.11.2019, the CoC replaced the then RP with Mr. Chakravarthi Srinivasan.
5. Thereafter, Mr Chakravarthi Srinivasan, RP filed a memo seeking withdrawal of the avoidance applications on the ground that they were wrongly filed. This Adjudicating Authority permitted such withdrawal vide order dated 19.12.2019.
6. Aggrieved by the withdrawal, the Operational Creditor filed IA No. 1048 o f 2020 under Sections 47 and 60(5) of the Code. Vide order dated 2 2.12.2023, this Adjudicating Authority directed the replacement of the RP and directed fresh examination of avoidance transactions.
7. Pursuant thereto, Mr. Ram Narayana Boga was appointed as RP, who was later replaced by the present RP, Mr Dantu Indu Sekhar, vide order dated 06.02.2024.
8. Upon reconstitution, the Committee of Creditors (“CoC”) comprised Asset Reconstruction Company (India) Limited (“ARCIL”) as the sole Financial Creditor, holding 100% voting share. In the 10th CoC meeting held on 07.03.2024 and the 12th CoC meeting held on 02.05.2024, the CoC, with 100% voting share, approved the filing of applications for exclusion and extension of the CIRP period.
9. It is stated that the Resolution Plan submitted by Mr. Venu Babu Nelakuditi was earlier filed for approval vide IA No. 257 of 2020. However, the same was returned by this Adjudicating Authority on 02.01.2024, with directions to reconsider the plan after fresh valuation and examination of avoidance transactions pursuant to the order dated 22.12.2023 in IA No. 1048 of 2020.
10. Accordingly, the Resolution Professional conducted a fresh valuation and, based on the Transaction Audit Report dated 23.08.2019 submitted by P.M.P.K Associates, Chartered Accountants, placed the matter before the CoC. The CoC, exercising its commercial wisdom with 100% voting share, resolved to proceed with necessary steps, including filing of the present applications, prior to reconsideration of the Resolution Plan.
11. The Transaction Auditor identified transactions aggregating to Rs. 94,82,429/- occurring between 01.02.2019 and 30.05.2019, i.e., immediately preceding the commencement of CIRP on 14.05.2019. The material findings include:
a. It is ascertained from the Bank Statements namely Union Bank of India (40152), 50,000/- paid to "Daksha" vide Transaction ID S89479661 dated 19-02-2019 but the same is accounted in the Books of the Company in the names of "M/s. Ramesh Fabrics" and "M/s. Suman Textiles" at amount of 25,000/- each vide payment entry dated 21-01-2019.
b. It is ascertained from the Ban
