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Rejects Liquidator's Bid to Declare DQ Entertainment Transactions Fraudulent Under IBC
The (NCLT) has dismissed two applications filed by the liquidator of , rejecting allegations that former directors engaged in , , and . The bench, comprising Judicial Member Rajeev Bhardwaj and Technical Member Sanjay Puri, held that a , standing alone without the underlying primary records, was insufficient to meet the high required under the .
The Corporate Debtor’s Collapse
, an animation studio, was admitted into on , following a petition filed by under . The resolution professional later appointed as transaction auditors to examine dealings from under .
Based on the audit report, the liquidator—initially the resolution professional, later substituted by Mr. Venka Reddy Bathina—moved two . The first, under , sought to recover ₹57.34 crore from five former directors and the CFO for alleged . The second, under , targeted preferential and worth over ₹2.47 crore, including a loan repayment to director Tapaas Chakravarti, payments to consultancy firms, and the sale of an Audi car and computer equipment.
The Liquidator’s Case: Reliance on the Audit Trail
The liquidator argued that the transaction auditor had flagged several irregularities: a ₹50 lakh repayment to Mr. Chakravarti without clear proof of the original loan; questionable accounting of intangible assets worth ₹225.24 lakh; invocation of a letter of credit worth ₹4,889.70 lakh for the subsidiary , which later wound up; and a transfer of ₹602.43 lakh from an cash credit account to the same subsidiary. The liquidator claimed these dealings were carried out with creditors and stakeholders.
On the preferential side, the liquidator pointed to the ₹50 lakh repayment to the director, ₹45.21 lakh in consultation fees paid to (a firm where a director was a partner), and ₹40 lakh paid to a consultant, Mr. Ramana Murthy. For undervalue, it cited the sale of computers and monitors (book value ₹99.50 lakh) to for just ₹6.50 lakh, and the adjustment of an Audi car (book value ₹19.76 lakh) against a director’s advance of ₹14.50 lakh.
The Directors’ Defence: Ordinary Course and Time Bars
The respondents—Mr. Tapaas Chakravarti, Mrs. Rashida Hatim Adenwala, Mr. Srinivasaraghavan Sundar, Mr. Goutam Auknoor, and former CFO Mr. Sanjay Choudhary—denied any fraudulent intent. They explained that the ₹50 lakh repayment was against an outstanding loan of over ₹2 crore that Mr. Chakravarti had advanced to the company from his own resources. The intangible assets, they said, were accounted for under Ind AS 38 as distribution rights received under co-production agreements, a standard industry practice. Regarding the subsidiary transactions, they argued that the letter of credit and cash credit transfers were part of a legitimate funding arrangement where DQ Ireland raised money against standby letters of credit and remitted the proceeds to the parent for production work. The write-offs of bad debts (₹21.45 lakh) were attributed to cancelled licence agreements.
Critically, the respondents argued that the alleged preferential transactions fell outside the statutory . Since CIRP began on , the two-year period for related-party transactions ran from , to . The ₹50 lakh repayment to the director occurred on —over three years before the look-back window. Similarly, payments to and Mr. Ramana Murthy were made in , well outside the period. For the , the sale of computers to in FY 2018-19 was also outside the one-year look-back for non-related parties. The Audi car sale on , did fall within the two-year look-back, but the respondents argued it was a at the best available price.
Legal Analysis: The High Bar of and the Look-Back Trap
The NCLT began its analysis by reiterating the stringent requirements of of the IBC. Drawing on the ’s decision in and the ’s ruling in , the tribunal emphasised that requires a high degree of proof. The applicant must present tangible evidence of , not merely suspicions or audit observations.
Applying this standard, the bench found the liquidator’s case lacking. On the ₹50 lakh repayment, the tribunal noted that the audited financial statements recorded the loan and its repayment. While the audit report questioned the cash inflow for the original loan, the NCLT held that “the mere absence of clear evidence regarding the original inflow, or the fact that the repayment was made to an erstwhile Director… does not by itself establish that the transaction was undertaken with an .” Similarly, the intangible asset entries, though questioned by the auditor, were not accompanied by sufficient independent material to prove they were fictitious.
Regarding the subsidiary transactions, the NCLT pointed out that neither side had placed the underlying letters of credit, bank statements, or inter-company loan agreements on record. In their absence, the auditor’s observations alone could not sustain a finding of fraud. The same reasoning applied to the bad debt write-offs.
On the preferential transaction allegations, the tribunal delivered a crisp temporal knockout. It held that the payments to Mr. Chakravarti, , and Mr. Ramana Murthy were all made in , more than two years before the CIRP commencement date. Since prescribes a two-year look-back for related parties and one year for others, these transactions were “clearly outside the statutory ” and could not be challenged as preferences.
For the , the tribunal examined each. The sale of computers to in FY 2018-19 was outside the one-year look-back for non-related parties. The Audi car sale, while within the two-year period, failed on merits. The liquidator had relied solely on the net book value of ₹19.76 lakh and the sale consideration of ₹14.50 lakh. But the NCLT held that “the reflected in the books, by itself, cannot be treated as conclusive evidence of the of the vehicle.” No independent valuation report or supporting sale documents were produced. “In the absence of such material, this Tribunal is unable to independently verify the findings recorded in the ,” the bench observed.
Key Observations
- “For invoking , the fraudulent purpose or intent must be established from the material on record. The mere absence of clear evidence regarding the original inflow does not by itself establish that the transaction was undertaken with an the creditors.”
- “The reflected in the books, by itself, cannot be treated as conclusive evidence of the of the vehicle.”
- “In the absence of the underlying primary banking and contractual documents, the observations in the , by themselves, do not establish that the aforesaid transactions were undertaken with fraudulent intent.”
- “The impugned payments… were made during and, therefore, fall outside the statutory prescribed under (a) of the Code.”
The Final Order
The NCLT dismissed both applications. I.A. (IBC) No. 1272 of 2023 under and I.A. (IBC) No. 1273 of 2023 under were rejected in their entirety. The tribunal declined to order any contribution from the respondents or to declare the impugned transactions as void.
The decision reinforces the principle that transaction audit reports, while a useful starting point, cannot substitute for concrete evidence of fraud or preferential dealing. As the bench made clear, the liquidator bears the burden of placing the underlying documents before the adjudicating authority—a burden that was not discharged in this case. The ruling also underscores the strict application of look-back periods, insulating older transactions from avoidance challenges even if they appear questionable in hindsight.
