Audit Report Is Not Conclusive Proof To Declare Commercial Transaction Fraudulent U/S 66(2) Of IBC: NCLAT New Delhi

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, comprising Justice Mohd. Faiz Alam Khan (Member-Judicial) and Arun Baroka (Member-Technical), has held that a transactional audit report alone cannot be conclusive proof of fraudulent trading under section 66 of the IBC, 2016. The CIRP of the corporate debtor was initiated, failing which the liquidation order was passed. The suspended director of the corporate debtor had some shares in two companies whose shares were not actively traded at that time. The auditor flagged these transactions as fraudulent. The adjudicating authority considered the audit report and declared the transactions to be fraudulent, and it directed the directors to deposit Rs. 28.5 lakhs in the liquidation estate of the corporate director. Aggrieved by the impugned order, the directors preferred the appeal. Contention of the Parties The appellant contended that the decision of the share purchase was taken in the ordinary course of business for the benefit of the corporate debtor, which later turned out to be non-profitable. And, merely because of the fact that loss has been caused, it cannot be said that the transaction is fraud or that due diligence was not taken. It further argued that there is no evidence indicating that the transactions are fraudulent, except the audit report, which could not be relied upon. It also highlighted that the audit report is full of contradictions, which cannot be considered as conclusive proof. Appellant further submitted that in order to take action under section 66(1), proof of dishonest intention is a precondition that has not been proved. Also, the ingredients of section 66(2) have not been made out. Per contra, the respondent submitted that the directors invested in the shares of a non-performing company without opening any demat account, which is in violation of the regulations and guidelines of the RBI and SEBI. It also highlighted that no due diligence has been exercised by the suspended directors. Observations of the NCLAT The NCLAT observed that each and every commercial transaction that results in 'loss' may not be labelled as fraudulent. And the failure to exercise due diligence may not be sufficient to label a transaction fraudulent for the purpose of section 66 IBC. The combined reading of clauses 'a' and 'b' of section 66(2) gives that at the time of making the transaction, the suspended director must know that there is no reasonable prospect of avoiding the CIRP process, and they failed in exercising the due diligence for minimizing the potential loss. The bench further observed that in the absence of any direct evidence, the purchasing of shares of unlisted companies cannot be considered to be an act of fraud. With this, the bench observed that the tribunal has erred in deciding the case only on the basis of the transactional audit report, which may not be termed as a conclusive piece of evidence. Accordingly, the appeal was allowed. Case Name: Nalinesh Kumar Paurush v. Shree Vishvamurte Tradinvest Pvt. Ltd. Case No.: Company Appeal (AT) (Insolvency) No. 346 of 2024 & IA No. 6783 of 2024 For Appellant: Mr. Adit S. Pujari, Mr. Avinash Bhati, and Mr. Vanya Chhabra, Advocates For Respondent: Mr. Animesh Pandey, Advocate Judgment Date: 25.09.2025 Click Here To Read/Download The Order

Audit Report Is Not Conclusive Proof To Declare Commercial Transaction Fraudulent U/S 66(2) Of IBC: NCLAT New Delhi

Mohd.Rehan Ali

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