WEBINAR on

Transaction Audit & Forensic Audit

Under IBC

Thursday ◊ 7th MAY 2020 ◊ 04:00 PM to 06:00 PM ◊ [Link]

Dr GOPAL KRISHNA RAJU

Chartered Accountant, Insolvency Professional & Registered Valuer
 Agenda
• Claims

• Verification of Transactions (RP / CoC)

• Transaction Audit

• Forensic Audit

• Tracing of Assets

• Understanding CIRP Regulation 35(A) and 39(2)

 Views
• Scope of Forensic / Transaction Audit
• Who has the Authority to appoint Forensic Auditor? (RP / CoC)
• Whether draft Forensic Audit report needs to be shared with
directors or Corporate Debtor?
• On what basis RP can form his opinion that there are PUEF
transaction?
• Should Forensic Audit Report be annexed to the application to be
filed by RP before Adjudicating Authority?
• Whether all the entities, who have been named as parties in these
transactions, be made respondents
 Claims
Topic:- Claims with Examples
• Verification

• Rejection

• Disputed Claims

• Contingent Claims

• Appeals

• Constitution of CoC

• Practical issues
 What is Transaction Audit?

• A transaction audit is a report of the transactions

entered.

• TA has two sections.

• The first section shows the transactions as they were

entered on the clients accounts, and

• The second section shows the corresponding

reflection of transactions of the counter-party
 What is Forensic Audit?

• A forensic audit is an examination and evaluation of

a firm's or individual's financial records to derive
evidence that can be used in a court of law or legal
proceeding.
“Lost” Asset Tracing
• As a preliminary activity to the recovery of stolen assets, the identification and
tracing of the proceeds of crime and securing the property for final
confiscation is an essential part of the process. This is a demanding task which
should be conducted in parallel with the investigation of the criminal offence
generating material benefit.
• It requires intense cooperation between law enforcement agencies or those
tasked with tracing assets, Financial Intelligence Units and, in most instances,
the prosecutor.
• Where an investigation focuses, for example, on a public official’s receipt of
bribes or otherwise unlawful financial enrichment, this will require the
involvement of investigators experienced in gathering and analysing financial
evidence. In many instances, it will also require the involvement of a forensic
accounting expert to assist in unravelling complex financial transactions, and an
understanding of the role played by gatekeepers in assisting (sometimes
unwittingly) criminals dispose of their criminal profits.
The process which leads to recovery or the repatriation of assets, is
divided into four (4) basic phases, i.e.,
• Pre-investigative phase, during which the investigator verifies the
source of the information initiating the investigation and determines
its authenticity. If there are inconsistencies in the story or incorrect
statements and assumptions, then the true facts must be
established
• Investigative phase, where the proceeds of crime are identified and
located and evidence in respect of ownership is collated covering
several areas of investigative work in the process. The result of this
investigation can be a temporary measure (seizure) to secure later
confiscation ordered by the court
• Judicial phase, where the accused person/defendant is convicted (or
acquitted) and the decision on confiscation is final
• Disposal phase, where the property is actually confiscated and
disposed of in accordance with the law
 Regulation Description Norm Timeline

Regulation 6(1) Public announcement Within 3 Days of T+3

inviting claims Appointment of IRP

Section 15(1)(c) / Submission of claims For 14 Days from T+14

Regulations Appointment of IRP
6(2)(c) and 12 (1)

th
Regulation 12(2) Submission of claims Up to 90 day of T+90
commencement

Regulation 13(1) Verification of claims Within 7 days from the T+21

received under regulation receipt of the claim
12(1)
Regulation 13(2) Verification of claims T+97
received under regulation
12(2)

Notification No. IBBI/2018-19/GN/REG031, dated 3rd July, 2018 (w.e.f. 04-07-2018).

Regulation: 10 Substantiation of claims.
• The interim resolution professional or the resolution
professional, as the case may be, may call for such
other evidence or clarification as he deems fit from
a creditor for substantiating the whole or part of its
claim.
Calculation Valuation Report — a Calculation Valuation Report contains a conclusion as to the
value of shares, assets or an interest in a business that is based on minimal review and analysis
and little or no corroboration of relevant information, and generally set out in a brief Valuation
Report.
Regulation: 11. Cost of proof.
• A creditor shall bear the cost of proving the debt
due to such creditor.
Regulation: 12. Submission of proof of claims.
• (1) Subject to sub-regulation (2), a creditor shall submit claim
with proof on or before the last date mentioned in the public
announcement.
• (2) A creditor, who fails to submit claim with proof within the
time stipulated in the public announcement, may submit the
claim with proof to the interim resolution professional or the
resolution professional, as the case may be, on or before the
ninetieth day of the insolvency commencement date.
• (3) Where the creditor in sub-regulation (2) is a financial creditor
under regulation 8, it shall be included in the committee from
the date of admission of such claim:
Provided that such inclusion shall not affect the validity of any
decision taken by the committee prior to such inclusion.
Regulation 13. Verification of claims.
• (1) The interim resolution professional or the resolution
professional, as the case may be, shall verify every claim, as on
the insolvency commencement date, within seven days from
the last date of the receipt of the claims, and thereupon
maintain a list of creditors containing names of creditors along
with the amount claimed by them, the amount of their claims
admitted and the security interest, if any, in respect of such
claims, and update it.
• (2) The list of creditors shall be –
– (a) available for inspection by the persons who submitted
proofs of claim;
– (b) available for inspection by members, partners, directors
and guarantors of the corporate debtor;
– (c) displayed on the website, if any, of the corporate debtor;
– (d) filed with the Adjudicating Authority; and
– (e) presented at the first meeting of the committee.
Regulation 14. Determination of amount of claim.
• (1) Where the amount claimed by a creditor is not precise due

to any contingency or other reason, the interim resolution

professional or the resolution professional, as the case may be,

shall make the best estimate of the amount of the claim based

on the information available with him.

• (2) The interim resolution professional or the resolution

professional, as the case may be, shall revise the amounts of

claims admitted, including the estimates of claims made

under sub-regulation (1), as soon as may be practicable,

when he comes across additional information warranting such

revision.
Section 38. Consolidation of claims. -
• (1) The liquidator shall receive or collect the claims of creditors within a
period of thirty days from the date of the commencement of the
liquidation process.
• (2) A financial creditor may submit a claim to the liquidator by providing a
record of such claim with an information utility:
• Provided that where the information relating to the claim is not recorded
in the information utility, the financial creditor may submit the claim in
the same manner provided for the submission of claims for the
operational creditor under sub-section (3).
• (3) An operational creditor may submit a claim to the liquidator in such
form and in such manner and along with such supporting documents
required to prove the claim as may be specified by the Board.
• (4) A creditor who is partly a financial creditor and partly an operational
creditor shall submit claims to the liquidator to the extent of his financial
debt in the manner as provided in sub-section (2) and to the extent of his
operational debt under sub-section (3).
• (5) A creditor may withdraw or vary his claim under this section within
fourteen days of its submission.
Section [Link] of claims.-

• (1) The liquidator shall verify the claims submitted under section 38 within
such time as specified by the Board.

• (2) The liquidator may require any creditor or the corporate debtor or any
other person to produce any other document or evidence which he thinks
necessary for the purpose of verifying the whole or any part of the claim.
Section 40. Admission or rejection of claims. -

• (1) The liquidator may, after verification of claims under

section 39, either admit or reject the claim, in whole or in
part, as the case may be:

• Provided that where the liquidator rejects a claim, he shall

record in writing the reasons for such rejection.

• (2) The liquidator shall communicate his decision of admission

or rejection of claims to the creditor and corporate debtor
within seven days of such admission or rejection of claims.
Section 41. Determination of valuation of claims. -

• The liquidator shall determine the value of claims admitted

under section 40 in such manner as may be specified by the
Board.
Section 42. Appeal against the decision of liquidator. -

• A creditor may appeal to the Adjudicating Authority against

the decision of the liquidator accepting or rejecting the claims
within fourteen days of the receipt of such decision.
Avoidance of Specified Transactions
 Finding irregularities
Section 43 & 44 – Preferential Transactions
 Finding irregularities
Section 45 - 49 – Undervalued Transactions
 Finding irregularities
Section 50 & 66 – Extortionate & Fraudulent
Finding irregularities
Section 68, 69 & 72
Finding irregularities
Section 68, 69 & 72
Forensic Audit
 Regulations 35A: Preferential and other transactions
– Days to remember

• 75th Day

• 115th Day

• 135th Day

Notification No. IBBI/2018-19/GN/REG031, dated 3rd July, 2018 (w.e.f. 04-07-2018).

 Section 21 – Committee of Creditors

Section 21(9)

• The committee of creditors shall have the right to

require the resolution professional to furnish any
financial information in relation to the corporate
debtor at any time during the corporate insolvency
resolution process.
 Section 25 – Duties of Resolution Professional

Section 25(2)(j)

• file application for avoidance of transactions in

accordance with Chapter III, if any;
 Regulation Description Norm Timeline

Regulation 35A RP to form an opinion on Within 75 days of the T+75

preferential and other transactions commencement

RP to make a determination on Within 115 days of T+115

preferential and other transactions commencement

RP to file applications to AA for Within 135 days of T+135

appropriate relief commencement

Notification No. IBBI/2018-19/GN/REG031, dated 3rd July, 2018 (w.e.f. 04-07-2018).

 Regulations 35A. Preferential and other transactions.
• (1) On or before the seventy-fifth day of the insolvency
commencement date, the resolution professional shall form an
opinion whether the corporate debtor has been subjected to any
transaction covered under sections 43, 45, 50 or 66.
• (2) Where the resolution professional is of the opinion that the
corporate debtor has been subjected to any transactions covered
under sections 43, 45, 50 or 66, he shall make a determination on
or before the one hundred and fifteenth day of the insolvency
commencement date, under intimation to the Board.
• (3) Where the resolution professional makes a determination
under sub-regulation (2), he shall apply to the Adjudicating
Authority for appropriate relief on or before the one hundred and
thirty-fifth day of the insolvency commencement date.]

Notification No. IBBI/2018-19/GN/REG031, dated 3rd July, 2018 (w.e.f. 04-07-2018).

 Regulations 39: Approval of resolution plan.
39(2)
The resolution professional shall submit to the committee all
resolution plans which comply with the requirements of the
Code and regulations made thereunder along with the details
of following transactions, if any, observed, found or determined
by him: -
• (a) preferential transactions under section 43;
• (b) undervalued transactions under section 45;
• (c) extortionate credit transactions under section 50; and
• (d) fraudulent transactions under section 66,
and the orders, if any, of the adjudicating authority in respect
of such transactions.

Notification No. IBBI/2017-18/GN/REG019, dated 7th November, 2017 (w.e.f. 7-11-2017).

 Specified (PUEF) Transactions
Section Particulars
43 Preferential Transactions and relevant Time

44 Order in case of preferential transactions

45 Avoidance of Undervalued transactions

46 Relevant period for avoidable transaction

47 Application by creditor in cases of undervalued transactions

48 Order in cases of undervalued

49 Transactions defrauding creditors

50 Extortionate Credit Transactions

51 Orders of AA in respect of extortionate credit transactions

66 Fraudulent trading or wrongful trading [Order u/s. 66(2)]

 Preferential Transactions
• Transaction: A transaction must have occurred between the
company and a creditor; usually this can be traced through
bank account transfers. This can also be found in the transferring
of an asset. This proves that the transaction physically took place
to the creditor.
• Relationship: The debtor has paid the creditor at the creditors
demand and this payment satisfies the debt. You should be
aware that payment for goods is not covered under this and
would not be considered preferential, also payment in advance
for future works or services is not considered preferential. There is
also the question of if there was a continuing relationship, and if
the debt increased or decreased over a period of time. If it is the
case that the debt has decreased, it could be argued that this
specific amount of decrease is considered a preference.
 Preferential Transactions
• Time Period: The transaction should have occurred within a
specific time period before the insolvency, this time period will
depend on the creditors’ relationship to the company and
Directors. For creditors that are not related parties to the
company this time limit is on year, if they are related, two years
(and if there is evidence that there has been interference and
delays in the rights of other creditors then whether a transaction
could be voided going back ten years)
• Debt: If the debt is secured and a creditor has a security over
various monies and assets then this is not considered preferential.
If the creditor received more than they would have through the
liquidation process this can also be considered a preference.
Section 43(1) : Preferential transactions and relevant time
Forming an Opinion:

• (1) Where the liquidator or the resolution professional, as the

case may be, is of the opinion that the corporate debtor has at a
relevant time given a preference in such transactions and in such
manner as laid down in sub-section (2) to any persons as
referred to in sub-section (4), he shall apply to the Adjudicating
Authority for avoidance of preferential transactions and for, one
or more of the orders referred to in section 44.
Section 43(2) : Preferential transactions and relevant time
Preferential Transaction
(2) A corporate debtor shall be deemed to have given a preference, if–
• (a) there is a transfer of property or an interest thereof of the
corporate debtor for the benefit of a creditor or a surety or a
guarantor for or on account of an antecedent financial debt or
operational debt or other liabilities owed by the corporate debtor;
and
• (b) the transfer under clause (a) has the effect of putting such creditor
or a surety or a guarantor in a beneficial position than it would have
been in the event of a distribution of assets being made in accordance
with section 53.
Antecedent: a thing that existed before or logically precedes another.
Section 43(3) : Preferential transactions and relevant time
Exceptions to Preferential
(3) For the purposes of sub-section (2), a preference shall not include the
following transfers–
a) transfer made in the ordinary course of the business or financial affairs of
the corporate debtor or the transferee;
b) any transfer creating a security interest in property acquired by the
corporate debtor to the extent that –
– (i) such security interest secures new value and was given at the time of or after
the signing of a security agreement that contains a description of such property as
security interest, and was used by corporate debtor to acquire such property; and
– (ii) such transfer was registered with an information utility on or before thirty days
after the corporate debtor receives possession of such property:
Provided that any transfer made in pursuance of the order of a court shall not,
preclude such transfer to be deemed as giving of preference by the corporate
debtor.
Section 43(3) : Preferential transactions and relevant time
• Explanation. – For the purpose of sub-section (3) of this section,
“new value” means money or its worth in goods, services, or
new credit, or release by the transferee of property previously
transferred to such transferee in a transaction that is neither
void nor voidable by the liquidator or the resolution professional
under this Code, including proceeds of such property, but does
not include a financial debt or operational debt substituted for
existing financial debt or operational debt.
Section 43(4) : Preferential transactions and relevant time
Relevant Time:

(4) A preference shall be deemed to be given at a relevant time, if –

• (a) It is given to a related party (other than by reason only of

being an employee), during the period of two years preceding
the insolvency commencement date; or

• (b) a preference is given to a person other than a related party

during the period of one year preceding the insolvency
commencement date.
Section 44 : Orders in case of preferential transactions
(1) The Adjudicating Authority, may, on an application made by the resolution
professional or liquidator under sub-section (1) of section 43, by an order:
• (a) require any property transferred in connection with the giving of the preference to be vested in the
corporate debtor;
• (b) require any property to be so vested if it represents the application either of the proceeds of sale of
property so transferred or of money so transferred;
• (c) release or discharge (in whole or in part) of any security interest created by the corporate debtor;
• (d) require any person to pay such sums in respect of benefits received by him from the corporate
debtor, such sums to the liquidator or the resolution professional, as the Adjudicating Authority may
direct;
• (e) direct any guarantor, whose financial debts or operational debts owed to any person were released
or discharged (in whole or in part) by the giving of the preference, to be under such new or revived
financial debts or operational debts to that person as the Adjudicating Authority deems appropriate;
• (f) direct for providing security or charge on any property for the discharge of any financial debt or
operational debt under the order, and such security or charge to have the same priority as a security or
charge released or discharged wholly or in part by the giving of the preference; and
• (g) direct for providing the extent to which any person whose property is so vested in the corporate
debtor, or on whom financial debts or operational debts are imposed by the order, are to be proved in
the liquidation or the corporate insolvency resolution process for financial debts or operational debts
which arose from, or were released or discharged wholly or in part by the giving of the preference:
Section 44 : Orders in case of preferential transactions
Provided that an order under this section shall not -
• (a) affect any interest in property which was acquired from a person other than the
corporate debtor or any interest derived from such interest and was acquired in good
faith and for value;
• (b) require a person, who received a benefit from the preferential transaction in good
faith and for value to pay a sum to the liquidator or the resolution professional.
Explanation-I: For the purpose of this section, it is clarified that where a person, who has
acquired an interest in property from another person other than the corporate debtor, or
who has received a benefit from the preference or such another person to whom the
corporate debtor gave the preference, -
• (a) had sufficient information of the initiation or commencement of insolvency resolution
process of the corporate debtor;
• (b) is a related party,
it shall be presumed that the interest was acquired, or the benefit was received otherwise
than in good faith unless the contrary is shown.
Explanation-II. – A person shall be deemed to have sufficient information or opportunity to
avail such information if a public announcement regarding the corporate insolvency
resolution process has been made under section 13.
Section 45 : Avoidance of Undervalued Transactions
Determining Undervalued Transactions:
• (1) If the liquidator or the resolution professional, as the case may be, on
an examination of the transactions of the corporate debtor referred to in
sub-section (2) determines that certain transactions were made during
the relevant period under section 46, which were undervalued, he shall
make an application to the Adjudicating Authority to declare such
transactions as void and reverse the effect of such transaction in
accordance with this Chapter.
• (2) A transaction shall be considered undervalued where the corporate
debtor–
– (a) makes a gift to a person; or
– (b) enters into a transaction with a person which involves the transfer of one or
more assets by the corporate debtor for a consideration the value of which is
significantly less than the value of the consideration provided by the corporate
debtor,
• and such transaction has not taken place in the ordinary course of
business of the corporate debtor.
Section 46 : Relevant period for Avoidable Transactions
1 year / 2 years:

• (1) In an application for avoiding a transaction at undervalue, the

liquidator or the resolution professional, as the case may be, shall
demonstrate that –
– (i) such transaction was made with any person within the period of one year
preceding the insolvency commencement date; or

– (ii) such transaction was made with a related party within the period of two years
preceding the insolvency commencement date.

• (2) The Adjudicating Authority may require an independent expert to

assess evidence relating to the value of the transactions mentioned in
this section.
 Section 47 : Application by creditor in cases of
undervalued transactions
Creditor / Member / Partner of a Corporate Debtor
• (1) Where an undervalued transaction has taken place and the liquidator or
the resolution professional as the case may be, has not reported it to the
Adjudicating Authority, a creditor, member or a partner of a corporate debtor,
as the case may be, may make an application to the Adjudicating Authority to
declare such transactions void and reverse their effect in accordance with this
Chapter.
• (2) Where, the Adjudicating Authority, after examination of the application
made under sub-section (1), is satisfied that -
– (a) undervalued transactions had occurred; and
– (b) liquidator or the resolution professional, as the case may be, after having sufficient
information or opportunity to avail information of such transactions did not report such
transaction to the Adjudicating Authority,
• it shall pass an order-
– (a) restoring the position as it existed before such transactions and reversing the effects
thereof in the manner as laid down in section 45 and section 48;
– (b) requiring the Board to initiate disciplinary proceedings against the liquidator or the
resolution professional as the case may be.
 Section 48 : Order in cases of undervalued transactions

Order
• (1) The order of the Adjudicating Authority under sub-section (1) of section
45 may provide for the following: -
– (a) require any property transferred as part of the transaction, to be vested in the
corporate debtor;

– (b) release or discharge (in whole or in part) any security interest granted by the
corporate debtor;

– (c) require any person to pay such sums, in respect of benefits received by such
person, to the liquidator or the resolution professional as the case may be, as the
Adjudicating Authority may direct; or

– (d) require the payment of such consideration for the transaction as may be
determined by an independent expert.
 Section 49 : Transactions defrauding creditors

45 vs. 49: Back to the Future

Where the corporate debtor has entered into an undervalued transaction as referred to in
sub-section (2) of section 45 and the Adjudicating Authority is satisfied that such
transaction was deliberately entered into by such corporate debtor -
– (a) for keeping assets of the corporate debtor beyond the reach of any person who is entitled to make a
claim against the corporate debtor; or
– (b) in order to adversely affect the interests of such a person in relation to the claim,
the Adjudicating Authority shall make an order-
– (i) restoring the position as it existed before such transaction as if the transaction had not been entered
into; and
– (ii) protecting the interests of persons who are victims of such transactions:
Provided that an order under this section -
• (a) shall not affect any interest in property which was acquired from a person other
than the corporate debtor and was acquired in good faith, for value and without
notice of the relevant circumstances, or affect any interest deriving from such an
interest, and
• (b) shall not require a person who received a benefit from the transaction in good
faith, for value and without notice of the relevant circumstances to pay any sum
unless he was a party to the transaction.
Extortionate transactions
 If the corporate debtor obtains any credit facility with exorbitant rate of interest or unfair
credit terms such as incorporating severe default provision or was in a vulnerable position
at the time of the transaction.
 Section 50: Extortionate Credit Transactions

Receipt transactions
• (1) Where the corporate debtor has been a party to an extortionate credit transaction
involving the receipt of financial or operational debt during the period within two
years preceding the insolvency commencement date, the liquidator or the resolution
professional as the case may be, may make an application for avoidance of such
transaction to the Adjudicating Authority if the terms of such transaction required
exorbitant payments to be made by the corporate debtor.

• (2) The Board may specify the circumstances in which a transactions which shall be
covered under sub-section (1).

• Explanation. - For the purpose of this section, it is clarified that any debt extended by
any person providing financial services which is in compliance with any law for the
time being in force in relation to such debt shall in no event be considered as an
extortionate credit transaction.
 Section 51: Orders of AA in respect of Extortionate credit
transactions
Restore / Set aside / Modify / Repay / Relinquish
Where the Adjudicating Authority after examining the application made under
sub-section (1) of section 50 is satisfied that the terms of a credit transaction
required exorbitant payments to be made by the corporate debtor, it shall, by an
order –
• (a) restore the position as it existed prior to such transaction;
• (b) set aside the whole or part of the debt created on account of the
extortionate credit transaction;
• (c) modify the terms of the transaction;
• (d) require any person who is, or was, a party to the transaction to repay any
amount received by such person; or
• (e) require any security interest that was created as part of the extortionate
credit transaction to be relinquished in favour of the liquidator or the
resolution professional, as the case may be.
Section 66: Fraudulent Trading or Wrongful Trading

• (1) If during the corporate insolvency resolution process or

a liquidation process, it is found that any business of the
corporate debtor has been carried on with intent to
defraud creditors of the corporate debtor or for any
fraudulent purpose, the Adjudicating Authority may on the
application of the resolution professional pass an order that
any persons who were knowingly parties to the carrying on
of the business in such manner shall be liable to make such
contributions to the assets of the corporate debtor as it may
deem fit.
Section 66: Fraudulent Trading or Wrongful Trading

• (2) On an application made by a resolution professional during the corporate

insolvency resolution process, the Adjudicating Authority may by an order
direct that a director or partner of the corporate debtor, as the case may be,
shall be liable to make such contribution to the assets of the corporate
debtor as it may deem fit, if-
– (a) before the insolvency commencement date, such director or partner knew or ought to
have known that the there was no reasonable prospect of avoiding the commencement of a
corporate insolvency resolution process in respect of such corporate debtor; and
– (b) such director or partner did not exercise due diligence in minimising the potential loss to
the creditors of the corporate debtor.

• Explanation. – For the purposes of this section a director or partner of the

corporate debtor, as the case may be, shall be deemed to have exercised due
diligence if such diligence was reasonably expected of a person carrying out
the same functions as are carried out by such director or partner, as the case
may be, in relation to the corporate debtor.
“Lost” Asset Tracing
• As a preliminary activity to the recovery of stolen assets, the identification and
tracing of the proceeds of crime and securing the property for final
confiscation is an essential part of the process. This is a demanding task which
should be conducted in parallel with the investigation of the criminal offence
generating material benefit.
• It requires intense cooperation between law enforcement agencies or those
tasked with tracing assets, Financial Intelligence Units and, in most instances,
the prosecutor.
• Where an investigation focuses, for example, on a public official’s receipt of
bribes or otherwise unlawful financial enrichment, this will require the
involvement of investigators experienced in gathering and analysing financial
evidence. In many instances, it will also require the involvement of a forensic
accounting expert to assist in unravelling complex financial transactions, and an
understanding of the role played by gatekeepers in assisting (sometimes
unwittingly) criminals dispose of their criminal profits.
The process which leads to recovery or the repatriation of assets, is
divided into four (4) basic phases, i.e.,
• Pre-investigative phase, during which the investigator verifies the
source of the information initiating the investigation and determines
its authenticity. If there are inconsistencies in the story or incorrect
statements and assumptions, then the true facts must be
established
• Investigative phase, where the proceeds of crime are identified and
located and evidence in respect of ownership is collated covering
several areas of investigative work in the process. The result of this
investigation can be a temporary measure (seizure) to secure later
confiscation ordered by the court
• Judicial phase, where the accused person/defendant is convicted (or
acquitted) and the decision on confiscation is final
• Disposal phase, where the property is actually confiscated and
disposed of in accordance with the law
 Section 66
Fraudulent trading or wrongful trading
Section 66 (1)
• If during the corporate insolvency resolution process or a
liquidation process, it is found that any business of the corporate
debtor has been carried on with intent to defraud creditors of the
corporate debtor or for any fraudulent purpose, the Adjudicating
Authority may on the application of the resolution professional
pass an order that any persons who were knowingly parties to
the carrying on of the business in such manner shall be liable to
make such contributions to the assets of the corporate debtor as
it may deem fit.
 Section 66
Fraudulent trading or wrongful trading
Section 66 (2) – Silence Spectator is a Serious offence
On an application made by a resolution professional during the corporate insolvency
resolution process, the Adjudicating Authority may by an order direct that a director
or partner of the corporate debtor, as the case may be, shall be liable to make such
contribution to the assets of the corporate debtor as it may deem fit, if—
• (a) before the insolvency commencement date, such director or partner knew or
ought to have known that the there was no reasonable prospect of avoiding the
commencement of a corporate insolvency resolution process in respect of such
corporate debtor; and
• (b) such director or partner did not exercise due diligence in minimising the
potential loss to the creditors of the corporate debtor.
Explanation.—For the purposes of this section a director or partner of the corporate
debtor, as the case may be, shall be deemed to have exercised due diligence if such
diligence was reasonably expected of a person carrying out the same functions as are
carried out by such director or partner, as the case may be, in relation to the
corporate debtor.
 Section 68
Punishment for concealment of property
Section 68.
Where any officer of the corporate debtor has,—

(i) within the twelve months immediately preceding the insolvency

commencement date,—

• (a) wilfully concealed any property or part of such property of the corporate
debtor or concealed any debt due to, or from, the corporate debtor, of the value
of ten thousand rupees or more; or

• (b) fraudulently removed any part of the property of the corporate debtor of the
value of ten thousand rupees or more; or

• (c) wilfully concealed, destroyed, mutilated or falsified any book or paper

affecting or relating to the property of the corporate debtor or its affairs, or
 Section 68
Punishment for concealment of property

• (d) wilfully made any false entry in any book or paper affecting or relating to
the property of the corporate debtor or its affairs; or

• (e) fraudulently parted with, altered or made any omission in any document
affecting or relating to the property of the corporate debtor or its affairs; or

• (f) wilfully created any security interest over, transferred or disposed of any
property of the corporate debtor which has been obtained on credit and has
not been paid for unless such creation , transfer or disposal was in the
ordinary course of the business of the corporate debtor; or

• (g) wilfully concealed the knowledge of the doing by others of any of the acts
mentioned in clauses (c), (d) or clause (e); or
 Section 68
Punishment for concealment of property
• (ii) at any time after the insolvency commencement date, committed any
of the acts mentioned in sub-clause (a) to (f) of clause (i) or has the
knowledge of the doing by others of any of the things mentioned in sub-
clauses (c) to (e) of clause (i) ; or
• (iii) at any time after the insolvency commencement date, taken in pawn
or pledge, or otherwise received the property knowing it to be so secured,
transferred or disposed,
such officer shall be punishable with imprisonment for a term which
shall not be less than 3 years but which may extend to 5 years, or
with fine, which shall not be less than 1 lakh rupees, but may extend
to 1 crore rupees, or with both:
• Provided that nothing in this section shall render a person liable to any
punishment under this section if he proves that he had no intent to defraud or to
conceal the state of affairs of the corporate debtor.
 CA Dr GOPAL KRISHNA RAJU
FCA, ACMA, ACS, PGDOR, PGDFM, DISA, [Link]
Chartered Accountant, Insolvency Professional & Registered Valuer
Partner : K GOPAL RAO & CO | Chartered Accountants | Mumbai, Chennai, Bengaluru, Hyderabad, Trichy, Madurai & Tiruvallur

Email: gkr@[Link]
Mobile: 98400 63269 | 98401 63269