NCLAT New Delhi: Fraudulent Transactions Not Barred By Limitation; Director Ordered To Restore ₹8.71 Crore To Corporate Debtor’s Assets
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, has held that fraudulent transactions under Section 66 of the Insolvency and Bankruptcy Code, 2016 (IBC) are not barred by limitation, as fraud vitiates all transactions and cannot be condoned merely because of procedural or temporal technicalities. A Bench comprising Justice Ashok Bhushan (Chairperson) and Mr. Arun Baroka (Technical Member) upheld the order of the National Company Law Tribunal (NCLT), Kolkata, which had directed the suspended director of PKS Limited to contribute ₹8.71 crore with interest at 12% to the assets of the corporate debtor, finding that the transaction was engineered with intent to defraud creditors.
Background
The appeal was filed by the suspended director of PKS Limited challenging the NCLT’s order passed under Section 66 of the IBC, allowing an application filed by the Resolution Professional (RP). The RP alleged that the appellant had purchased 88,000 equity shares of Orient Exports Pvt. Ltd., a related party, for ₹8.8 lakh, even though the corporate debtor had acquired those same shares two years earlier for ₹8.80 crore. This undervalued transaction, the RP contended, caused a loss of ₹8.71 crore to the corporate debtor and amounted to a fraudulent diversion of assets. Aggrieved, the suspended director contended that the NCLT’s findings were erroneous, arguing that a single undervalued transaction cannot amount to fraudulent trading within the meaning of Section 66 of the IBC.
Appellant’s Submissions
The appellant argued that the application before the NCLT relied solely on balance sheet entries and lacked any substantive averments proving that the business of the corporate debtor was carried on with intent to defraud creditors. It was further submitted that he was not given full opportunity to present his case, thereby violating the principles of natural justice. He contended that Sections 66(1) and 66(2) of the IBC must be read conjunctively, meaning that the conditions of both subsections must be fulfilled before liability can be imposed. The director also argued that a single transaction, in the absence of continued fraudulent conduct, cannot establish the intent required under Section 66.
Respondent’s Submissions
The Liquidator, appearing for the corporate debtor, submitted that the corporate debtor had invested ₹8.80 crore in Orient Exports Pvt. Ltd. in FY 2011–12 at ₹1,000 per share, even when the book value per share was only ₹8.50. However, in FY 2013–14, the same shares were sold to the appellant at a mere ₹10 per share. It was contended that the appellant was a director in both PKS Limited and Orient Exports Pvt. Ltd., and therefore, the transaction was a deliberate attempt to siphon off funds and defraud creditors. The respondent further argued that fraud has no limitation under the IBC, and fraudulent transactions can be challenged at any stage, irrespective of time, if the intent to defraud is established.
Findings of the Tribunal
After reviewing the materials on record, the Appellate Tribunal found that the intent to defraud creditors was clearly established from the conduct of the appellant, who was in control of both entities involved in the undervalued transaction. The NCLAT observed: “We note that the Appellant, in the year 2013–14, had acquired 88,000 equity shares of Orient Exports Pvt. Ltd. from the Corporate Debtor (which had acquired them for ₹8.80 crores) at an undervalued rate of ₹8.80 lakhs, thereby causing loss of ₹871.20 lakhs to the Corporate Debtor.” Rejecting the plea of natural justice, the bench recorded that the appellant had been given several opportunities to present his case but failed to do so. The tribunal noted that the impugned order itself recorded the appellant’s arguments, and hence the claim of violation of natural justice was unfounded. It held that: “The Appellant was heard in detail and the impugned order records his arguments. He cannot now invoke Rule 49 of the NCLT Rules to recall the order merely to delay proceedings.”
On the appellant’s contention that Sections 66(1) and 66(2) must be read together, the NCLAT held that both provisions are independent in their operation, as evident from the disjunctive expression “or” in Section 67 of the IBC. It explained that both subsections create distinct grounds of liability — one for fraudulent trading and the other for wrongful trading — and can be invoked separately depending on the circumstances. The tribunal noted: “From a bare reading of Section 66(1) and Section 66(2), we find that both have self-contained provisions with clear mechanisms for their invocation. The intentional use of the disjunctive ‘or’ in Section 67 makes the legislative intent abundantly clear that these provisions must be read as independent and not conjunctive.”
The Bench relied on the Supreme Court’s decision in Hussain Ahmed Choudhury v. State of Assam, which emphasized that disjunctive expressions such as “or” should not be read conjunctively. The NCLAT further held that fraud vitiates all transactions, and procedural or temporal arguments cannot shield a fraudulent act. It emphasized: “Fraud by its very nature cannot be overlooked or condoned merely because of procedural technicalities or partial identification. Whether there is one fraudulent transaction or multiple, the principle remains the same that fraud vitiates all transactions. Even a single instance of fraud once proven is sufficient to establish the intent to deceive creditors and manipulate the insolvency process.”
Holding that the fraudulent share transfer was a deliberate act intended to siphon off corporate assets, the Tribunal concluded that the appellant, as a director, was liable under Section 66(1) of the IBC for conducting the business of the corporate debtor with intent to defraud creditors. Accordingly, the NCLAT upheld the NCLT’s order, directing the appellant to contribute ₹8.71 crore with interest at 12% to the assets of the corporate debtor. The appeal was dismissed as devoid of merit.
Appearance
For Appellant: Mr. Abhijeet Sinha, Sr. Advocate with Mr. Santosh Kumar, Advocates.
For Respondent: Mr. Krishnendu Datta Sr. Advocate with Mr. Santosh Kumar Ray, Ms. Zeba Khan, Mr. Ishan Roy Chowdhury, Ms. Shrishti Mahana and Mr. Yash Tandon, Advocates for Liquidator.
Cause Title: Swapan Kumar Saha Versus Ashok Kumar Agarwal
Case No: Company Appeal (AT) (Insolvency) No. 2355 of 2024
Coram: Justice Ashok Bhushan (Chairperson), Mr. Arun Baroka (Technical Member)
