NCLAT New Delhi Rules, Adjudicating Authority Cannot Declare A Sale Transaction Void U/S 66(1) Of IBC
Pranav B Prem
The Principal Bench of the National Company Law Appellate Tribunal (NCLAT), New Delhi, comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member), has partly allowed an appeal against an order of the Adjudicating Authority (NCLT, Mumbai), which had declared a registered sale transaction as void under Section 66(1) of the Insolvency and Bankruptcy Code (IBC), 2016. The tribunal clarified that while the Adjudicating Authority has the power to pass directions for contributions in fraudulent transactions, it does not have the jurisdiction to declare a registered sale deed void under Section 66(1).
Background
The case involved New Empire Textile Processors Pvt. Ltd., a Corporate Debtor that owned two flats in the Tirupati Apartment building. In 2017, these flats were sold to the appellants, Sangeeta Jatinder Mehta and Meeta Jatinder Mehta, by way of duly registered sale deeds. Each flat was sold for Rs. 69 lakhs, and the appellants financed the purchases through loans of Rs. 55.2 lakhs each from the Shamrao Vithal Co-operative Bank. The loan proceeds were disbursed directly to the Corporate Debtor’s account.
In 2019, Corporate Insolvency Resolution Process (CIRP) was initiated against the Corporate Debtor. The Resolution Professional (RP) filed an application under Section 66 of the IBC alleging that the sale of the flats and the payment of consultancy charges to the appellants were fraudulent transactions intended to divert assets and funds of the Corporate Debtor. The Adjudicating Authority accepted the RP's claims and held the sale transactions to be void, while also directing the appellants to contribute to the assets of the Corporate Debtor.
Appellants’ Submissions
The appellants contended that the sale of the flats was genuine and supported by registered sale deeds and actual financial transactions. They emphasized that the entire sale consideration was transferred directly from the lender bank to the Corporate Debtor’s bank account, and thus there was no fraudulent intent.
They relied on the decision of the Tripura High Court in Mrs. Sudipa Nath v. Union of India [Writ Petition (C) (PIL) No.04 of 2023] and the Supreme Court’s ruling in Gluckrich Capital Pvt. Ltd. v. The State of West Bengal [Miscellaneous Application No.1302 of 2023], arguing that registered sale deeds backed by financial consideration cannot be declared void in proceedings under Section 66 of the IBC.
As to the consultancy charges, the appellants argued that the payments were made for services rendered, though no concrete evidence of such services was placed on record.
Respondent’s Arguments
The Resolution Professional, on the other hand, contended that while the sale amounts were credited to the Corporate Debtor’s account, they were quickly diverted to a separate entity, Mehta Global Inc., which was allegedly controlled by the appellants’ family members. This raised serious doubts about the bona fides of the transactions.
The RP also questioned the payment of consultancy fees to the appellants, stating that no documentation or proof of actual consultancy services had been provided. It was argued that such transactions were fraudulent in nature and that the Adjudicating Authority was empowered under Section 66 to direct reversal and contribution.
Reliance was placed on Royal India Corporation Ltd. vs. Mr. Nandkishore Visnupant Deshpande [Company Appeal (AT) (Ins.) No.137 of 2021] and Tridhaatu Kirti Developers LLP vs. Mr. Arihant Nenawati [Company Appeal (AT) (Ins.) No.95 of 2021] in support of the RP’s powers under the IBC to deal with fraudulent transactions.
Findings and Observations of the NCLAT
The NCLAT analyzed the financial trail and noted that the sale consideration for both flats was indeed received by the Corporate Debtor through banking channels. The fact that the funds were later transferred elsewhere was not sufficient to conclude that the sale transactions themselves were fraudulent.
The tribunal observed that under Section 66(1) of the IBC, while the Adjudicating Authority is empowered to direct contributions by persons who were knowingly parties to fraudulent trading or business, it does not have the authority to declare a registered sale deed void. The sale of immovable property through a registered document is governed by the Transfer of Property Act and Registration Act, and such transactions can only be declared void by a competent civil court in appropriate proceedings.
Citing Mrs. Sudipa Nath v. Union of India, the NCLAT reinforced that Section 66(1) only allows for imposition of liability, not nullification of title transfers.
However, with respect to the consultancy charges, the tribunal found that the appellants had failed to substantiate the nature or scope of consultancy services allegedly provided to the Corporate Debtor. In the absence of any documentation or evidence, the tribunal upheld the direction to return the consultancy fees received.
Conclusion and Decision
The NCLAT partially allowed the appeal. It set aside the portion of the Adjudicating Authority’s order that declared the sale of flats as void. However, it upheld the direction requiring the appellants to return the consultancy charges paid by the Corporate Debtor.
Appearance
For Appellants: Ms. Sowmya Saikumar, Mr. Siddharth Praveen Acharya, Mr. Surya Kant Vyas and Mr. Siddharth Vaid, Advocates
For Respondent: Mr. Gaurav Mitra, Ms. Honey Satpal, Ms. Aishwarya Modi, Mr. Kanishk Khullar, Ms. Pooja Singh, Mr. Akash Agarwalla, Advocates
Cause Title: Sangeeta Jatinder Mehta & Anr. V. Kailash Shah RP of New Empire Textile Processor Pvt. Ltd.
Case No: Company Appeal (AT) (Insolvency) No. 104 of 2024
Coram: Justice Ashok Bhushan [Chairperson], Barun Mitra [Member (Technical)]
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