NCLAT Orders Director to Repay ₹8.71 Cr for Fraudulent Related-Party Share Sale That Depleted Corporate Debtor’s Assets
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), New Delhi has upheld an order directing a director of the Corporate Debtor (CD) to compensate the company for losses caused by a fraudulent related-party share transaction, holding that such conduct independently attracts Section 66(1) of the Insolvency and Bankruptcy Code, 2016, without any look-back limitation. The Tribunal found that the director had caused depletion of the CD’s assets by purchasing shares of a related party from the CD at an artificially undervalued price, thereby resulting in substantial financial loss to the creditors.
The Division Bench comprising Justice Ashok Bhushan (Chairperson) and Arun Baroka (Technical Member) noted that Section 66(1) empowers the Adjudicating Authority to direct contribution by persons who knowingly engaged in fraudulent trading, irrespective of the period within which such transactions were made. Referring to Section 66(2), the Bench further reiterated that when a director, before the insolvency commencement date, knew or ought to have known that the corporate debtor was likely to go into CIRP and failed to exercise due diligence, he may be held personally liable to compensate the CD’s assets.
The Tribunal found that the appellant, who was a director/key managerial personnel in the CD as well as connected with its related party, Orient Exports Pvt. Ltd., had orchestrated a series of transactions that were clearly intended to defraud creditors. During FY 2011-12, the CD had invested approximately ₹8.80 crores in 88,000 equity shares of Orient Exports at around ₹1,000 per share, despite the par value being ₹10 and the book value about ₹8.50 per share. However, in FY 2013-14, the appellant caused the CD to sell the same 88,000 shares to himself at merely ₹10 per share for a total of about ₹8.80 lakhs, resulting in a loss of about ₹8.71 crores. The NCLAT noted that this transaction was reflected in the financial statements obtained from the MCA portal, as the CD had not cooperated with the Resolution Professional in producing its accounts.
The Bench observed that the CD’s business was being conducted “with the intent to defraud the creditors,” particularly since the CD’s accounts had already been declared NPA by lenders. It found that the appellant, being a KMP in both companies, had deliberately caused the CD to first acquire the shares at an inflated price and later transfer them to himself at a drastically discounted value, thereby depleting the company’s assets. The appellant had not been able to dispute the underlying facts and had instead attempted to delay proceedings by raising what the Tribunal described as “artificially created technicalities.”
Upholding the findings of the Adjudicating Authority (NCLT), the NCLAT held that the loss caused by the undervalued related-party transaction had to be recovered from the appellant. The Tribunal emphasised that the fraudulent nature of the transaction independently triggered liability under Section 66(1), and that the director’s conduct demonstrated a complete lack of due diligence expected under Section 66(2).
Accordingly, the NCLAT affirmed the direction requiring the appellant to contribute ₹871.20 lakhs to the corporate debtor, along with 12% interest from the date of the CD’s investment in Orient Exports Pvt. Ltd. The appeal was dismissed, and the NCLT’s order was upheld in full.
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 V. Ashok Kumar Agarwal
Case No: Company Appeal (AT) (Insolvency) No. 2355 of 2024
Coram: Justice Ashok Bhushan (Chairperson), Arun Baroka (Technical Member)
