Pranav B Prem

The National Company Law Tribunal (NCLT), New Delhi bench comprising Justice Ashok Kumar Bhardwaj (Judicial Member) and Anil Raj Chellan (Technical Member) has ruled that third parties who sold land to the Corporate Debtor cannot be deemed to fall within the ambit of "any persons who were knowingly parties to the carrying on the business of the Corporate Debtor" as mentioned in Section 66 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Tribunal held that an application under this Section may be maintainable only against persons responsible for the management of the Corporate Debtor.

Background Facts

On February 17, 2019, the NCLT initiated the Corporate Insolvency Resolution Process (CIRP) against M/s Three C Universal Developers Private Limited (Corporate Debtor). The Resolution Professional (RP) filed I.A. No. 3054/2021 under Section 66 of the IBC against the suspended management and promoters of the Corporate Debtor. Additionally, the RP included the Applicants—third parties who had sold land to the Corporate Debtor—in the array of respondents. The Applicants, contending that they were erroneously impleaded, filed an interlocutory application (I.A.) seeking removal of their names from the list of respondents.

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Contentions

Applicants' Arguments

The Applicants submitted that I.A. No. 3054/2021 was not maintainable against them in light of the Supreme Court’s ruling in Gluckrich Capital Pvt Ltd. v. State of West Bengal & Ors.[Special Leave Petition (Diary No. 6732 of 2023)], which held that Section 66 of the IBC can only be invoked against persons responsible for the conduct of the business of the Corporate Debtor. The Applicants argued that they were neither responsible for running the Corporate Debtor’s business nor its partners or directors. Thus, as third parties, no relief could be sought against them under Section 66.

Respondent/RP's Arguments

The RP contended that the Applicants had defrauded the creditors of the Corporate Debtor to the tune of Rs. 66.7 crores by selling agricultural land to the Corporate Debtor at exorbitant prices. The RP further argued that the ruling in Gluckrich Capital Pvt. Ltd. had been diluted by the NCLAT in Royal India Corporation Limited v. Mr. Nandkishor Vishnupant Deshpande & Ors.[Company Appeal (AT) (Insolvency) No. 137/ 2021], where it was held that Section 66 could be invoked against "any persons" for recovering amounts involved in fraudulent transactions. On this basis, the RP argued that the Applicants were necessary parties to I.A. No. 3054/2021.

Observations and Ruling

The primary issue before the Tribunal was whether third parties who sold land to the Corporate Debtor at allegedly inflated prices could be arrayed as respondents in a Section 66 application. The Tribunal referred to its previous ruling in Relan Buildwell Private Limited v. Kaliber Associates [I.A. No. 2833 of 2022], where it analyzed the essential elements of Section 66(1) of the IBC:

1. " Carrying of business;

2. Intention to defraud the creditors of CD or for any fraudulent purpose;

3. Any person who is knowingly party to carrying on the business with the intent to defraud creditors of the Corporate Debtor or for any other fraudulent purpose."

In that case, the Tribunal had observed: "A third party may not be liable to make contributions to the assets of the Corporate Debtor under Section 66 of the IBC, but if a third party knowingly participates in the conduct of the Corporate Debtor’s business with the intent to defraud creditors or for a fraudulent purpose, such a party may be held liable."

Applying this principle, the Tribunal found that merely selling land to the Corporate Debtor does not establish that the Applicants were knowingly participating in the conduct of the Corporate Debtor’s business. It rejected the RP’s contention that Royal India Corporation Limited had diluted the Supreme Court’s ruling in Gluckrich Capital Pvt. Ltd. The Tribunal reaffirmed that lower courts and tribunals cannot dilute or override Supreme Court rulings.

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Furthermore, the Tribunal noted that in Royal India Corporation Limited, the NCLAT had emphasized that the Corporate Debtor and the appellant company were managed by the same individual, thus justifying the invocation of Section 66. However, in the present case, the RP did not assert that the Applicants had any role in the Corporate Debtor’s management. Consequently, the Tribunal found that the RP’s reliance on Royal India Corporation Limited was misplaced.

Verdict

The Tribunal allowed the Applicants' I.A., directing their removal from the array of respondents in I.A. No. 3054/2021. It clarified that proceedings under Section 66 and 67 of the IBC would continue against the suspended board, promoters, and directors of the Corporate Debtor if it were found that the transactions were fraudulent.

Appearance

For the Applicant: Sumesh Dhawan, Karan Kohli, Raghav, Kapoor,, Advocates

For the RP: Rakesh Kumar Gupta, Abhishek Anand, Advocates

Cause Title: M/s Jakson Limited V. M/s Three C Universal Developers Pvt Ltd 

Case No: CP(IB) No. 2582/ND/2019

Coram: Sh. Ashok Kumar Bhardwaj [Hon’ble Member (J)], Sh. Anil Raj Chellan [Hon’ble Member (T)]

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