Business Decisions Resulting in Losses Cannot Be Automatically Termed as Fraudulent Transactions: NCLAT Delhi
Overview of the Judgment
The National Company Law Appellate Tribunal (NCLAT), Delhi Bench has delivered a significant ruling emphasizing that commercial transactions undertaken in the ordinary course of business, even if they result in financial losses, cannot be automatically characterized as fraudulent or undertaken with malicious intent to deceive creditors. The appellate authority set aside the lower tribunal's order after finding that the essential requirements under Section 66(2) of the Insolvency and Bankruptcy Code, 2016 (IBC) were conspicuously absent in the matter.
Background Facts of the Case
The appellants, who were members of the Suspended Board of Directors of the corporate debtor (CD), challenged the decision dated 09.05.2023 rendered by the National Company Law Tribunal, Delhi Bench in I.A. No. 2536/2022 in CP No. (IB)-637(PB) 2020. Through the contested order, specific transactions executed by the appellants were classified as fraudulent, and they were mandated to deposit Rs. 28 lakhs into the liquidation estate of the CD.
The CD, M/s Temple Leasing and Finance Ltd., entered Corporate Insolvency Resolution Process (CIRP) vide order dated 25.06.2021, with Mr. Arvind Mittal being appointed as Interim Resolution Process (IRP), who was subsequently confirmed as Resolution Professional (RP) through an order dated 21.02.2022.
Following the Committee of Creditors' (CoC) approval with 100% voting share, the Resolution Professional filed an application under Section 33(2) of the Code seeking liquidation of the corporate debtor, proposing his own appointment as liquidator.
The Disputed Transactions
A Transactional Auditor was appointed by the liquidator, who submitted a Transaction Audit Report dated 24.12.2021 after examining the books of accounts of the CD for the period from 01.04.2016 to 25.06.2021.
The liquidator subsequently filed an application under Section 66 of the Insolvency and Bankruptcy Code 2016, bearing IA No. 2536/ND/2022, challenging two specific transactions:
- Purchase of shares of Uno Industries Limited - Rs. 15,00,000/- on 02.08.2019 for 30,00,000 shares
- Purchase of shares of Jayant Mercantile Company Limited - Rs. 13,50,000/- on 06.08.2019 for 9,00,000 shares
The lower tribunal characterized these transactions as having been executed to avoid commencement of insolvency resolution proceedings and directed the appellants to contribute Rs. 28,50,000/- to the CD's assets.
Contentions Advanced by the Appellants
Commercial Wisdom and Business Judgment
The appellants' counsel submitted comprehensive written arguments asserting that the trial court committed manifest illegality by completely overlooking the due diligence exercised by the appellants. They argued that although the companies whose shares were acquired were not actively trading, there existed a reasonable probability that these companies would soon fulfill their procedural compliances and become actively traded on stock exchanges.
Bonafide Business Decision
It was emphasized that the commercial decision regarding share purchases was taken during ordinary business operations with bonafide intentions for the benefit of the CD. The counsel stressed that business decisions sometimes result in losses, and such outcomes cannot automatically be characterized as fraudulent or lacking due diligence.
No Connection with Insolvency
The appellants maintained there was no nexus between the CD's insolvency and these investments. Importantly, the investment remained a sole asset of the CD and attracted an offer of Rs. 15,00,000/- during liquidation proceedings. Under normal circumstances, these shares might have commanded a higher price, particularly considering numerous instances where previously de-listed companies were relisted and their shares fetched substantial returns.
Lack of Evidence of Fraudulent Intent
The appellants argued that no substantial evidence demonstrated that purchasing shares of these two companies was fraudulent or executed with intent to defraud creditors. The burden of proving fraudulent intent rested on the Respondent, yet apart from the transaction audit report—which itself was unreliable—no other substantial evidence indicated fraudulent transactions.
Deficiencies in the Transaction Audit Report
The transaction audit report, which formed the sole basis of the Tribunal's reliance, was characterized as containing contradictions and arriving at inconclusive findings. Such uncertain conclusions could not justify terming the appellants' conduct as fraudulent.
Section 66 Requirements Not Met
To invoke Section 66(1) of the Code, proof of dishonest intention constitutes a pre-condition. The lower tribunal failed to consider this aspect and, without establishing the ingredients of Section 66(2) of the Code, directed the appellants to deposit Rs. 28,50,000/-.
The appellants relied upon:
- Inasara Technologies Pvt. Ltd. vs. Yogendra Vasupal & Ors., 2024 SCC Online NCLT 1071
- Regen Powertech Pvt. Ltd. vs. Wind Construction Pvt. Ltd., 2022 SCC Online NCLAT 3801
Arguments Presented by Respondent Shree Vishvamurte Trad Invest Pvt. Ltd.
Assignment of Rights
Respondent SVTIPL stated that in the 4th meeting of the stakeholder's consultation committee (SCC) convened on 11.12.2023, the SCC with 100% voting power passed a resolution assigning all rights, title, and interest arising from the impugned order dated 09.05.2023 in their favor. A deed of assignment dated 03.09.2024 was executed between the CD through its liquidator and SVTIPL.
Reliability of Transaction Audit Report
The respondent maintained that the impugned judgment was passed considering the transaction auditor report—a comprehensive document confirming fraudulent transactions committed by the appellants. The findings were based on audited financial statements, bank statements, loan facility agreements, purchase invoices, sale agreements, income tax returns, and other relevant records for the period from 01.04.2016 to 25.06.2021.