₹28.5 Lakh Fraudulent Trading Liability on Suspended Directors u/s 66 IBC Set Aside: NCLAT [Read Order]

In a recent ruling, the National Company Law Appellate Tribunal (NCLAT ), Delhi, set aside an order passed by the National Company Law Tribunal (NCLT), which held that they were liable for fraudulent and wrongful trading under section 66 of the Insolvency and Bankruptcy Code ( IBC) and had directed them to contribute ₹28.5 lakh to the liquidation estate.

The appeal was filed by Nalinesh Kumar Paurush and other members of the suspended board of directors, challenging the NCLT New Delhi Bench (Court-II) order dated 9 May 2023. The impugned NCLT order arose from an application filed by the Resolution Professional under Section 66 IBC, alleging that the suspended directors had made fraudulent investments by purchasing shares of Uno Industries Limited and Jayant Mercantile Company Limited in August 2019.

The appellant, Nalinesh Kumar Paurush, along with other suspended directors, argued that NCLT committed illegality by ignoring the fact that they had exercised due diligence before investing in shares of companies that, though not actively traded, were expected to resume compliance and relisting. They claimed the investment was a bona fide commercial decision made in the ordinary course of business for the benefit of the corporate debtor, and a mere loss cannot render such transactions fraudulent.

The respondents, Arvind Mittal, argued that there was no illegality in holding the suspended directors liable under Section 66 IBC. They relied on the transaction audit report, and said that it was a comprehensive document based on the corporate debtor’s books of accounts, audited financial statements, bank records and other contemporaneous material, which clearly established fraudulent and wrongful trading.

NCLAT observed that Section 66 of the IBC imposes a high threshold and that every commercial decision resulting in loss cannot automatically be labelled as fraudulent or wrongful trading. also found that there was no material to establish that the suspended directors knew, or ought to have known, that there was no reasonable prospect of avoiding CIRP at the time of the impugned share purchases.

It was further observed that only ₹15 lakh of the ₹28.5 lakh share value was actually paid by the directors, and the key ingredients of Section 66(2) IBC were absent, stressing that commercial risk‑taking cannot be equated with fraud.

The bench Justice Mohd. Faiz Alam Khan( judicial member ), Arun Baroka ( technical member) ruled that the NCLT erred in relying solely on the audit report without considering broader commercial wisdom. Acoordingly the appeal was allowed, the impugned order set aside, with no costs and all pending applications closed.

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