IBC Fraudulent Trading: NCLAT Directs Suspended Director to Contribute ₹8.71 Crore with 12% Interest to Corporate Debtor [Read Order]

The National Company Law Appellate Tribunal (NCLAT), Principal Bench at New Delhi, upheld the National Company Law Tribunal (NCLT) order directing contribution to the assets of a corporate debtor after finding that a share transaction with a related party was carried out with the intent to defraud creditors.

The appeal arose from proceedings under the corporate insolvency resolution process (CIRP) of PKS Limited, where the resolution professional had moved an application alleging that a substantial investment made by the corporate debtor in a related party was subsequently divested at a grossly undervalued price, causing significant loss to the corporate debtor. The transaction involved the purchase of 88,000 equity shares of Orient Exports Pvt. Ltd. for ₹8.80 crore during the financial year 2011–12, followed by the sale of the same shares in 2013–14 for merely ₹8.80 lakh.

The appellant, a suspended director of the corporate debtor, contended that the application under Section 66 was not maintainable due to lack of pleadings satisfying the statutory requirements. It was argued that there were no averments establishing fraudulent conduct, intent to defraud creditors, or failure to exercise due diligence, and that reliance had been placed solely on balance sheets. The appellant further submitted that an isolated transaction could not form the basis for alleging fraudulent trading.

The liquidator opposed the appeal, asserting that the transaction was patently fraudulent and defied commercial logic. It was pointed out that the corporate debtor had subscribed to shares of the related party at ₹1,000 per share despite the face value being ₹10 and the book value being ₹8.50 per share, and that the same shares were later transferred to the appellant at ₹10 per share.

The liquidator emphasized that the corporate debtor’s account had already been declared a non-performing asset prior to these transactions, indicating a deliberate attempt to divert funds at the expense of creditors.

Addressing the legal issue concerning the scope of Section 66 of the Code, the NCLAT, comprising Justice Ashok Bhushan (Chairperson), Arun Baroka (Technical Member) held that Sections 66(1) and 66(2) operate independently and are not required to be read conjunctively.

The Tribunal observed that Section 66(1) applies where the business of the corporate debtor is carried on with intent to defraud creditors or for any fraudulent purpose, whereas Section 66(2) specifically deals with wrongful trading by directors who knew or ought to have known that insolvency was unavoidable.

On the issue of natural justice, the Appellate Tribunal rejected the appellant’s contention that adequate opportunity of hearing had not been granted. It noted that multiple opportunities were afforded before the Adjudicating Authority and that the impugned order had duly recorded and considered the appellant’s submissions.

Upholding the findings of the NCLT, the NCLAT concluded that the transaction in question clearly demonstrated intent to defraud creditors and justified invocation of Section 66(1) of the Code. The Tribunal found no infirmity in the direction requiring the appellant to contribute ₹871.20 lakh to the assets of the corporate debtor and dismissed the appeal accordingly.