NCLAT affirms NCLT's Power to Declare Fraudulent Transactions Void [Read Order]

In a recent ruling, the National Company Law Appellate Tribunal(NCLAT), New Delhi bench has affirmed that the National Company Law Tribunal has jurisdiction to examine and declare documents void ab initio when they are found to be fraudulent, even though such power is not explicitly mentioned in Section 66 of the Insolvency and Bankruptcy Code.

The tribunal distinguished between void and voidable documents, stating that fraudulent documents can be ignored without requiring a separate declaration from a civil court.

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The dispute centered on a 2011 transaction where Chamber Construction acquired a debt from Mafatlal Engineering (in liquidation since 1999) through Invent Assets Securitization and Reconstruction Pvt. Ltd. The corporate debtor paid approximately ₹38.19 crore for a debt with an admitted value of only ₹16.68 crore. The Resolution Professional alleged this was a fraudulent transaction designed to siphon funds from the company.

The appellants argued that the transaction was a legitimate commercial arrangement and that Section 66 couldn't apply to a transaction from 2011 when the IBC wasn't in force. They also contended that the NCLT exceeded its jurisdiction by declaring the MOU void.

The NCLAT bench, comprising Justice Mohd. Faiz Alam Khan (Member Judicial) and Naresh Salecha (Member Technical), found the transaction highly unusual and against commercial wisdom. They noted that the payment schedule required 99% payment before the seller even acquired the debt from Kotak Mahindra Bank, indicating a pre-arranged mechanism to siphon funds from the corporate debtor.

The Tribunal rejected arguments about time limitations, noting that the legislature intentionally provided no look-back period for fraudulent transactions. They clarified that the NCLT had jurisdiction to consider the validity of the MOU as it was central to determining whether fraudulent trading had occurred.

The NCLAT distinguished between documents that are "void ab initio" (which can be ignored by courts as they are non-existent in the eyes of law) and "voidable" documents (which require a declaration from a competent court). The MOU was deemed void ab initio due to fraud, and thus the NCLT was within its rights to ignore it without needing a separate civil court declaration.

The NCLAT concluded that the business was carried on with intent to defraud creditors, upholding the NCLT order directing the former directors to contribute ₹36.53 crores to the corporate debtor's assets.

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