NCLAT Distinguishes Fraudulent Trading from Wrongful Trading Provisions [Read Order]

In a detailed judgment,National Company Law Appellate Tribunal (NCLAT), Principal Bench at New Delhi, has clarified that Section 66(1) (fraudulent trading) and Section 66(2) (wrongful trading) of the Insolvency and Bankruptcy Code operate independently and in different arenas.

The tribunal explained that fraudulent trading can be established without proving "twilight-of-insolvency" timing if business was carried on with intent to defraud creditors, whereas wrongful trading requires different elements to be established.

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), made a significant distinction between fraudulent trading under Section 66(1) and wrongful trading under Section 66(2) of the IBC. They clarified that these provisions operate independently, with Section 66(1) applying to any business carried on with intent to defraud creditors, regardless of proximity to insolvency, while Section 66(2) specifically addresses director conduct during the "twilight period" before insolvency.

The Tribunal found the transaction highly unusual and against commercial wisdom, noting 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. They rejected arguments about time limitations, noting that the legislature intentionally provided no look-back period for fraudulenttransactions.

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, while clarifying the distinct applications of Section 66(1) and Section 66(2) in fraudulent trading cases.

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