No Time Limitation for Section 66(1) Fraudulent Trading Actions: NCLAT [Read Order]
The NCLAT clarified that Section 66(1) actions for fraudulent trading have no time limitation and that tribunals have jurisdiction to examine the validity of documents central to determining whether fraudulent trading occurred.
The National Company Law Appellate Tribunal (NCLAT) has held that there is no look-back period limitation for actions under Section 66(1) of the Insolvency and Bankruptcy Code against fraudulent transactions.
The tribunal rejected arguments that a decade-old transaction could not be examined, emphasizing that the legislature intentionally did not provide any limitation period for fraudulent transactions, and such transactions can be examined regardless of when they occurred relative to the initiation of CIRP.
The bench were considering an appeal filed by former directors (Anubhav Anilkumar Aggarwal and Gokul Anilkumar Aggarwal) of Chamber Construction Pvt. Ltd. challenging an order that directed them to contribute ₹36.53 crores to the corporate debtor's assets for alleged fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code.
The case 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 NCLAT bench, comprising Justice Mohd. Faiz Alam Khan (Member Judicial) and Naresh Salecha (Member Technical), addressed several critical issues. The NCLAT found the transaction highly unusual and against commercial wisdom. They noted that the payment schedule required 99% payment (₹36.53 crore) by November 28, 2011, before the seller (Invent Assets) had even acquired the debt from Kotak Mahindra Bank on November 29, 2011. This indicated 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 once a transaction is found to be fraudulent, there is no limitation to look back if the other ingredients of Section 66(1) are satisfied.
The NCLAT clarified that Section 66(1) actions for fraudulent trading have no time limitation and that tribunals have jurisdiction to examine the validity of documents central to determining whether fraudulent trading occurred.
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