What constitutes a fraudulent transaction under Section 66 of the Insolvency and Bankruptcy Code, 2016?
An application was filed by the liquidator of a Corporate Debtor before the National Company Law Tribunal, Chennai (“NCLT”) praying that an entry of Rs. 21.37 Crore in the financial statements of FY 2018 be declared fraudulent and that the directors of the corporate debtor should be held liable.
The NCLT was of view that the said entry will come under the purview of the Section 66 of the Insolvency and Bankruptcy Code, 2016 (“Code”). Thereafter, aggrieved by the impugned Order dated 13.07.2021 passed by the NCLT, the corporate debtor filed an appeal, i.e., Mr. Shibu Job Cheeran, Suspended Director of CD vs. Mr. Ashok Seshadri, Liquidator of M/s Archana Motors Limited [Company Appeal (AT) (CH) (Ins.) No. 350 of 2021 & IA No.727/2021], before the National Company Law Appellate Tribunal, Chennai (“NCLAT”).
Observation of NCLAT:
The NCLAT held that the Section 66 of the Code gives the NCLT the power to give directions for making contributions to the assets of the Corporate if it is proven that any person has carried out the business of the corporate debtor with an intention to defraud the creditors or the stakeholders of the corporate debtor.
The NCLAT remarked that it is the director’s responsibility to exercise due diligence and take appropriate steps to minimize potential losses to the creditors when there is no possibility to avoid the Corporate Insolvency Resolution Process (“CIRP”).
Furthermore, the Hon’ble Appellate Tribunal held that the following elements needs to be established in order to prove that there was a fraudulent transaction under Section 66 of the Code:
- That the business of the Corporate Debtor has or was being carried out to defraud its creditors.
- That the directors took part in carrying out the said business of the corporate Debtor Despite there being aware of the possibility of the Corporate Debtor being insolvent.
The NCLAT held that the Appellants had not turned out to be clean in their explanations and submissions, and therefore could not avoid their responsibilities towards non-available / non-verifiable assets of Rs. 21.37 crore, as shown in the balance sheet for the Financial Year 2018. These assets were proved to be fictitious / fraudulent in nature and were held to be created in the books of accounts of the corporate debtor with an intent to defraud the creditors of the corporate debtor. In light of the above, the appeal was dismissed.