Fraud Not Barred By Time: NCLAT Upholds Director's Liability To Contribute ₹8.71 Crore To Corporate Debtor's Assets Obtained Through Fraud

A bench of Justice Ashok Bhushan and Mr. Arun Baroka (Technical Member) held that “fraud by its very nature cannot be overlooked or condoned merely because of procedural technicalities or partial identification. Whether there is one fraudulent transaction or multiple, the principle remains the same that fraud vitiates all transactions. Even a single instance of fraud once proven is sufficient to establish the intent to deceive creditors and manipulate the insolvency process.”

Background:

The suspended director of PKS Limited had filed an appeal against an order passed by National Company Law Tribunal (NCLT) Kolkata which had directed him pay to contribute Rs. 8.71 crore with interest at 15% to the assets of the corporate debtor on an application under section 66 of the Insolvency and Bankruptcy Code, 2016 (IBC) filed by the Resolution Professional.

The Resolution Professional had alleged that the Appellant had purchased equity shares of a related party Orient Exports Pvt. Ltd. from the corporate debtor for Rs. 8.8 lakh which had already been acquired by the corporate debtor two years ago earlier for Rs. 8.80 crore, causing a loss of Rs. 8.71 crore to the company.

Aggrieved by the decision of the NCLT, the suspended director had filed an appeal before the NCLAT.

The director submitted that the application before the NCLT was based solely on the balance sheet without any averment demonstrating that the business of the corporate debtor was conducted to defraud the creditors, that he knew insolvency was imminent and that he failed to minimise the loss to the creditors. Based on the above, it was submitted that the basic ingredients of section 66 of the IBC had not been pleaded or proved and that a single transaction cannot establish fraudulent trading.

It was further submitted that section 66(1) and (2) of the IBC must be read conjunctively stating that an application could not be sustained unless conditions of both the sections were satisfied.

It was further submitted that the principle of natural justice was violated as the matter was reserved without hearing him fully.

Per contra, the Liquidator submitted that the corporate debtor had invested ₹ 8.80 crore in Orient Exports in FY 2011-12 at Rs 1000 per share when the book value was Rs. 8.50 per share. It was further submitted that in FY 2013-14, those shares had been sold to the director at Rs. 10 per share, causing a loss of Rs. 8.71 crore.

It was further submitted that fraud has no limitation under the IBC and that transactions falling within preferential, undervalued, or fraudulent categories (PUFE) are not constrained by time when intent to defraud is evident.

It was further submitted that the Appellant was a director in both the companies and that the transactions were a deliberate attempt to divert the funds and defraud the creditors.

Findings:

The Tribunal after examining the records observed that the intent to defraud the creditors is evident from the manner in which the Appellant being director of both the corporate debtor and its related party planned the undervalued share sale transaction. It held that “we note that the Appellant, in the year 2013–14, had acquired 88,000 equity shares of Orient Exports Pvt. Ltd. from the Corporate Debtor (which had acquired them for ₹8.80 crores) at an undervalued rate of ₹8.80 lakhs, thereby causing loss of ₹871.20 lakhs to the Corporate Debtor.”

On plea of natural justice, the Tribunal observed that the Appellant was given multiple opportunities but failed to argue. Therefore, there was no violation of the principle of natural justice. It held that “the Appellant was heard in detail and the impugned order records his arguments. He cannot now invoke Rule 49 of the NCLT Rules to recall the order merely to delay proceedings.”

The Tribunal rejected the Appellant's submissions that sections 66(1) and (2) must be read together holding that both sections operate independently. The Tribunal held that it is clear from the disjunctive or used in section 67 of the IBC.

The Tribunal held that “From a bare reading of Section 66(1) and Section 66(2), we find that both have self-contained provisions with clear mechanisms for their invocation during a CIRP. The intentional use of the disjunctive 'or' in Section 67(1) and (2) makes the intent abundantly clear that the provisions must be read as independent sub-sections applicable to the facts in hand.”

It relied on the Supreme Court's judgment in Hussain Ahmed Choudhury where it was held that disjunctive expressions such as "or" must not be interpreted conjunctively.

The Tribunal further held that fraud vitiates all transactions and that fraudulent transactions are not barred by lapse of time. It further observed that fraud cannot be overlooked on procedural grounds. It held that “fraud by its very nature cannot be overlooked or condoned merely because of procedural technicalities or partial identification. Whether there is one fraudulent transaction or multiple, the principle remains the same that fraud vitiates all transactions. Even a single instance of fraud once proven is sufficient to establish the intent to deceive creditors and manipulate the insolvency process.”

Accordingly, the Tribunal upheld the NCLT's order directing the suspended director of the PKS Limited to contribute Rs. 8.71 crore with interest at 12% to the corporate debtor's assets and held that the business of the corporate debtor was conducted with intent to defraud the creditors thereby attracting section 66(1) of the IBC.

Case Title: Swapan Kumar Saha Versus Ashok Kumar Agarwal

Case Number: Company Appeal (AT) (Insolvency) No. 2355 of 2024

Date of Judgment: 06/11/2025

For Appellant :Mr. Abhijeet Sinha, Sr. Advocate with Mr. Santosh Kumar, Advocates.

For Respondent : Mr. Krishnendu Datta Sr. Advocate with Mr. Santosh Kumar Ray, Ms. Zeba Khan, Mr. Ishan Roy Chowdhury, Ms. Shrishti Mahana and Mr. Yash Tandon, Advocates for Liquidator.

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