NCLAT Declares Transactions Fraudulent U/S 66 Of IBC Due To Corporate Debtor's Failure To Diligently Negotiate One-Sided Clause In MOU
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Rakesh Kumar Jain (Judicial Member), Justice Mohammad Faiz Alam Khan and Mr. Naresh Salecha (Technical Member) has held that a complete surrender on the part of the corporate debtor to negotiate the terms of the Memorandum of Understanding, by which the property from the Respondent was to be purchased,...
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Rakesh Kumar Jain (Judicial Member), Justice Mohammad Faiz Alam Khan and Mr. Naresh Salecha (Technical Member) has held that a complete surrender on the part of the corporate debtor to negotiate the terms of the Memorandum of Understanding, by which the property from the Respondent was to be purchased, and agreeing to a one side clause that empowers the Respondent to unilaterally terminate the agreement and forfeit the entire amount paid in pursuance of the said agreement would fall within scope of fraudulent transactions under section 66 of the Code.
Brief Facts:
This appeal has been filed by the Appellants under Section 61 of the Insolvency and Bankruptcy Code, 2016 (“Code”), challenging the Impugned Order dated 02.04.2024 passed by the National Company Law Tribunal, Mumbai Bench-I (“Adjudicating Authority”) wherein the Adjudicating Authority has disallowed the application of the Resolution Professional under Section 66 of the Code for refund of amount in respect of transactions entered into between the suspended management and Respondent No. 7 & 8 aggregating to Rs. 32,59,00,000/- alongwith interest.
Corporate Insolvency Resolution Process (CIRP) was initiated against Respondent No. 1 (Corporate Debtor) on 03.08.2020 vide order in CP(IB) No. 1632/MB/2019. The Appellants contended that the Forensic Audit Report dated 15.11.2021 by M/s BDO India LLP which was submitted on the request of the Resolution Professional, conclusively identified suspicious and fraudulent transactions involving the suspended management and third parties, including Respondents No. 7 and 8.
The Resolution Professional based on his independent analysis and the Forensic Audit Report filed an application under section 66 of the Code seeking refund for compensation of loss suffered to the creditors of the Corporate Debtor in respect of four transactions.
However, the above application of the Resolution Professional was partly allowed. Against the above order, the present appeal has been filed.
The Appellant submitted that an advance of Rs. 29.35 Crore was paid by the Corporate Debtor to Respondent No. 7 between 10.08.2015 and 31.03.2016, purportedly for a property purchase, but was entirely written off on 31.03.2020.No evidence exists of any property being acquired, indicating that the advance was siphoned off in connivance with the suspended management to defraud creditors.
It was further submitted that the MoU's forfeiture clause (Clause 9), allowing Respondent No. 7 to retain Rs. 29.35 Crore, is arbitrary and one-sided, designed to facilitate fraudulent transfer of funds. Under Section 54 of the Transfer of Property Act, 1882, agreements for the sale of immovable property worth Rs. 100 or more must be registered, rendering the MoU legally deficient.
It was further submitted that the suspended directors made no efforts to recover the advance, indicating complicity with Respondent No. 7 to defraud the Corporate Debtor's creditors.
It was further contended that the Resolution Professional has discharged the burden of proof under Section 66 of the Code by presenting the Forensic Audit Report, ledger accounts, and unregistered agreements as evidence of fraudulent conduct.The Respondents' failure to provide credible explanations shifts the burden to the Respondent to prove the transactions' legitimacy.
Per contra, the Respondent submitted that the Appellants, representing only approximately 30% of the Committee of Creditors ('CoC'), have not produced any document or authority letter demonstrating that they represent the entire CoC. In the absence of such authority, the appeal is bad in law and liable to be dismissed.
It was further submitted that the application lacks the three mandatory milestones under Section 66: a clear 'opinion,' a suitable 'determination,' and a concrete 'finding' of fraudulent intent. The Resolution Professional failed to comply with Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, and did not establish mens rea against the Respondents, rendering the application defective.
It was further contended that the transactions with Respondent No. 7 and Respondent No. 8 predate the filing of the Section 7 application and fall beyond the two-year look-back period from the CIRP admission date i.e., 03.08.2020.
It was also submitted that the MoU's Clause 9, which allowed Respondent No. 7 to forfeit the earnest money if the Corporate Debtor failed to pay the full consideration by 31.08.2019, was mutually agreed upon. The MoU's unregistered status does not render it invalid, as registration is not mandatory for preliminary agreements under the Transfer of Property Act, 1882.
The Respondent No. 8 submitted that the transaction with the Corporate Debtor involved an inter-corporate deposit of Rs. 8.98 Crores for the purchase of property. The transaction was an investment to build an asset, with no accrual of interest or repayment terms, distinguishing it from a loan transaction.
Observations:
The Tribunal noted that the amount to the tune of Rs. 29.35 crores was transferred to the M/s Dev Land & Housing Pvt. Ltd. for the purchase of property as per MOU executed on 18.08.2015. However, the amount that was paid was written off on 31.03.2016 and there is no evidence that the property was transferred.
It further noted that the transaction was based on an alleged forged and unregistered MOU on stamp paper of Rs. 100 which was not even notarised and registered. Furthermore, clause 9 of the MOU permitted the Respondent No. 7 to forfeit the entire amount unilaterally which indicates that the Suspended Director failed to protect the interest of the corporate debtor. 40 percent of the total amount was paid but there was no request for extension of time, renegotiation or settlement that too amid financial distress.
It further observed that the Deed of Cancellation was executed without any Board Resolution and objections from the suspended director. It was alleged that the Cancellation Deed was fabricated and backdated on a stamp paper of 2019 and it was executed during the peak COVID 19. The Deed also lacked the signature of the Suspended Director which further raises concerns about the genuineness of the MOU. In light of the above discussion, the Tribunal held that these all lend credence to the claims raised by the Appellant.
The Tribunal further observed that clause 9 of the MOU gave absolute power to the Respondent to unilaterally terminate the agreement and forfeit the entire amount and further prohibit the corporate debtor from initiating legal proceedings or claiming any right over the property. Such a lop sided clause is highly unusual in the commercial transaction in which the obligations and rights of both the parties are balanced. In the present case, no efforts were made by the corporate debtor to renegotiate the timeline, reduce the forfeiture amount and look for the acquisition of the property after paying the EMD.
It further said that the default was attributed to extraneous reasons without any explanation. All this shows that this transaction was entered into to surrender of Rs. 29.35 crores by the corporate debtor to the Respondent which raises serious concerns about the intent of the Respondent and suggest a fraudulent transaction falling within the contour of section 66 of the code.
The Tribunal held that section 66 of the code does not prescribe any look back period but imposes a duty on the directors to act in the best interest of the corporate debtor and its creditors. In the present case, the Suspended Director failed to exercise its duty in a responsible manner. This provision has been incorporated to address such misconduct on the part of the Directors.
It further observed that the Auditor who was appointed by the Resolution Professional with an approval of the CoC found that all four transactions were fraudulent. The findings of the Auditor were also approved by the Resolution Professional. It is the duty of the court to assess the intent, structure and purpose for which transactions took place to uncover fraud, reckless indifference that harm the creditors.
Accordingly, the present appeal was allowed and the impugned order was set aside.
Case Title: Vistra ITCL (India) Limited and Ors. Versus Satra Properties (India) Ltd. and Ors.
Case Number: Comp. App. (AT) (Ins) No. 1043 of 2024 & I.A. No. 3794 of 2024
Judgment Date: 03/07/2025
For Appellants: Mr. Vaibhav Gaggar, Sr. Advocate along with Mr. Devashish Chauhan, Ms. Madhura MN & Ms. Jasleen Singh Sandha, Advocates.
For Respondents: Ms. Neha Agarwal, Mr. Pulkit Sharma & Ms. Vanshika Mittal, for R-1.
Mr. Malak Bhatt, Ms. Neeha Nagpal & Mr. Shreyansh Chopra, for R-2 to 6.
Mr. Aayush Agarwala & Mr. Prakash Jha, for R-7.
Mr. Zeeshan Hashmi, for R-8.