Unsecured High-Value Transactions During Pending Insolvency Held Fraudulent Under Section 66 IBC
- REEDLAW
- 3 hours ago
- 3 min read
REEDLAW Legal News Network reports: In a pivotal ruling, the Appellate Tribunal held that execution of a series of unsecured high-value transactions during pendency of insolvency proceedings, without realistic prospects of recovery and in disregard of established financial prudence, amounted to fraudulent conduct. The Tribunal concluded that such acts were intentionally prejudicial to creditor interests and attracted contribution liability under the statutory framework governing avoidance transactions and wrongful trading.
The National Company Law Appellate Tribunal, New Delhi Bench, comprising Justice Mohd. Faiz Alam Khan and Mr. Naresh Salecha examined material demonstrating that corporate decision-makers entered into financial arrangements during the insolvency period that lacked commercial rationale and exposed the corporate debtor to irrecoverable liabilities. The Tribunal observed that such conduct directly diminished asset value available to legitimate creditors and, therefore, attracted liability under Section 66 of the IBC.
The appeal had arisen from an order by the adjudicating authority, which had partly allowed an application under Section 66 of the IBC and had directed contribution to the credit of the Corporate Debtor on account of two transactions held to be fraudulent. The Appellant had assailed this finding on the ground that the transactions were bona fide commercial dealings and that the liquidator failed to discharge the burden of proving fraudulent intent. The Appellant emphasised that default in recovery from a business counter-party could not, in itself, amount to fraudulent trading, particularly when the transactions were part of a continuing business cycle involving procurement and sale of gold. It had further been argued that neither personal benefit, siphoning of assets, nor collusion had been established and that the adjudicating authority had only presumed fraudulent intent based on subsequent non-payment. Reliance was placed on judicial precedents to assert that fraud must be specifically proved, and that mere commercial errors could not be equated with wrongful trading.
The Respondent, appearing through the liquidator, contended that the transactions in question were executed when the Appellant, serving as officers of the Corporate Debtor, were fully aware that a Section 7 proceeding was pending and insolvency was imminent. It had been highlighted that gold worth substantial value was sold entirely on unsecured credit, both shortly before and immediately prior to commencement of CIRP, and that negligible recovery followed. The Respondent had argued that the pattern, timing and commercial irrationality of entering into high-value credit transactions in the bullion industry—where cash-based settlement is the norm—clearly demonstrated intent to transfer assets outside the reach of creditors. These acts, according to the Respondent, amounted to deliberate dissipation of value, attracting Sections 66(1) and 66(2).
Upon consideration of the statutory scheme, particularly the dual nature of Section 66 dealing with fraudulent trading and wrongful trading, the appellate tribunal found that liability may arise where decision-makers of the Corporate Debtor either knowingly partook in transactions with the intent to defraud creditors or failed to exercise due diligence despite knowledge that insolvency proceedings could not be avoided. The tribunal noted that the impugned transactions were effected during the pendency of the Section 7 application and shortly before commencement of CIRP, without a reasonable prospect of recovery and without any safeguards ordinarily expected in that line of business. The tribunal concluded that such conduct evidenced a lack of diligence and contributed to the depletion of the Corporate Debtor’s assets, thereby sustaining the order directing contribution from those responsible.
Mr. Ashish Raghuvanshi, Advocate, represented the Appellants.
Ms. Disha Shah, Advocate, appeared for the Respondent No. 1.
This is premium content available to our subscribers.
To access the full content related to this article — including the complete judgment, detailed legal analysis, ratio decidendi, headnotes, cited case laws, and updates on relevant statutes and notifications — we invite you to subscribe to REEDLAW’s premium research platform.
Â
Click here to Subscribe and unlock exclusive access to structured legal analysis, judicial summaries, and a comprehensive legal research database.
REEDLAW Legal Intelligence & Research is India’s most trusted legal publishing and research platform, empowering professionals with structured judicial insights and authoritative legal intelligence since 1985.
The platform offers comprehensive resources spanning Corporate Insolvency, Bankruptcy, Company Law, SARFAESI, Debt Recovery, Contract, MSMEs, Arbitration, Banking, and Commercial Laws. Through curated journals like IBC Reporter and Bank CLR, and an advanced Online Legal Research Database, REEDLAW simplifies complex legal research for professionals, institutions, and academia across India.