S. 66 Of IBC: Fraud Includes A Debt Which Debtor Has No Intention To Repay: NCLAT Delhi

The National Company Law Appellate Tribunal (“NCLAT”), Principal Bench, comprising of Justice Rakesh Kumar Jain (Judicial Member) and Shri Naresh Salecha (Technical Member), while adjudicating an appeal filed in Shri Baiju Trading and Investment Private Limited v Mr. Arihant Nenawati & Ors., has held under that ‘fraud’ for the purpose of Section 66 of IBC would consist of debts which the Debtor has no intention to repay or does not expect to be able to pay. Further, fraud may also happen by way of false representation, without there being any intention to pay back. The expression ‘any persons’ in Section 66 of IBC includes a knowing party to the carrying out of fraudulent transactions.

BACKGROUND FACTS

Royal Refinery Pvt. Ltd. (“Corporate Debtor”) is engaged in the business of bullions i.e. importing and exporting gold and sale/purchase of gold in local markets. On 13.11.2019, the Corporate Debtor was admitted into Corporate Insolvency Resolution Process (“CIRP”). Subsequently, the NCLT ordered liquidation of the Corporate Debtor on 16.04.2021 and appointed a Liquidator.

Shri Baiju Trading and Investment Pvt. Ltd. (“Appellant”) is a company engaged in the business of Non-Banking Financial Services (“NBFC”) and had taken financial assistance from the Corporate Debtor.

The Liquidator filed an application before the NCLT under Section 66 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), alleging fraudulent transaction between Appellant and the Corporate Debtor amounting to Rs. 41.03 crores and seeking reversal of the same. The Liquidator submitted that the Corporate Debtor was engaged in the business of bullions and not of money lending. Further, as per normal practice in gold business, the transaction and dealing occur on spot payment basis and there is hardly any scope for lending money. After advancing funds to the Appellant, the Corporate Debtor had written off the entire sum owed by a simple journal entry i.e. ‘Sundry Balances written off’.

The Corporate Debtor was raided by the Department of Revenue Intelligence (“DRI”) in 2019 and just a month prior to the same the amount of Rs. 41.3 Crores was written off by the Corporate Debtor. Therefore, the transaction was fraudulent in nature.

On 29.01.2021, the NCLT allowed the application and observed that the Appellant is the principal beneficiary of the fraudulent transaction. The NCLT directed the Appellant to return Rs. 41.03 crores into the account of Corporate Debtor.

The Appellant challenged the Order dated 29.01.2021 before the NCLAT.

NCLAT VERDICT

The Bench observed that the NCLT is empowered under Section 66 of IBC to direct a person to make contributions to the Corporate Debtor’s assets, in case such person has carried on the business of the Corporate Debtor with intention to defraud its creditors.

The Bench interpreted ‘fraud’ as under:

“It can also be inferred that the ‘fraud’ can, inter alia, consist of such debts which debtor has no intention of paying or does not expect to be able to pay or such fraud may also happen by way of false representation and without intention to pay back. The expression any person includes a knowing party to the carrying out fraudulent transactions.”

Further, the Appellant had taken contrary stands before the NCLT while explaining the nature of transaction. The Appellant explained the transaction as ‘Long Term Borrowing (Loan)’ and ‘not credit from trading activities’ in its Reply and explained it as ‘regular business transactions’ in its Rejoinder. It was opined that such contradictory statements raise doubts in the mind of the Bench regarding the real nature of the transaction/relationship between the Appellant and the Corporate Debtor.

“The very fact that the ‘Appellant’ was ‘NBFC’ and the ‘Corporate Debtor’ was in the business of bullion/ gold, therefore, there cannot be such transactions in the normal course of business. Similarly, there is no reason for ‘Corporate Debtor’ to give such loan without any basis, reason and substance and that too, apparently as brought out, without suitable incentives or returns for time value of money.”

The Bench held that the Appellant is the principal beneficiary of fraudulent and wrongful trading and therefore, the NCLT had rightly held the transaction to be fraudulent under Section 66 of IBC.

The appeal has been dismissed.

Case Title: Shri Baiju Trading and Investment Private Limited v Mr. Arihant Nenawati & Ors.

Case No.: Company Appeal (AT) (Ins.) No. 699 of 2021

Counsel For Appellant: Mr. Sanchar Anand & Mr. Kshitiz Garg, Advocates.

Counsel For Respondents: Mr. Kaustav Som and Mr. Abhijeet Singh, Advocates for R-1. Ms. Srishti Prabhakar & Mr. Utsav Singhal, Advocates for R- 2 & 3.

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