NCLAT Overturns NCLT's Order on Alleged Fraudulent Trading
Tribunal Finds Lack of Evidence to Support Claims of Fraudulent Intent in Equity Share Transactions
In a significant ruling on September 25, 2025, the National Company Law Appellate Tribunal (NCLAT) set aside a previous order by the National Company Law Tribunal (NCLT), which had directed suspended directors of M/s Temple Leasing and Finance Ltd. to contribute Rs. 28.5 lakhs to the corporate debtor's liquidation estate. The case, involving Mr. Nalinesh Kumar Paurush and others versus Mr. Arvind Mittal and others, revolved around alleged fraudulent transactions in purchasing equity shares of non-traded companies.
The appellants were initially accused by the NCLT of engaging in fraudulent trading by purchasing shares from companies not actively traded on the stock exchange, thereby supposedly avoiding the insolvency resolution process. However, the NCLAT, comprising Justice Mohd. Faiz Alam Khan and Member Arun Boroka, found that the NCLT's decision lacked substantial evidence to prove fraudulent intent.
The NCLAT observed that the transactional audit report relied upon by the NCLT was inconclusive and full of contradictions. The appellate tribunal emphasized that every commercial decision resulting in a loss should not automatically be labeled as fraudulent unless there is clear evidence of intent to defraud creditors or a lack of due diligence in minimizing potential losses.
The appellants argued that the decision to invest in shares of these companies was a bona fide commercial decision made with the anticipation of future appreciation in share value. The NCLAT agreed, noting that the appellants had exercised due diligence, and the shares had fetched an offer of Rs. 15 lakhs during liquidation, suggesting potential value.
In its detailed judgment, the NCLAT highlighted the need for a high degree of proof to establish fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code, 2016. It reiterated that mere losses in business transactions do not equate to fraudulent conduct without evidence of dishonest intent.
The ruling underscores the importance of distinguishing between genuine business risks and fraudulent intent, setting a precedent for future cases involving allegations of fraudulent trading during insolvency proceedings.
Bottom Line:
Section 66 of the Insolvency and Bankruptcy Code, 2016 - Parameters for fraudulent or wrongful trading - Appellate Tribunal held that every commercial decision resulting in loss cannot be labeled as fraudulent unless the directors knew there was no reasonable prospect of avoiding insolvency and failed to exercise due diligence to minimize the loss to creditors.
Statutory provision(s): Insolvency and Bankruptcy Code, 2016 - Section 66
The decision is expected to impact how transactions during insolvency proceedings are scrutinized, reinforcing the notion that commercial wisdom and due diligence must be considered before attributing fraudulent intent to business decisions.
