NCLAT Upholds NCLT Order on Fraudulent Transactions Amidst Insolvency Proceedings

Directors of Varsha Corporation Ltd. ordered to contribute over Rs. 16 crore for fraudulent gold transactions during insolvency process

In a significant ruling, the National Company Law Appellate Tribunal (NCLAT), Principal Bench in New Delhi, has dismissed an appeal filed by the directors of Varsha Corporation Ltd., upholding the National Company Law Tribunal's (NCLT) decision which declared certain transactions as fraudulent. The transactions in question involved the sale of substantial quantities of gold bullion on credit during the pendency of insolvency proceedings.

The appeal, filed by Shantilal Javerchand Jain and others, was against an order by the NCLT, Mumbai, which had directed the appellants to contribute Rs. 16,49,32,520 and Rs. 29,65,464, respectively, with an annual interest of 12% from the date of the order, to the assets of the Corporate Debtor (CD). The transactions were deemed fraudulent under Section 66 of the Insolvency and Bankruptcy Code (IBC), 2016, for being conducted with the intent to defraud creditors and keeping assets out of their reach.

Justice Mohd. Faiz Alam Khan, Member (Judicial), and Naresh Salecha, Member (Technical), presided over the appellate tribunal. They held that the directors of Varsha Corporation had sold gold bullion on a 100% credit basis to Swastik Diamonds and Maa Kali Jewellers without any security, amidst ongoing insolvency proceedings. This was considered a clear attempt to siphon off assets from the reach of creditors.

The tribunal noted that the transactions were executed with full knowledge of the impending insolvency, and despite knowing that the Corporate Insolvency Resolution Process (CIRP) was unavoidable. The directors failed to exercise due diligence to minimize the potential loss to creditors.

The ruling emphasized the distinct legal provisions for fraudulent trading and wrongful trading under the IBC. Fraudulent trading requires proving an intent to defraud creditors, whereas wrongful trading pertains to directors’ failure to exercise due diligence to avoid insolvency or minimize losses to creditors.

The tribunal also considered the transaction audit report, which, although not conclusive, provided valuable insights based on audited financial records. The audit revealed that during the financial year 2020-2021, 98% of Varsha Corporation's sales revenue was attributed to the transactions with Swastik Diamonds, a highly unusual practice in the gold bullion market, typically characterized by cash transactions and minimal credit.

The NCLAT's decision sends a strong message regarding the responsibilities of company directors during insolvency proceedings, emphasizing the need for transparency and accountability in business transactions to protect the interests of creditors.

Bottom Line:

Section 66 of the Insolvency and Bankruptcy Code, 2016 - Fraudulent trading or wrongful trading - Directors of Corporate Debtor sold gold bullion on credit, without securing the transactions, during the pendency of insolvency proceedings - Such transactions were declared fraudulent for being carried out with intent to defraud creditors and keep assets out of their reach.

Statutory provision(s): Section 66 of the Insolvency and Bankruptcy Code, 2016

Shantilal Javerchand Jain v. Vinodkumar Pukhraj Ambavat, (NCLAT)(Principal Bench New Delhi) : Law Finder Doc Id # 2817530