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, 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...

NCLAT Declares Transactions Fraudulent U/S 66 Of IBC Due To Corporate Debtor's Failure To Diligently Negotiate One-Sided Clause In MOU

Mohd Malik Chauhan

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