The National Company Law Appellate Tribunal (NCLAT), New Delhi, ruled that the action of a director of a Corporate Debtor (CD) selling shares of a related party to himself at a substantial loss, resulting in fraudulent depletion of the corporate debtor’s assets, independently attracts Section 66(1) of the Insolvency and Bankruptcy Code (IBC), 2016, to such related-party transactions without any look-back limitation. Thus, the NCLAT ordered the director to contribute the amount of loss with interest to the corporate debtor.
The Appellate Tribunal referred to Section 66(2), of the IBC, which talks about the Director or partner of the CD for which CIRP is going on, to observe that if before the insolvency commencement date, a director or partner knew or ought to have known that CIRP could not have been avoided and failed to exercise due diligence in minimising potential loss to the creditors, the NCLT may direct the erring director or partner to be liable and make such contributions to the assets of the CD as it may deem fit.
The Division Bench comprising Justice Ashok Bhushan (Chairperson) and Arun Baroka (Technical Member) observed that the business of the corporate debtor was clearly carried on with the intent to defraud the creditors of the corporate debtor.
The observation came after finding that the appellant, in the year 2013-14, had acquired 88,000 equity shares of a related party, from the CD (which was acquired by the CD in the year 2011-12 for a sum of Rs. 8.80 crores) at an undervalued rate of Rs. 8.80 lakhs, thereby causing a loss of Rs. 871.20 lacs to the CD.
In this case, the Bench noted that the business of the CD was being carried on with the intent to defraud the creditors, as the share purchase and sale were being carried on, which had already been apparently loss-making transactions, even though the accounts of the CD were declared as NPA by the Creditors.
The Bench further noted that the factual matrix is supported by the balance sheet of the CD, which bears the signature of the Appellant. Also, the Resolution Professional had obtained them from the records with the Ministry of Corporate Affairs, as the CD had not provided them and had not cooperated in the proceedings. Moreover, the appellant is a KMP in both companies and has caused a loss to the CD by these transactions, by first buying the shares from a related party at a high price and subsequently selling them back to the same related party at a very low price, thereby incurring a huge loss.
Since the appellant was not able to controvert the facts, but has been delaying the proceedings based on artificially created technicalities and procedural requirements, the NCLAT upheld the orders of the NCLT in directing the appellant to contribute to the CD a sum of Rs. 871.20 lakhs along with interest @ 12%, from the date of the investment of the CD in the said related party namely, Orient Exports Pvt Ltd.
Briefly, the appellant was a director/key managerial person in the corporate debtor and was connected with its related party, Orient Exports Pvt Ltd. During FY 2011-12, the corporate debtor invested about Rs. 8.80 crores in 88,000 equity shares of Orient Exports at around Rs. 1,000 per share, though the par value was Rs. 10 and the book value was about Rs. 8.50 per share as per audited accounts. In FY 2013-14, the corporate debtor sold the entire 88,000 shares of Orient Exports to the appellant at Rs. 10 per share for about Rs. 8.80 lakhs, recording a loss of about Rs. 8.71 crores in its financial statements available on the MCA portal.
The resolution professional, therefore, alleged fraudulent/wrongful trading in respect of the said related-party share transaction and sought a direction for contribution of about Rs. 8.71 crores with interest from the date of investment. The Adjudicating Authority (NCLT) passed an order under Section 66(1) of the IBC, directing the appellant to contribute about Rs. 8.71 crores with interest at 12% from the date of the corporate debtor’s investment.
Cases Distinguished:
Atlanti Spinning and Weaving Mills Ltd. v. Dolly Investment Company (P.) Ltd. [Civil Appeal No. 7420 of 2023]
Ashok Kumar Agarwal v. Narayan Chandra Saha [Company Appeal (AT) (Ins.) No. 139 of 2025]
Appearances:
Senior Advocate Abhijeet Sinha and Advocate Santosh Kumar, for the Appellant
Senior Advocate Krishnendu Datta, along with Advocates Santosh Kumar Ray, Zeba Khan, Ishan Roy Chowdhury, Yash Tandon, and Shrishti Mahana, for the Respondent
