Between The Lines | NCLAT: IBC does not provide for any look-back period on how far back fraudulent transactions can be investigated January 20, 2023
Published in: Between The Lines
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National Company Law Appellate Tribunal, Chennai (“NCLAT”), in the matter of Mr. Thomas George v. K. Easwara Pillai and Others [Company Appeal (At)(Ch) (Insolvency) No. 293 of 2021], held that Section 66 (Fraudulent trading or wrongful trading) of Insolvency and Bankruptcy Code, 2016 (“IBC”) does not provide for any look-back period on how far back fraudulent transactions can be investigated.
Mr. Thomas George is the suspended director of the corporate debtor – M/s. Mathstraman Manufacturers and Traders Private Limited (“Appellant”). Corporate insolvency resolution process (“CIRP”) was commenced against the corporate debtor and Mr. K. Easwara Pillai (“RP”) was appointed as the resolution professional. During the CIRP, the RP found irregular business activities in the factory and registered office of the corporate debtor. It was pleaded that as the corporate debtor was dormant during the financial year 2015-16, the RP had prepared the annual accounts for the financial year 2014-15 with limited information. The corporate debtor failed to file the statutory accounts before the registrar of companies from 2015 onwards. It was stated that all the movable and current assets were traded to respondent 3 and sold to settle the liabilities of the corporate debtor by cash mode outside the books of accounts of the corporate debtor. It was also pleaded that there were no workers and employers working on the payroll of the corporate debtor.
Though notice was served on respondents 3 to 6, they did not appear before the adjudicating authority and hence the order was passed ex-parte. Accordingly, an interim application was filed by the RP under Section 66 of the IBC against the Appellant seeking, inter alia, the following reliefs:
“II. To pass an order directing the Respondents to make good the losses caused to the creditors of the Corporate Debtor as concluded in the present Application as envisaged under Section 67(2) of the I&B Code, 2016.
III. To hold the Respondents personally liable for such deliberate and wilful default.
IV. To declare the transaction as concluded in the present Application as Fraudulent Transactions.”
The adjudicating authority allowed the application filed by the RP and observed as follows (“Impugned Order”):
“From a reading of the above provision and considering the submission of the learned Resolution Professional, we are of the opinion that the suspended Directors of the Corporate Debtor have carried on the business in the factory and registered office of the Corporate Debtor were illegally continuing with M/s. Whispower Sales & Services (P) Ltd. and the Respondent No. 3 utilised the assets of the Corporate Debtor which is 100% owned by the Directors and Shareholders of the Corporate Debtor. From this it is clear that the suspended Directors were done the above act with an intent to defraud the creditors of the Corporate Debtor for fraudulent purpose. Hence, they are liable to make such contributions to the assets of the Corporate Debtor. It is also clear that suspended directors did not exercise due diligence in minimising the potential loss to the creditors of the Corporate Debtor.
In view of what is stated above, this application is allowed declaring the transactions as fraudulent transactions and directing the Respondents to make good the losses caused to the creditors of the Corporate Debtor holding that Respondents are personally liable for such deliberate and wilful default. The Respondents are directed to furnish all documents requested for by the Resolution Professional for smooth conduct of Corporate Insolvency Resolution Process.”
Aggrieved by the Impugned Order of the NCLT, the present appeal was preferred under Section 61 (Appeals and appellate authority) of the IBC.
Whether the look-back period for Section 66 of the IBC is to be construed as three years as per the Limitation Act, 1963.
Contentions of the Appellant:
The Appellant contended that the adjudicating authority wrongfully passed an ex-parte order. It was only based on the pleadings that the transactions were ‘fraudulent’ as per Section 66 of the IBC, without discussing evidence to this effect. It was submitted that the application filed by the RP did not demonstrate any fraud by the Appellant nor did it set out any facts to show any elements of fraud. It is laid down by the Hon’ble Supreme Court in a catena of judgements that ‘fraud’ must be established beyond doubt and mere suspicion, however coinciding, can never be proof of fraud. There was no investigation nor any report to prove that there was any fraud committed by the Appellant. It was contended that the Impugned Order is non-speaking and devoid of any findings to conclude that the Appellant has done any fraudulent act.
Further, Section 66 of the IBC is covered under the provisions of the Limitation Act, 1963 which constricts the period of ‘look back’ to three years. In the instant case, respondent 3 took over all rights for a period of five years and therefore, it is ‘barred by limitation’.
Observations of the NCLAT
NCLAT observed that the adjudicating authority had passed the Impugned Order. There was absolutely no ground for not filing the reply, despite service of notice on the Appellant. The advocate for the Appellant was present but did not choose to contest the matter. As a result, the Appellant could not wriggle out of the observations made by the adjudicating authority. Further, the NCLAT was also conscious of the fact that the Appellant did not deny, even in the present appeal, about taking over the factory, plant and machinery of the corporate debtor. Therefore, the NCLAT did not see any grounds for giving any additional opportunity to the Appellant. The RP had produced sufficient material to evidence that the Appellant had committed the fraudulent act knowingly and in a dishonest manner to hoodwink the creditors.
Regarding the look-back period for Section 66 of the IBC as per the law of limitation, the NCLAT was of the considered view that Section 66 of the IBC does not provide for any look-back period as far as fraudulent transactions are concerned. Hence, the RP was allowed to retrieve/ repossess, without any limitation of time, and correct all the wrongdoings of any relevant point in time.
Decision of the NCLAT
Therefore, the NCLAT did not find sufficient cause for setting aside the Impugned Order or giving another opportunity to the Appellant to present their case. In the absence of any substantial grounds in allowing the present appeal, the same was dismissed.
Through this judgment, NCLAT has clarified a very important provision of the IBC. The judgment will have a significantly positive impact on creditors who wrongly suffer losses out of the malicious acts of promoters and directors of corporate debtors. By holding that there is no limitation on the look-back period on how far back fraudulent transactions can be investigated, it will ensure that mala fide acts are less likely to go unpunished.
For any query, please write to Mr. Bomi Daruwala at [email protected]DOWNLOAD NEWSLETTER