NCLAT Confirms ₹8.71 Crore Recovery From Director For Fraudulent Share Sale, Says “Even A Single Proven Fraud Vitiates All Transactions”
Introduction
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Ashok Bhushan (Chairperson) and Arun Baroka (Technical Member), upheld the liability of a suspended director to restore ₹8.71 crore to the corporate debtor’s assets. The bench held that the director’s actions in engineering undervalued share transactions amounted to conducting business with intent to defraud creditors, attracting Section 66(1) of the Insolvency and Bankruptcy Code (IBC), 2016.
Factual Background
The suspended director of PKS Limited had appealed against the order of the National Company Law Tribunal (NCLT), Kolkata, which directed him to contribute ₹8.71 crore with 15% interest to the corporate debtor’s assets. The Resolution Professional (RP) alleged that the director purchased shares of Orient Exports Pvt. Ltd. — a related party — from PKS Limited at a grossly undervalued price, resulting in a loss of ₹8.71 crore to the corporate debtor.
The corporate debtor had originally acquired 88,000 shares of Orient Exports for ₹8.80 crore in FY 2011–12. Two years later, the same shares were sold to the appellant for only ₹8.80 lakh, even though the appellant was a director in both companies.
Procedural Background
The RP filed an application under Section 66 of the IBC before NCLT Kolkata, alleging fraudulent conduct and diversion of assets. The NCLT found that the transaction was deliberately structured to defraud creditors and directed the suspended director to return ₹8.71 crore with interest. Aggrieved, the appellant approached the NCLAT, challenging the order primarily on procedural and substantive grounds.
Issues
1. Whether the transaction in question amounted to conducting business with intent to defraud creditors under Section 66(1) of the IBC.
2. Whether Sections 66(1) and 66(2) of the IBC should be read conjunctively or independently.
3. Whether the principles of natural justice were violated by the NCLT while passing the impugned order.
Contentions of the Parties
Appellant’s Submissions: The RP’s application relied solely on the balance sheet without specific averments showing intent to defraud or knowledge of impending insolvency. It was argued that a single transaction could not constitute fraudulent trading. The appellant contended that Sections 66(1) and 66(2) must be read together, and therefore, the application could not stand independently. The appellant also claimed violation of natural justice, stating that the NCLT reserved the matter without granting a full opportunity of hearing.
Respondent’s Submissions: The Liquidator contended that the undervalued transaction was deliberate, as the appellant was a director in both entities, indicating a clear conflict of interest and intent to defraud. It was argued that fraud has no limitation period under the IBC and that procedural technicalities cannot shield fraudulent conduct. The Liquidator maintained that both Sections 66(1) and 66(2) are independent provisions and can be invoked separately based on the nature of the transaction.
Reasoning and Analysis
The NCLAT held that the appellant’s dual role as director in both entities proved deliberate undervaluation and fraudulent intent. The Tribunal emphasized that the sale of shares for ₹8.80 lakh that were purchased for ₹8.80 crore caused a direct loss to creditors. Rejecting the plea of natural justice, the Tribunal noted that the appellant had multiple opportunities to present his case and was heard in detail. Thus, there was no procedural infirmity. The Tribunal also clarified that Sections 66(1) and 66(2) of the IBC operate independently, relying on the disjunctive use of “or” in the statute and on the Supreme Court’s decision in Hussain Ahmed Choudhury, which held that “or” must not be read conjunctively. Importantly, the bench underscored that fraud vitiates all transactions and cannot be ignored due to procedural or technical lapses. It reiterated that even a single proven instance of fraud is sufficient to establish an intent to deceive creditors. Accordingly, the NCLAT affirmed the NCLT’s direction requiring the suspended director to pay ₹8.71 crore with 12% interest to the corporate debtor’s assets.
Implications
This decision reinforces the principle that fraudulent intent, once established, cannot be mitigated by procedural defenses or limited by time constraints. It underscores that the NCLAT takes a strict view of undervalued and related-party transactions that harm creditors during insolvency. The decision strengthens the accountability of directors in managing corporate debtor affairs and clarifies that Sections 66(1) and (2) of the IBC are standalone provisions capable of independent invocation.
In this case the appellant was represented by Mr. Abhijeet Sinha, Sr. Advocate with Mr. Santosh Kumar, Advocates. Meanwhile the respondent was represented by Mr. Krishnendu Datta Sr. Advocate with Mr. Santosh Kumar Ray, Ms. Zeba Khan, Mr. Ishan Roy Chowdhury, Ms. Shrishti Mahana and Mr. Yash Tandon, Advocates for Liquidator.