2025 (4) TMI 1406 - AT - IBC

Transfer of flats - transfer declared as void and subject to charge - fraudulent transaction under Section 66 of the Insolvency and Bankruptcy Code (IBC) 2016 or not - HELD THAT - The judgment which has been relied by learned Counsel for the Respondent in Royal India Corporation Ltd. 2024 (5) TMI 999 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL NEW DELHI of this Tribunal supports the submission of Respondent that action under Section 66 sub-section (1) can be taken against any person. The judgment of this Tribunal in Tridhaatu Kirti Developers LLPi 2023 (1) TMI 455 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH NEW DELHI also supports the submission of learned Counsel for the Respondent. There are no error in the judgment of Adjudicating Authority insofar as it has held that transaction of payment of consultancy charges to Appellant Nos.1 and 2 were not bona-fide transaction. The present is a case where Adjudicating Authority has also held that payments of consultancy charges to the Appellants is fraudulent and in exercise of power under Section 66(1) has directed the said contribution void. We however relying on the judgment of Tripura High Court in Smt. Sudipa Nath agree with the submission of the Appellant that Adjudicating Authority could not have declared the Sale Deed in favour of the Appellants dated 21.08.2017 as void - the Sale Deed was obtained by the Appellants of two Flats by payment of consideration of Rs.69, 00, 000/- each out of which Rs.55, 20, 000/- was obtained by loans and the Lenders transferred the said amount in the account of the CD and loans having been taken by the Appellants the Appellants are still discharging the liabilities of the loans - sale transaction in favour of the Appellants could not have been declared void. Conclusion - The sale transaction in favour of the Appellants could not have been declared void. The sale was made and consideration amount was received in the account of the CD and after receiving the amount it was transferred. Mere transfer of amount to a related company does not lead to a conclusion of fraudulent sale. Appeal allowed in part.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the transfer of two Flats (Nos.903 and 904) by the Corporate Debtor (CD) in favor of the Appellants was a fraudulent transaction under Section 66 of the Insolvency and Bankruptcy Code (IBC), 2016.

- Whether the Adjudicating Authority was justified in declaring the sale deeds void and subject to charge, and in directing the Appellants to contribute to the assets of the CD.

- Whether the payments made by the CD to the Appellants as consultancy charges were bona fide or fraudulent transactions.

- The applicability and scope of Section 66 of the IBC, particularly regarding the power of the Adjudicating Authority to declare transactions void and to fix liabilities on persons knowingly party to fraudulent business conduct.

- The relevance and impact of prior rejection of claims by the Resolution Professional (RP) in the CIRP of a related company on the present proceedings.

- The extent and nature of liability of the Appellants, including the effect of their loan arrangements with lenders and ongoing repayment obligations.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether the transfer of Flats was a fraudulent transaction under Section 66 IBC

Relevant legal framework and precedents: Section 66(1) of the IBC empowers the Adjudicating Authority to pass orders against persons knowingly party to carrying on the business of the CD with intent to defraud creditors or for any fraudulent purpose, making them liable to contribute to the assets of the CD. The Tribunal's prior decisions in Royal India Corporation Ltd. and Tridhaatu Kiriti Developers LLP were cited to support the broad scope of Section 66(1) to include persons beyond directors or partners.

Court's interpretation and reasoning: The Court noted that the sale of Flats was effected by registered sale deeds dated 21.08.2017 at a consideration of Rs.69,00,000/- each. The Appellants took loans amounting to Rs.55,20,000/- each from Bharat Co-operative Bank, which was disbursed directly into the CD's account. The Appellants have been servicing these loans continuously. The Court found that mere transfer of loan proceeds from the CD to a related company (Sangeeta Tex Dyes Pvt. Ltd.) where relatives of the Appellants are directors does not, per se, establish fraudulent intent in the sale transaction.

Key evidence and findings: The Appellants deposited earnest money and TDS, and the balance payments were made over 2017-2019. The Adjudicating Authority had expressed doubts about consultancy charges paid to the Appellants but did not find the sale consideration itself fraudulent. The RP's claim that amounts were transferred to a related company was not sufficient to characterize the sale as fraudulent.

Application of law to facts: The Court held that the sale transaction was supported by consideration, loan arrangements, and continuous repayment by the Appellants, and thus could not be declared void as fraudulent under Section 66(1). The Court relied on the Tripura High Court judgment in Sudipa Nath, which clarified that Section 66(1) does not confer jurisdiction to declare transactions void but to fix liabilities on persons responsible for fraudulent conduct.

Treatment of competing arguments: The Respondent argued that the sale was a facade to siphon off funds and that the Appellants were related parties whose transactions should be scrutinized strictly. The Appellants contended that the loan was bona fide and the sale valid. The Court gave weight to the bona fide nature of the loan and sale consideration, rejecting the Respondent's argument that the sale itself was fraudulent.

Conclusion: The Court set aside the Adjudicating Authority's declaration of the sale deeds as void but maintained scrutiny over the consultancy charges.

Issue 2: Whether the payments made as consultancy charges to the Appellants were bona fide or fraudulent

Relevant legal framework and precedents: Section 66(1) allows the Adjudicating Authority to hold persons liable who were knowingly parties to fraudulent business conduct. The absence of evidence supporting the legitimacy of payments can indicate fraudulent transactions.

Court's interpretation and reasoning: The Adjudicating Authority found that the Appellants failed to plead or demonstrate what consultancy services were rendered to the CD to justify payments of Rs.13,74,000/- and Rs.13,80,000/- respectively. The payments were made after the sale transactions and appeared to be a mechanism to adjust the balance sale consideration.

Key evidence and findings: The Adjudicating Authority noted the lack of material evidence on record regarding the consultancy services. The payments were credited towards the balance consideration, raising suspicion of a sham transaction designed to siphon off funds.

Application of law to facts: The Court upheld the Adjudicating Authority's finding that these consultancy charges were not bona fide transactions and were liable to be treated as fraudulent under Section 66(1).

Treatment of competing arguments: The Appellants did not provide any substantiation for the consultancy charges. The Respondent emphasized the lack of proof and the suspicious timing and nature of payments. The Court sided with the Respondent on this issue.

Conclusion: The Court upheld the direction that the Appellants must contribute the amounts equivalent to the consultancy charges back to the CD's assets.

Issue 3: The scope and effect of Section 66 of the IBC and the power of the Adjudicating Authority

Relevant legal framework and precedents: Section 66(1) empowers the Adjudicating Authority to hold persons liable to contribute to the assets of the CD if found knowingly party to fraudulent business conduct. The Tripura High Court in Sudipa Nath clarified that Section 66(1) does not empower the Adjudicating Authority to declare transactions void but to fix liabilities.

Court's interpretation and reasoning: The Court agreed with the Tripura High Court's interpretation that the jurisdiction under Section 66(1) is limited to fixing personal liabilities and does not extend to voiding sale deeds or transactions outright. The Court also referred to the Supreme Court's judgment in Gluckrich Capital Pvt. Ltd., which emphasized that civil remedies for recovery from third parties are independent and not available under Section 66.

Key evidence and findings: The Adjudicating Authority's declaration of the sale deeds as void was found to exceed its jurisdiction under Section 66(1). However, its direction for contribution regarding fraudulent consultancy payments was within scope.

Application of law to facts: The Court modified the impugned order to set aside the declaration of the sale deeds as void but upheld the contribution order regarding consultancy charges.

Treatment of competing arguments: The Appellants relied on the Tripura High Court and Supreme Court judgments to argue for limitation of the Adjudicating Authority's powers. The Respondent argued for a broad interpretation to include voiding transactions. The Court adopted the narrower interpretation consistent with the legislative intent and judicial precedents.

Conclusion: The Adjudicating Authority's power under Section 66(1) does not extend to declaring sale deeds void but can impose liability to contribute to the CD's assets for fraudulent transactions.

Issue 4: Impact of RP's claim rejection in CIRP of related company on current proceedings

Relevant legal framework and precedents: The RP's rejection of claims in the CIRP of Sangeeta Tex Dyes Pvt. Ltd. was argued by the Appellants to negate the present allegations. However, the Respondent contended that such rejection does not bar action under Sections 66 and 67 of the IBC.

Court's interpretation and reasoning: The Court held that the rejection of claims in a different CIRP does not preclude the RP from initiating proceedings under Section 66 in the present CIRP. The allegations and evidence must be considered independently.

Key evidence and findings: The RP's failure to prove claims in the other CIRP was not determinative of the present application alleging fraudulent transactions.

Application of law to facts: The Court found no merit in the Appellants' argument that the prior claim rejection barred the present proceedings.

Treatment of competing arguments: The Court favored the Respondent's position that separate proceedings and evidence are relevant for each CIRP.

Conclusion: The prior claim rejection does not affect the Adjudicating Authority's jurisdiction or findings in the present matter.

Issue 5: Liability of Appellants in light of loan arrangements and ongoing repayments

Relevant legal framework and precedents: The Appellants took loans from a bank, which were disbursed to the CD's account, and have been repaying them. The liability to repay loans and the bona fide nature of such financial arrangements are relevant to assessing fraudulent intent.

Court's interpretation and reasoning: The Court observed that the loans were taken by the Appellants and the amounts were credited to the CD's account, establishing a legitimate financial transaction. Continuous repayment by the Appellants further supports the bona fide nature of the sale.

Key evidence and findings: Loan sanction letters, disbursement records, and repayment history were considered. The Court found no evidence that the loan transactions were a sham or part of fraudulent conduct.

Application of law to facts: The Court held that the Appellants' loan arrangements and repayments negate the characterization of the sale transaction as fraudulent.

Treatment of competing arguments: The Respondent's argument that the loan amount was diverted post receipt was not sufficient to override the bona fide loan and repayment facts.

Conclusion: The Appellants' liability under the loan agreements remains valid and does not constitute fraudulent conduct under Section 66.

3. SIGNIFICANT HOLDINGS

- "Section 66(1) contemplates an application thereunder only by the resolution professional and by none other. Section 66(1) also restricts the power of NCLT subject to being satisfy with pre-requisite that any business of the corporate debtor has been carried on with intent to defraud creditors or the corporate debtors or for any fraudulent purpose and if satisfied it powers to pass an order is only against such person who are responsible for the conduct of such fraudulent business of the corporate debtor with mens rea to make them personally liable to make such contributions to the assets of the corporate debtor as it may deem fit." (Tripura High Court, Sudipa Nath)

- "The sale transaction in favour of the Appellants could not have been declared void. The sale was made and consideration amount was received in the account of the CD and after receiving the amount, it was transferred. Mere transfer of amount to a related company does not lead to a conclusion of fraudulent sale."

- "To the extent of consultancy charges of Rs. 13,74,000/- to Mrs. Sangeeta Mehta and Rs. 13,80,000/- to Mr. Divyank Jatinder Mehta cannot be said to be a bona-fide transaction and are liable to be treated as fraudulent."

- "The Adjudicating Authority's power under Section 66(1) does not extend to declaring sale deeds void but can impose liability to contribute to the CD's assets for fraudulent transactions."

- "The remedy against third party for recovery of dues payable to corporate debtor is not available under Section 66 of IBC, and civil remedies which may be available in law are independent of the said Section." (Supreme Court, Gluckrich Capital Pvt. Ltd.)

- The Appellants are directed to deposit the amounts equivalent to the consultancy charges within 30 days, while the declaration of the sale deeds as void is set aside.