Appeal dismissed; Section 66 claim rejected where group-company share settlement not proven as fraud or undervaluation.
NCLAT dismissed the appeal and upheld the Adjudicating Authority's rejection of the liquidator's Section 66 claim, holding that settlement by the corporate debtor through transfer of group-company shares did not establish fraud or undervaluation. The Tribunal found the liquidator's presumption of fraud and under-valuation unsupported by circumstantial or direct evidence and reiterated that mere possibility or a transaction auditor's characterization as "preferential" cannot satisfy Section 66. The Adjudicating Authority committed no error in denying the application.
ISSUES PRESENTED AND CONSIDERED
1. Whether the transfer of shares by a related company to settle a long-standing debt of the corporate debtor can be treated as a fraudulent transaction within the meaning of Section 66 of the Insolvency and Bankruptcy Code, 2016.
2. Whether a Transaction Audit Report characterising the transfer as a "preferential transaction" suffices to establish fraud or to justify relief under Section 66 of the Code.
3. Whether absence of a valuation report, lack of adverse remarks by the statutory auditor, absence of enquiries by statutory authorities, and absence of shareholder complaints preclude a finding of fraudulent trading under Section 66.
ISSUE-WISE DETAILED ANALYSIS
Issue 1: Whether the transfer of shares to settle a debt amounted to a fraudulent transaction under Section 66 of the Code
Legal framework: The Court considered the alleged transaction under Section 66 of the Insolvency and Bankruptcy Code, 2016, which addresses conduct of persons liable for fraudulent or wrongful trading (referred to in the judgment as applications by the liquidator under Section 66).
Precedent Treatment: No earlier judicial authorities or precedents were relied upon or distinguished in the impugned order; the Adjudicating Authority and this Tribunal proceeded on the factual matrix and statutory standard for establishing fraud under Section 66.
Interpretation and reasoning: The Adjudicating Authority found that the corporate debtor, instead of writing off a long-standing receivable of Rs. 37.50 lakhs, accepted transfer of shares held by the debtor's creditor in a group company. The fact of share transfer to settle a debt, by itself, does not establish fraudulent intent. The Tribunal endorsed the Adjudicating Authority's view that mere possibility of fraud, absent specific findings and supporting evidence, is legally insufficient. The liquidator's assertion of under-valuation and fraud was unsubstantiated: no valuation report was produced to support the claim that the shares were undervalued, and no circumstantial or direct evidence of fraudulent intent was placed on record.
Ratio vs. Obiter: Ratio - A transfer of assets (shares) in settlement of a long-standing debt does not automatically equate to fraudulent trading under Section 66; affirmative, specific evidence of fraud or undervaluation is required. Obiter - The Adjudicating Authority's observations on how the liquidator apparently relied on net asset value without a valuation report function as explanatory remarks supporting the ratio.
Conclusions: The Tribunal upheld the Adjudicating Authority's finding that the share transfer could not be characterised as fraudulent under Section 66 on the record before the Authority. The absence of specific, probative evidence of fraud defeated the liquidator's application under Section 66.
Issue 2: Whether a Transaction Audit Report labelling the transaction as "preferential" can sustain a Section 66 claim
Legal framework: The significance of a Transaction Audit Report in insolvency proceedings was considered insofar as it may identify potentially voidable or objectionable transactions; however, the standard of proof for establishing fraudulent trading under Section 66 remains a matter of substantive evidence.
Precedent Treatment: No prior rulings were relied upon to elevate a Transaction Audit Report to conclusive proof; the Tribunal and Adjudicating Authority treated the auditor's remark as one piece of material, not as determinative.
Interpretation and reasoning: The Tribunal agreed with the Adjudicating Authority that a Transaction Audit Report describing a transaction as "preferential" does not, by itself, bring the transaction within the ambit of Section 66. The label in the audit report does not substitute for independent evidence demonstrating fraudulent intent, undervaluation, or other elements required to make out wrongful or fraudulent trading.
Ratio vs. Obiter: Ratio - A Transaction Audit Report characterisation is not sufficient on its own to establish fraud under Section 66; substantive evidence is necessary. Obiter - The observation that the auditor may be common to related companies and that absence of adverse audit remarks weakens the liquidator's case is explanatory.
Conclusions: The Tribunal endorsed the view that the Transaction Audit Report's reference to a "preferential transaction" cannot, without supporting evidence, found a Section 66 claim.
Issue 3: Evidentiary significance of absence of valuation report, lack of adverse statutory/auditor inquiries, and absence of shareholder complaints
Legal framework: Determination under Section 66 requires proof of fraudulent or wrongful intent or conduct; evidentiary materials and corroborative indicia are essential to sustain such claims.
Precedent Treatment: The judgment contains no citation of precedents shifting the burden of proof; the Adjudicating Authority applied basic evidentiary principles in assessing the liquidator's material.
Interpretation and reasoning: The Adjudicating Authority found-and the Tribunal agreed-that (a) the liquidator did not furnish any independent valuation to substantiate the alleged undervaluation of the shares; (b) there were no adverse remarks from the statutory auditor(s) of the companies involved (even assuming a common auditor); (c) no statutory authorities had initiated enquiries; and (d) shareholders had not raised the transaction in meetings. Collectively, these absences undermined the liquidator's presumption of undervaluation and fraudulent conduct. The Tribunal accepted that presumptions of fraud based on conjecture or possibility, without circumstantial or direct supporting evidence, cannot justify relief under Section 66.
Ratio vs. Obiter: Ratio - Material omissions in the liquidator's case-specifically lack of valuation, absence of adverse audit or regulatory findings, and no shareholder complaints-are significant and can be dispositive in rejecting a Section 66 application when they leave only speculative inferences of fraud. Obiter - Observations regarding the liquidator having apparently relied on net asset value as a notional basis for valuation are explanatory of the evidentiary shortfall.
Conclusions: The Tribunal concluded that the evidentiary deficiencies identified by the Adjudicating Authority were decisive. In the absence of valuation evidence and corroborative adverse findings, the liquidator's claim of fraudulent/under-valued transfer could not be sustained, and rejection of the Section 66 application was correct.
Overall Conclusion
The Court upheld the Adjudicating Authority's rejection of the liquidator's application under Section 66: (i) transfer of shares to settle a long-standing debt did not, on the record, establish fraudulent conduct; (ii) a Transaction Audit Report labelling the transfer "preferential" was insufficient by itself to establish fraud; and (iii) the lack of a valuation report and absence of adverse auditor/regulatory/shareholder material rendered the liquidator's allegations speculative. Appeal dismissed.
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AI Drafter ✕
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