Unenforceable transfer of secured assets and fraudulent trading findings upheld where restructuring was used to defeat creditors.

An agreement to transfer secured assets after a demand notice and in breach of the SARFAESI restraint on dealing with such assets was unenforceable, so cancellation could not be sustained under undervalued-transaction provisions not properly pleaded. The record also showed a post-commencement restructuring involving related persons, a new LLP, and transfer of business and assets for nominal consideration, supporting a finding that the business was carried on to defeat creditors. On that basis, fraudulent trading was made out and the contribution directions were upheld.

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Issues: (i) Whether the Adjudicating Authority could cancel the leave and licence agreement and the deed of usage despite the application not specifically pleading Sections 45 and 49 of the Insolvency and Bankruptcy Code, 2016; (ii) Whether the finding of fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code, 2016 and the consequential direction for contribution were justified.

Issue (i): Whether the Adjudicating Authority could cancel the leave and licence agreement and the deed of usage despite the application not specifically pleading Sections 45 and 49 of the Insolvency and Bankruptcy Code, 2016.

Analysis: The application was framed under Section 66, and did not specifically plead the ingredients of undervalued transactions under Sections 45 and 49. Specific material facts are required where avoidance of an undervalued transaction is sought, and the absence of such pleadings prevented exercise of jurisdiction under Section 49 for cancelling the agreements on that footing. However, the agreements were executed after service of the demand notice under Section 13(2) and in the face of the restraint under Section 13(13) of the SARFAESI Act, 2002, which prohibited transfer, lease or other dealing with secured assets without prior written consent. The agreements were therefore contrary to the statutory bar and unenforceable.

Conclusion: The cancellation could not be sustained under Section 49 of the Insolvency and Bankruptcy Code, 2016, but the agreements were nevertheless liable to be treated as non est and unenforceable because they violated Section 13(13) of the SARFAESI Act, 2002.

Issue (ii): Whether the finding of fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code, 2016 and the consequential direction for contribution were justified.

Analysis: The sequence of events showed that the suspended management resigned, related persons were inducted, a new LLP was formed after commencement of insolvency proceedings, and the business and assets were transferred for a nominal consideration while the corporate debtor was under statutory restraint. These circumstances supported the conclusion that the business was carried on with intent to defraud creditors and that the transaction was a fraudulent device to keep assets beyond the reach of creditors. The contribution directions related to amounts paid from the corporate debtor's estate and amounts realised through the transferred business, and were not shown to be impermissible merely because the LLP had reflected some amounts in its books.

Conclusion: The finding of fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code, 2016 and the directions for contribution were upheld.

Final Conclusion: The appeals failed, and the order allowing the application was sustained in substance, with the challenged transactions remaining ineffective and the contribution directions standing.

Ratio Decidendi: A transaction executed in breach of the statutory prohibition under Section 13(13) of the SARFAESI Act, 2002 is unenforceable, and where the record shows a deliberate device to transfer business and assets to defeat creditors, Section 66 of the Insolvency and Bankruptcy Code, 2016 permits contribution orders against those responsible.

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