NCLT Kochi Ruling on Fraudulent Transactions: Sale of Corporate Debtor's Property Can't Be Declared Fraudulent Without Supporting Evidence

NCLT Kochi Ruling on Fraudulent Transactions: Sale of Corporate Debtor's Property Can't Be Declared Fraudulent Without Supporting Evidence

Introduction

The National Company Law Tribunal (NCLT), Kochi Bench has held that when the property of the Corporate Debtor is purchased in good faith by a bona fide purchaser, the mere fact that the sale price was slightly lower than the actual price does not bring the transaction within the ambit of a fraudulent transaction. This ruling clarifies the law on the treatment of transactions entered into by a corporate debtor prior to the initiation of Corporate Insolvency Resolution Process (CIRP).

Factual Background

The applicant, M/s. Greenlace Builders and Developers Private Limited, filed an application under Section 66 of the Insolvency and Bankruptcy Code (IBC), seeking appropriate orders against the respondents. The applicant submitted that the corporate debtor sold the property, which was a secured asset under the exclusive charge of Respondent No. 3. Therefore, the sale deeds and transfer of ownership are void and must be reversed because the sale was conducted to dissipate the assets of the corporate debtor.

Procedural Background

The respondents submitted that the application filed is false and not maintainable in the eyes of law, and the transaction does not come within the ambit of Section 66 of IBC. No charge or security interest was created in favor of any financial creditor, including Respondent No. 3, as gathered from the records of the Registrar of Companies.

Issues

1. No Fraudulent Transaction: The NCLT held that the sale of a corporate debtor's property cannot be declared fraudulent merely on the claim of security interest without supporting evidence.

2. No Valid Charge: The Tribunal held that no valid charge had been created in favor of Respondent No. 3.

Contentions of the Parties

Applicant's Contentions: The applicant submitted that the sale deeds and transfer of ownership are void and must be reversed because the sale was conducted to dissipate the assets of the corporate debtor.

Respondents' Contentions: The respondents submitted that the application filed is false and not maintainable in the eyes of law, and the transaction does not come within the ambit of Section 66 of IBC.

Reasoning and Analysis

The coram of Shri. Vinay Goel (Judicial Member) and Smt. Madhu Sinha (Technical Member) carefully examined the facts and circumstances of the case and held that there is no evidence of an equitable mortgage through the deposit of title deeds. At best, the Inter Corporate Deposit (ICD) agreement may create a negative lien that does not constitute a valid charge under law. The Tribunal agreed with the respondents' contentions and held that no valid charge had been created in favor of Respondent No. 3.

The NCLT observed that the sale deeds executed by the corporate debtor reference a fair value and the stamp duty as applicable. Therefore, just because the price was slightly lower than the actual price, that would not slip the transactions within the ambit of fraudulent transactions. The Tribunal held that the applicant has failed to prove the creation of any security interest in favor of Respondent No. 3.

Outcome

The NCLT accepted the submissions of Respondents 4 to 7 and declared the transactions fair and valid. The Tribunal also observed that the RP wrongly classified Respondent No. 3 as a Secured Financial Creditor in the absence of a valid security interest.

In this case the applicant was represented by Mr. Akhil Suresh, Advocate. Meanwhile the respondent was represented by Mr. Rohan Kumar, Advocate.