Finvin Investor Private Limited Vs Orix Leasing and Financial Services Limited (NCLAT Delhi)
The National Company Law Appellate Tribunal (NCLAT), Delhi, disposed of two appeals arising from the same order dated 04.06.2024 passed by the National Company Law Tribunal (NCLT), Mumbai Bench, concerning an application filed under Sections 43, 66, 67 and 70 of the Insolvency and Bankruptcy Code, 2016 (IBC). One appeal was filed by an assignee of the corporate debtor (CD) that had stepped into the shoes of the liquidator through an assignment agreement dated 03.06.2024, while the other was filed by a leasing company against findings recorded in the impugned order.
The dispute arose from a Master Lease Agreement (MLA) executed on 07.09.2018 under which the leasing company financed the purchase of equipment for the corporate debtor. A security deposit of ₹74,49,947 was placed with the leasing company. The corporate debtor allegedly defaulted in lease payments, following which a demand notice was issued on 06.08.2019. Subsequently, insolvency proceedings against the corporate debtor commenced on 23.09.2019.
The Interim Resolution Professional (IRP) filed IA No. 1319 of 2020 alleging fraudulent transactions, preferential treatment, wrongful trading, and fraudulent trading. The IRP contended that despite efforts to take custody of the corporate debtor’s assets, the leased machinery and equipment could not be traced. The Committee of Creditors was informed that the machinery was untraceable. One of the directors stated that most machinery had technical defects and had been returned to suppliers, but no supporting documentation was provided. The supplier also failed to respond to enquiries regarding the whereabouts of the machinery.
The IRP further alleged that the leasing company adjusted the security deposit after commencement of the Corporate Insolvency Resolution Process (CIRP). According to the IRP, the adjustment of the security deposit and foreclosure of the lease arrangement violated the moratorium and resulted in a preferential benefit to the leasing company. The IRP also questioned whether the machinery had ever been delivered to the corporate debtor, relying upon analysis of e-way bills and vehicle details, and alleged that the transactions appeared to have been structured to increase the liabilities of the corporate debtor without any genuine supply of machinery. It was alleged that the arrangement was designed to defraud creditors through a coordinated scheme involving the leasing company, supplier, and certain directors.
The NCLT rejected the application. It held that proceedings under Section 66 could not be maintained against the leasing company as it was a third party. The NCLT further held that the transaction did not fall within Section 43. However, despite rejecting the application, the NCLT recorded findings that the lease transaction appeared fraudulent and intended to defraud creditors. It observed that no sufficient proof had been produced regarding actual receipt of machinery by the corporate debtor or its subsequent return to the supplier. The NCLT concluded that the transaction appeared designed to siphon funds and directed the Resolution Professional to ascertain amounts paid under the MLA and initiate appropriate proceedings for recovery.
The leasing company challenged the order on the ground that the NCLT had recorded adverse findings despite holding that no relief could be granted against it. It argued that the security deposit had been adjusted before commencement of CIRP pursuant to termination of the MLA and that the transaction was genuine. The leasing company relied on various proceedings initiated by it, including arbitration-related proceedings, proceedings under Section 138 of the Negotiable Instruments Act, and proceedings against personal guarantors, to demonstrate the genuineness of the underlying commercial dispute. It contended that a mere inability to trace machinery could not render the transaction fraudulent.
The assignee of the corporate debtor argued that the NCLT’s order was contradictory because, after recording findings that the transaction was fraudulent and intended to defraud creditors, it nevertheless rejected the application. It submitted that once fraudulent conduct was established, recovery ought to have been ordered. It also argued that the expression “any person” under Section 66(1) of the IBC was broad enough to include parties benefiting from fraudulent transactions.
The Appellate Tribunal examined Section 66 of the IBC and discussed the distinction between fraudulent trading under Section 66(1) and wrongful trading under Section 66(2). Referring to judicial precedents, it noted that Section 66(1) applies where business is carried on with intent to defraud creditors or for a fraudulent purpose and may impose liability upon persons knowingly participating in such conduct. Section 66(2), on the other hand, specifically concerns directors or partners who knew or ought to have known that insolvency could not be avoided and failed to exercise due diligence. The Tribunal observed that both provisions address different factual situations and operate independently.
The Tribunal further observed that judicial precedents establish that the applicability of Section 66 depends on the specific facts of each case. It held that whether a person or entity qualifies as a third party for the purposes of Section 66(1) cannot be determined through a rigid formula and depends upon the circumstances. Since the matter was being remanded, the Tribunal left open the question whether the leasing company could ultimately be directed to contribute to the assets of the corporate debtor under Section 66.
On the issue of the security deposit, the Tribunal noted that the leasing company had admitted through an email dated 29.06.2020 that the security deposit was adjusted against lease rentals outstanding as on 31.10.2019. Since CIRP had commenced on 23.09.2019, the Tribunal agreed with the NCLT’s observation that the security deposit had been appropriated after commencement of the moratorium. However, it also agreed that restoration of the security deposit could not be ordered within the present proceedings and would require an appropriate application before the Adjudicating Authority.
The Tribunal then considered documents produced by the leasing company at the appellate stage. These included purchase requests, payment requests, invoices, acknowledgements signed on behalf of the corporate debtor, GST-related documentation, and e-way bills relating to the machinery. The Tribunal observed that these documents had not been considered by the NCLT and could have a significant bearing on the defence that the machinery had in fact been supplied to the corporate debtor. The Tribunal also noted that the NCLT had not discussed certain proceedings initiated by the leasing company, including actions seeking possession of the machinery and proceedings against guarantors.
The Tribunal found that the NCLT had simultaneously recorded findings that the MLA was fraudulent and that respondents were liable to contribute amounts to the corporate debtor, while also rejecting the application itself. According to the Tribunal, the issues relating to the genuineness of the MLA and the actual supply of machinery required reconsideration in light of the additional documents placed before it.
Accordingly, the NCLAT set aside the impugned order and remanded the matter to the NCLT for fresh consideration. It directed that parties be given an opportunity to file further documents supporting their claims and defences. The issue whether a third party could be directed to contribute to the assets of the corporate debtor under Section 66 was expressly left open for reconsideration by the NCLT. IA No. 1319 of 2020 was revived and restored for adjudication. The parties were directed to appear before the NCLT on 01.07.2026, and the NCLT was requested to dispose of the application within two months from their appearance.
FULL TEXT OF THE NCLAT JUDGMENT/ORDER
