Lawsikho Blog

In this article, you will learn about the practical aspects of fraudulent transactions under the Insolvency and Bankruptcy Code (IBC), 2016, such as how to draft applications for the avoidance/reversal of fraudulent transactions and how to contest them effectively before the National Company Law Tribunal. If you are looking to carve your niche in insolvency and bankruptcy laws, this article will help you immensely. 

Introduction

What if the people entrusted with running a company are the masterminds behind its downfall? Think of a scenario where directors, knowing the company is heading toward insolvency, deliberately divert assets or engage in imprudent business transactions—leaving other stakeholders in a lurch. Sounds concerning, right? That is precisely what section 66 of the Insolvency and Bankruptcy Code (IBC), 2016, aims to avoid. 

Now, let us take an example. 

Sharma Industries Ltd., a financially ailing company, is undergoing insolvency proceedings. The company owes ₹50 crore to its creditors. However, 3 months into the insolvency resolution process, the resolution professional found out that just before filing for insolvency resolution, the director of Sharma Industries, Mr. ABC, transferred an asset worth Rs. 5 crores for Rs. 1 crore to a related party, his brother’s company, Sharma 2 Pvt. Ltd., without any justifiable business reason. 

Something here seems fishy, right? 

So now why should such a transaction be construed as fraudulent?

• Prima facie, the aforesaid transaction was intended to divert funds and reduce the assets available for repayment to the genuine creditors.
• An asset valued at Rs. 5 crore was sold for Rs. 1 crore to a related party, which makes it evident that there was no fair value exchange.
• It was committed with malicious intent to defraud creditors, violating section 66 of IBC.

These transactions if noticed by the resolution professional will cost you a lot. Here are the consequences that defrauding creditors may face- 

The resolution professional may report this transaction to the NCLT, which is empowered to take the following actions against the defrauding directors- 

• The NCLT may reverse the transaction and recover the money.
• Mr. X (the director) may be held personally liable for losses.
• Penalties and criminal proceedings can be initiated. 

If you know how to draft an application to avoid fraudulent transactions, you can fetch anything between 50k-1.5L (depending on your standing at the bar and practice). I hope this is enough motivation to read this article thoroughly. 

What is the legal framework to deter fraudulent transactions? 

Let’s get to the basics first. 

Before I jump straight to the IBC, I would like to take a tiny halt at the Companies Act, 2013 to understand what constitutes “fraud”. Please note that since the IBC does not define the term “fraud”, we shall adopt the definition from the Companies Act, 2013 for clarity. 

Even before we move to what constitutes fraud, let us understand its meaning in simple terms. 

When a person is cheating and deceiving another person to gain an unfair advantage, usually money or assets it amounts to fraud. It happens when a person or company manipulates or hides the truth to trick others for his/her personal gain. For instance, when a company hides its debts to attract investors or when a corporate debtor transfers the assets to a friend to avoid clearing the debts of its creditors. 

Now coming to the point, as per the explanation given under section 447 of the Companies Act 2013- 

“Fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss. 

The framework of section 66 of the IBC is such that individuals who are instrumental in committing fraudulent and wrongful trade are held personally liable, assuring that those who manipulate finances for personal gain don’t escape accountability. 

The said section provides that- 

• During the process of corporate insolvency resolution or liquidation, if a resolution professional discovers that any business is carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, he may approach the NCLT seeking directions for the perpetrators to contribute towards the assets of the corporate debtor. 

I am sure a lot of people are not fully aware of the difference between liquidation and CIRP and thus these terms are often used interchangeably. 

Among many differences between these terms, the key difference lies in its objectives. In the case of CIRP, the goal is to revive the company by restructuring its debt, whereas liquidation is the last resort wherein the company is unable to repay its debt to the creditors due to which, the assets are sold and the company is eventually wound up. 

• On an application by the resolution professional, the NCLT can order a director or partner of the corporate debtor to contribute to assets if they knew or should have known about the impending insolvency but failed to exercise due diligence to mitigate potential losses for creditors. 

This sub-section is a great defence for the defrauding directors. For instance, when any professional lapse is alleged, he/she can conveniently say that “I exercised reasonable due diligence at the time of entering into such a transaction” or “That I have acted in the best interest of the company”, etc. But how are you going to evaluate this? 

When can you say that a director has exercised due diligence?  It is when he acts in a way that is reasonably expected of a person carrying out the same functions as are carried out by such director or partner, in relation to the corporate debtor.

Take for instance, Mr. ABC, being aware of the ailing financial situation of Sharma Industries Pvt. Ltd., should have, to say the least, ensured that the property’s sale was fairly valued. However, since he failed to do so and hastily sold the property to a related party, he may be held accountable.

• A resolution professional shall not file an application for any default where the initiation of the corporate insolvency resolution process has been suspended. 

Wait, let me introduce you to the concept of “suspension of CIRP proceeding”. So section 10A was introduced in the year 2020 to suspend fresh filing of CIRP proceedings due to the economic impact of COVID-19. The said section provides that no corporate insolvency cases could be filed for defaults occurring between March 25, 2020, and March 24, 2021. Needless to say, this prevented companies affected by the pandemic from being forced into insolvency during such hard times.

Let us also understand the scope of section 66 with the help of a case law.  

In a miscellaneous application (M.A. 05/2019) filed by Venkatesan Sankaranarayanan, the Resolution Professional for RTIL Limited vs. Nitin Shambhukumar Kasliwal & Ors. in the matter of Edelweiss Reconstruction Company Ltd. vs. RTIL (C.P. 382/I&BP/MB/2018) the Mumbai bench of the Hon’ble NCLT held that the scope of section 66 of IBC is to demonstrate that the business of Corporate Debtor has been carried on with the “intent to defraud” its creditor or for “any fraudulent purpose”.

Therefore, while looking into the purported/alleged fraudulent transaction it has to be clearly established that the transaction was made with intention to defraud /fraudulent purpose.  

What is the time limit to file this application?  

As per Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016 provides timelines to the resolution professional/liquidator to make an application for relief against a fraudulent transaction, which are required to be adhered to. 

As per Regulation – 

• The resolution professional must, on or before the 75th day of the insolvency commencement date, assess whether the corporate debtor has engaged in an fraudulent transaction;
• If the RP concludes that the corporate debtor has been involved in any such transaction, they must make a formal determination within 115 days from the date of insolvency commencement; and 
• Following such a determination, the RP must make an application before the NCLT within 130 days from the date of insolvency commencement, seeking appropriate relief. 

To make this simpler, the resolution professional shall apply to the NCLT within 130 days from the date of insolvency commencement. 

How to draft an application for relief? 

Before we learn HOW to draft an application, we need to know WHY well-drafted pleadings matter. 

A short story time! 

Let me talk about my junior colleague Siddharth who was an excellent and passionate counsel. He was so convincing in his arguments that it was almost impossible to not get a favourable order when he was on the dias. Even the Hon’ble members of the NCLT seemed pretty impressed with the way he presented the case despite being so young at the bar. 

So we had to file an application for relief in case of a fraudulent transaction on behalf of a very reputable client of our firm. I can conveniently say that we generated a lot of revenue courtesy of them. 

One fine day, eager to prove himself in front of the partner, Siddharth took up the responsibility of drafting the said interim application. Knowing his capability and his proven track record of success, our partner happily delegated it to him.

Confident of the facts and the law, Siddharth quickly drafted the interim application and shared it with the client. To our utter surprise (rather rude shock), the client pointed out several flaws in his drafting and seemed furious. 

The partner immediately assigned the reviewing and correction task to me. Upon the perusal, I found that: 

1. The facts were vaguely mentioned. No chronology was followed. 
2. He did not even make a clear case of fraud. Can you imagine? 
3. The prayer clause did not categorically mention the reliefs that our client sought. 

The moral of the story is a case is only as strong as its pleading no matter how awesome you are at presenting it.  

Do you want to avoid such blow-ups?

Do you want to do justice to the fees that your client is paying you? 

Then follow what is given below. 

Here are the facts of the case at hand. 

Sharma Industries Pvt. Ltd., a chemical manufacturing unit, was struggling financially to repay its debts to banks, financial institutions and its creditors. 

Given this, India NBFC Ltd. approached the NCLT to initiate CIRP against Sharma Industries Pvt. Ltd. i.e. Corporate Debtor. The said application was duly admitted. 

Thereafter, a Resolution Professional (“the RP” for short) was appointed and the accounts of the Corporate Debtor were audited. The RP flagged certain transactions as fraudulent and hence this application is being filed for seeking necessary relief/s. 

Now, let’s move on to drafting. The rationale and explanation are in red.

The application shall begin with specifying the forum where it is being filed and must include the petition number of the CIRP or liquidation in which it is being filed. Further, all the necessary and proper parties are listed. Do not forget to implead the suspended directors of the corporate debtor as respondents. 

BEFORE THE NATIONAL COMPANY LAW TRIBUNAL,

MUMBAI BENCH

I.A.NO. 54 OF 2025

IN

C.P. (IB) 1000/MB/2020

First, mention the parties of the original petition in which this interim application is being filed. 

IN THE MATTER OF

                     

Now here name the necessary and proper parties of this interim application. 

AND IN THE MATTER OF

S. Sankaran 

Resolution Professional

 Suspended Directors of Corporate Debtor

   1) Mr. ABC

At the outset, it is crucial to mention the provisions under which this application is being filed. 

APPLICATION BY RESOLUTION PROFESSIONAL UNDER SECTION 25(2)(J) AND 66 OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016, SEEKING APPROPRIATE ORDERS AGAINST THE RESPONDENTS.

MOST RESPECTFULLY SHOWETH:

In the first paragraph, you need to answer to the following questions briefly- Who is the applicant? Under which provisions is it being filed? For what purpose? Answer these questions briefly in this para. 

1. This instant application is filed by Mr. S. Sankaran, Resolution Professional under section 25(2)(j) and 66 of the Code inter alia seeking appropriate orders against the Respondents requiring them to make a contribution to the assets of the Corporate Debtor under the provision of the Code for the interest of the creditors of the Corporate Debtor.

Next up, you need to state what forms the basis of this application. What makes you eligible to file this application? Remember that you are a third party here. Does the law empower you to file such an application? If yes, in what capacity? State it clearly before you allow your opponent an opportunity to attack on such a preliminary ground. 

2. That a Transaction Audit was performed on the accounts of the Corporate Debtor at the instance of the Applicant. The Transaction Auditor in its Report dated 30^th April 2024, has reported a transaction which in the opinion of the Applicant has casts serious doubts that the said transaction may be fraudulent in nature.

Therefore, the Applicant is making this Application in compliance with the statutory requirements as prescribed. Under section 25(2)(j) and 66 of the Code read with relevant regulations framed there under to discharge the statutory duties and obligations as a Resolution Professional and to place on record, acts and conducts discovered to have been caused by erstwhile management of Corporate Debtor which has been detrimental to the interest of the creditors. The facts and the circumstances leading to the instant application are more fully and particularly stated. 

Like me, you too might have heard about the term “transaction audit” for the first time. So FYI, it is just a fancier term for an audit undertaken by the statutory auditors specifically to identify fraudulent, preferential and extortionate credit transactions.  

PARTICULARS OF THE PETITIONER: –

Now in the next 3 sections, give details of the petitioner, the corporate debtor and the applicant, that is its full name and registered address. 

As this application emanates from a CIRP application (or a liquidation application, depending on your case), it is important to give the “root of the application” so mention that the petitioner had filed the CIRP petition and the date of the order by which the petition was allowed.  

3.   India NBFC Ltd., the Petitioner abovenamed, registered under the Companies Act, 1956 and having its registered office at One India Blues, Lower Parel, Mumbai- 400034 initiated the Corporate Insolvency Resolution Process (“CIRP” for short) of the Corporate Debtor, as filed before the Hon’ble Tribunal and was allowed on 15^th December, 2023.

PARTICULARS OF THE CORPORATE DEBTOR: –

4. Sharma Industries Pvt. Ltd., having its registered office at Plot No.B-10/B-11, Phase I Verna Industrial Estate, Goregaon East, Mumbai- 400 0063, is involved in the business of manufacturing of chemicals used in medicines and other allied products.  

PARTICULARS OF THE APPLICANT

5. Mr. S. Shankaran, Resolution Professional appointed in the instant matter, having his registered office at Brilliant Insolvency Professionals LLP Suite-9B, 1st Floor, 22/28A, Andheri (East), Mumbai- 400 100.

JURISDICTION OF THE BENCH

Incorporating an averment concerning jurisdiction in your pleading ensures that the case is brought before the proper court which in turn minimizes procedural challenges. It is an attempt to ensure that the case proceeds without any debate on jurisdiction.  

6. The Applicant declares that the subject matter of the application is within the jurisdiction of this Bench.

LIMITATION

We very well know that limitations can completely mar your case if the prescribed period is not adhered to at the time of filing an application. Thus an averment concerning limitation is made to confirm that the application is filed well within the such period. 

7. The Applicant declares that there is no period of limitation prescribed for the instant application as known to the Applicant. However, the application is within the period of limitation, if any.

BRIEF FACTS: –

You remember, Siddharth, right?

More importantly, hope you remember the blunders committed by him in his draft IA. 

Let me make it abundantly clear that when we state facts, we need to mention them chronologically. This is non-negotiable. 

Imagine reading a complaint where the accused killed the victim before he/she even stepped into the house. Sounds so bizarre and absurd, right? 

So then how can you avoid such a mistake? The draft and the explanation of it below is my humble attempt to help you avoid blow-ups such as those of Siddharth’s. 

First, we shall begin by giving a brief overview of the company with its relevant details- its legal status, date of incorporation and business. 

8. Sharma Industries Pvt. Ltd., the Corporate Debtor herein, was incorporated on 5^th September 1994 and has its registered office in Mumbai. It is engaged in the business of manufacturing chemicals which are used in drugs such as paracetamol, combi-flam and other allied medicines.  

Now you can give a background of your case. 

For this, think of drafting as a story-writing activity. Take a pen and paper and start putting all the pointers one by one, date-wise. This will give structure to your thoughts. 

Only once you have done this, start drafting. Or else, it will be a Takeshi Castle’s maze which no one can navigate. 

Start with under what circumstances was this application filed? 

9. India NBFC Limited had filed an application for initiating CIRP of the Corporate Debtor under section 7 of the Code, which was allowed by the Hon’ble Tribunal by virtue of an order dated 15^th December 2024. Hereto annexed and marked as “Annexure 1” is the copy of the order dated 15^th December 2024.

Here, you need to add the necessary details of the audit report which gives a clear picture and confirms that fraudulent transaction has taken place. So mention that an audit was conducted of the Corporate Debtor’s books and that the auditor flagged certain transactions which, prima facie appear to be fraudulent. 

The following paragraphs will mention the fact that an auditor was duly appointed to conduct the audit of the corporate debtor and that the auditor, after completion of the review, submitted a final report to the Applicant, which should also have identified fraudulent transactions. 

10. The Applicant engaged M/s. Toshi & Associates as the Transaction Auditor vide its letter dated 17th June 2023 to conduct a Transaction Audit of the Corporate Debtor for a review period from 1^st April 2023 to 5^th May 2024 and to determine the transactions of the nature mentioned under section 25 (2)(j), 43, 45, 49, 50 and 66 of the Code.  

11. That on 17th June 2023, the Transaction Auditor was appointed to conduct the Transaction Audit and submitted its Final report to the Applicant on 29^th April 2022 having considered the Transaction report as determined and specified transactions that were preferential, undervalued, fraudulent or extortionist in nature.

Hereto annexed and marked as “Annexure 2” is the copy of the Transaction Report dated 29^th April 2022, along with its Annexures. Hereto annexed and marked as “Annexure 3” is the copy of the Financial Statement for the Financial year 2022-2023 and “Annexure 4” is the copy of the Financial Statement for the Financial year 2023-2024.

Here we need to give reasons as to why should NCLT pass necessary orders in our favour and thus, in the following paragraphs, we shall state why should such an application is filed to uphold objects of the Code and the amount siphoned off by the Respondents.

12. That in view of the determination of transactions by the Resolution Professional, this Instant Application is being filed to bring to the notice of the Hon’ble Tribunal, those transactions which are Fraudulent in nature, so that appropriate orders may be passed for the avoidance of such transactions, to declare such transaction void and reverse its effect and to direct such contributors to contribute to the assets of the Corporate Debtor.

13. The Applicant submits that the object of the Code and this present application inter alia is to ensure that the value of assets of the Corporate Debtor is maximized and all the creditors get their dues in an equitable manner which otherwise has been wrongfully dissipated on account of fraudulent and wrongful transactions.

14. The Applicant submits that monies siphoned off under fraudulent transactions of Rs. 3,21,15,434/- (Rupees Three Crore Twenty-One Lakhs Fifteen Thousand Four Hundred and Thirty-Four Only) is being prayed to be returned/ contributed to the Corporate Debtor together with interest.

In the next two paragraphs, you need to state the provisions of the IBC which form the basis of this application and give a flow to the application. 

15. Under section 66 of the IBC,”(1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.

 (2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if—

(a) before the insolvency commencement date, such director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and

(b) such director or partner did not exercise due diligence in minimizing the potential loss to the creditors of the corporate debtor.

Explanation—For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor.”

16. Thereafter, the terms “Fraud” and “Fraudulent purpose” have not been defined as such in the Code. However, it provides that words/expressions not defined under the Code shall have the same meaning assigned to them under other Acts (including the Companies Act, 2013) identified under the Code. As per section 447 of the Companies Act 2013, “fraud” has been defined as under:

“Fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss. 

From now on, we shall be presenting the detailed observations on the fraudulent transaction based on perusal of the Audit Report. We need to categorically state which documents were not given access to at the time of audit by the Respondents. 

18. The Applicant states that while conducting the Audit of the Corporate Debtor, details pertaining to Books of Accounts, Statutory Records, non-filling returns, board approvals, resolutions, fiduciary finances etc of the Corporate Debtor were limited to the scope of accessibility and upon being requested, the Suspended Board of Directors failed to provide the same.

19. That the Audited Financials and Audit Reports, Directors Report, Minutes of Board Meetings and General Meetings, Statutory Records, Returns and Filings with various authorities for the year ended 31/03/2023 and 31/03/2024, agreements for related party transactions, Bank statements, Title Deeds of Immovable Properties etc., are still pending to be provided by the Suspended Board of Directors.

 Now state the discrepancies within the records of the Corporate Debtor which were available with you or could be inferred from them. 

20. There are various anomalies, inconsistencies, and contradictions within the records of the Corporate Debtor.

21. That the summarized details of the various anomalies recorded from the documents on record amounting to transactions being fraudulent in nature are as follows:

Particulars	Amount
Electricity and Water Charges reflected in the Profit & Loss Account for the FY 22-23 and FY 23-24	Rs. 47,30,152/-
Retainership and Professional expenses reflected in the Profit & Loss Account for the FY 2022-2023, 2023-2023 & upto 5th May, 2024	Rs. 93,35,718/-
Sale inflation for the FY 2020-2021	Rs. 13,43,733/-
Loan and advances given to various related parties for FY	Rs. 1,55,80,436/-
Investment in Gold	Rs. 11,25,395/-
TOTAL	Rs. 3,21,15,434/-

You know numbers never lie. Here state how the accounts are not reconciling by highlighting that the corporate debtor has incurred some astronomical expenses against meagre sale. This raises a “fraud alarm” in the mind of the authority. 

22. Electricity and Water charges in the Profit & Loss Account for the FY 22-23 and FY 23-24:

Year	Sales (Rs.)	Electricity and water charges (Rs.)
2022-23	3,29,49,625/-	21,67,220/-
2023-24	13,43,733/-	25,62,932/-
Upto 5th May, 2024	Nil	Nil

That the electricity and water charges have increased which remains unjustified considering insignificant operations during the said financial years. That further the electricity and water charges have been booked through journal entries by crediting the following parties:

FY  2022-2023
V Sharma	Rs. 1,38,526/-
Expenses Payable Cr Card (V Sharma)	Rs. 2,38,444/-
VKS Co-Op. Bank	Rs. 9,79,257/-
M/s. Sharma 2 Pvt. Ltd.	Rs. 8,10,993/-
Total	Rs. 21,67,220/-

FY 2023-2024
S Sharma	Rs. 1,38,526/-
Sharma 2 Pvt. Ltd. Electricity & Water Charges Payable A/c	Rs. 3,34,556/-
SS Finance	Rs. 18,33,282
Electricity & Water Charges Payable A/c	2,56,568/-
Total	Rs. 25,62,932/-

It is pertinent to mention here that no documents or proofs thereof were provided for verification of the above transactions. 

You can also add a year-wise break of fees paid to the professionals (it could be your chartered accountant, external legal counsel, engineering consultant, financial advisor, etc.), if any.  

State here how and why even the sale and the stock available with the corporate debtor did not tally. 

24. That pertinently there was a sale of Rs. 13,43,733/- (Rupees Thirteen Lakhs Forty-Three Thousand Seven Hundred and Thirty-Three Only) during FY 2023-24 despite no opening stock. The details of the same are as follows:

Particulars	As on 31.03.2023	As on 31.03.2024
Chemical Y	3,30,800/-	–
Chemical X	–	–
Chemical A	52,46,040/-	–
Total	55,76,840/-	–

As depicted above the inventories are showing a balance of Rs. 55,76,840/- as per the Audited Financial Statement of FY 2022-24. There is no closing inventory as of 31/03/2023. There was no purchase in the year ended 31/03/2024. However, there is a sale of Rs. 13,43,733/- in the year 31/03/2024. It is thus pertinent to note that the stock register does not tally. 

Stock statements if any, submitted to banks were also not made available by the Respondents.

Present an extract from the Independent Auditor’s Report which confirms and substantiates the above statement.

As per the Annexure B to the Independent Auditor’s Report for the F.Y. 2023-24, “Clause 2–

a) As the company is engaged in the business of manufacturing chemicals/drugs for medicines, we are given to understand that considering the bulk volume of the stock, it is not possible to carry out physical verification of inventory.

b) The company has not maintained proper records of the inventory. Even though the Company does not have the procedure of physical verification of inventory, in our opinion, the discrepancies in stocks could not be verified due to non-maintenance of physical stocks.”

The existence of the inventory could not be verified by the Auditor of the Company.

If the corporate debtor has given any loans/advances to the related party, mention it here. 

25. There are various loans and advances given to related parties amounting to [state the amount]. The description of the same is as follows:

Insert a table showing the names of the parties and the amount paid to them as loan/advances. 

If the company has invested in gold, give details and also propose to have it valued once again by an expert independent valuer. 

26. As per the information and explanation provided physically there was no gold available and it was distributed for business purposes but as per the books of accounts provided book value of gold as on 05/05/2024 was Rs. 11,25,395/-.

Considering the nature of the asset i.e., investment in Gold, the Applicant requested critical information data points for considering engaging an expert to assess the value of the specialized nature of the asset being gold such as purchase invoice, details of specifications, quantity, carat, the physical location of storage, etc and requested the Respondents to provide a certificate from a recognized jeweller for fair valuation as on the insolvency commencement date. However, such information was not provided to the Applicant.

Now, it is time for an impactful closure. In the next part, we need to reiterate how the aforesaid transactions adversely affect the rights of the creditors and thus must be classified as fraudulent as per the provisions of the Code. 

29. The Applicant submits that from the above it can be clearly established that the Corporate Debtor through the Respondents have entered into fraudulent transactions thereby prejudicially affecting the rights and interest of the Lender/Financial Creditor of the Corporate Debtor and that the same is clearly liable under section 66 of the Code.

General averments required to prove your bonafide shall also be added. 

30. It is a fit and proper case where the necessary direction is issued and action is taken in accordance with the law.

31. This Application is made bonafide and for the ends of justice.

32. The balance of convenience and the prima facie case is in favour of order as prayed for herein.

Prayers

In this application, before we ask for compensation or any other relief, we need to seek a declaration to the effect that this transaction be held fraudulent. Once the NCLT has granted such a declaration, contributions and other reliefs as stated below shall follow. 

33. The Applicant humbly prays before the Hon’ble Tribunal for the following reliefs:

a) That this Hon’ble Tribunal may be pleased to adjudicate the facts and circumstances of this case and be pleased to declare the various transactions carried out by the Corporate Debtor as fraudulent transaction as per section 66 of the Code particularly;

b) That this Hon’ble Court may be pleased to make necessary adjudication in the facts and circumstances of this case and necessary directions be passed in terms of sections 66 and 60 (5) (c) of the Code;

c) That this Hon’ble Tribunal may be pleased to take in its notes the report of the Transaction Auditor which is being placed before this Hon’ble Tribunal by the Applicant in the instance case. 

d) Be pleased to declare the suspended directors of the Corporate Debtor i.e., Respondent No.1 & 2 as a contributory under section 66 of the Code.

e) Respondent No.1 & 2 may be directed to contribute the amount of Rs. 3,21,15,434/- (Rupees Three Crore Twenty-One Lakhs Fifteen Thousand Four Hundred and Thirty-Four Only) towards the fraudulent transactions carried out as per section 66 of the Code.

f) Report the transactions to the Insolvency & Bankruptcy Board of India for making a complaint to the Special Court under section 236 of the Code.

g) Such further or other orders as this Hon’ble Tribunal may deem fit and proper in accordance with the Civil Procedure Code and the Code of Criminal Procedure.

h) Any other such directions which this Hon’ble Tribunal may deem fit.

Lastly, it is important to convey to the NCLT that the prescribed court fee is paid by the applicant. Hence, an averment to this effect is mandatory. 

Particulars of the Bank draft evidencing payment of the fee for the petition or application made: 

Branch of the Bank on which drawn: 

Name of the issuing branch: 

Demand Draft No. [insert DD No.] Date [insert the date on which DD was drawn] 

(Note: If payment has been made via Bharatkosh, you need to mention the transaction ID and date of such a transaction)

Amount Rs. 1000/- ……….. 

Mr. S. Shankaran 

Resolution Professional

Sharma Industries Pvt. Ltd.

Mumbai, dated this 5th day of April, 2024.                                                               

To show the Applicant’s bonafide, the resolution professional must depose to the effect that what he knows and has averred in the application, is true.     

     VERIFICATION

I, Mr. S. Shankaran, age 45, Indian Inhabitant, the Resolution Professional of Sharma Industries Pvt. Ltd. having his registered office at Brilliant Insolvency Professionals LLP, 46-B, 5th Floor, Ghatkopar (east), Mumbai do hereby state and declare that whatever has been stated in the foregoing paragraphs are true to the best of my knowledge and belief and I believe the same to be true.

 Sd/- 

Advocate for Deponent

How to contest an application to avoid fraudulent transactions?

How does the Applicant contest? 

• It starts with filing an application before the NCLT.
• Proves that the transaction was fraudulent and shows that it harmed creditors or benefited specific individuals unfairly with the help of bank statements & financial records, valuation reports & expert opinions, Board resolutions approving transactions, emails, contracts, and communications proving intent

How does the Respondent contest? 

He will open this argument by emphasizing on following points- 

• argues the transaction was genuine and lawful and that the directors exercised due diligence at the time of executing such a transaction; resort to case laws for this.   
• that fair market value was paid and proper due diligence was done.
• shows that the transaction was made before financial distress was known.
• submits independent valuation reports, audit statements, and legal approvals as a defence.

How are the proceedings conducted before the NCLT? 

• Both sides present their evidence and arguments.
• NCLT may appoint an independent expert to assess the transaction.
• If fraud is proven, NCLT voids the transaction and orders the return of assets.
• If no fraud is found, the transaction remains valid.

Orders that can be passed by the NCLT in case of fraudulent transactions

Once it is established by the NCLT that a transaction is fraudulent, it is empowered to pass the mainly the following orders under section 66 of the IBC- 

1. Contribution to the assets of the corporate debtor– The NCLT may direct the directors in default to personally contribute to the company’s assets.
2. Reverse fraudulent transactions– The NCLT may cancel or reverse transactions entered into to defraud creditors.
3. Depending upon the veracity of the fraud, NCLT may refer the case for criminal prosecution under the Companies Act, 2013. 

To do complete justice to the creditor, section 67 of which IBC in fact goes a step further to protect the interests of the creditor by providing that:

• If the company owes money to the director in default, the tribunal court can use that money to recover losses caused by the fraud.
  
• Further, if the guilty person has a mortgage or charge (legal right over assets) on the company’s property, the court can override it and use it to pay creditors.

It is interesting to note that this sub-clause does even protect those who paid for it in good faith and had no knowledge of the fraud.

• If a creditor is found guilty of fraud, the NCLT can lower the priority of their claims. This means their debt will be paid last under section 53 of the IBC after all other creditors are paid.

Conclusion

By now I have mentioned numerous times that fraudulent transactions prejudice the interests of the creditors. But honestly, even more importantly, such transactions threaten the cornerstone of corporate governance and financial stability. Preventing fraudulent transactions under the Code is crucial for stopping the unfair transfer of assets at significantly lower values which unjustly depletes the asset value of corporate debtor. 

In such scenarios, the NCLT plays a key role in restoring the rightful position of the corporate debtor and maintaining commercial fairness. Identifying and contesting questionable transactions requires a thorough examination of financial records, valuation reports, and corporate decisions to ensure compliance with insolvency regulations.

As insolvency laws evolve, transparency, due diligence and accountability remain essential in corporate restructuring and liquidation. To prevent fraudulent transactions, companies and their key managerial personnel- 

1. Must ensure transparent accounting practices and avoid any transactions that could be deemed fraudulent. 
2. Companies must implement strict internal controls, ensuring that board members and decision-makers adhere to ethical business practices. Whistleblower policies and independent audits can act as safeguards.

Fraudulent transactions are not just legal violations—they are financial crimes that can have severe repercussions. By adopting a proactive approach, businesses and insolvency professionals can minimize risk, protect stakeholders and uphold the integrity of the insolvency resolution process. 

FAQs

Who can challenge fraudulent transactions?

Resolution Professional (RP), Liquidator, or Creditors can file an application with the NCLT.

What happens if a transaction is found to be fraudulent?

NCLT can reverse the transaction and order the guilty parties to repay the losses.

What is the difference between fraudulent and wrongful trading?

Fraudulent Trading – Done with the intent to cheat creditors.
Wrongful Trading – Directors continue business despite knowing insolvency is unavoidable.

Is there a time limit to challenge fraudulent transactions?

Unlike other avoidable transactions, there is no relevant period/loo-back period to challenge a fraudulent transaction. 

Can directors be held personally liable?

Yes, directors can be held personally liable if they fail to exercise reasonable due diligence at the time of entering into a transaction. 

Are any ancillary documents required to be filed along with the application? 

The NCLT Rules, 2016 prescribed that only an affidavit in support of such an application is needed to be filed. This being a part of an ongoing proceeding, one need not file any other documents. 

It is to be noted that a memo of parties shall be filed along with this application to effect service on parties. 

Is this application listed any differently from the main petition?

No. Rules for listing this application are the same as that of the main petition. You may refer to my article “The Ultimate Guide on Initiating CIRP” for more information. 

What is the court fee payable on such an application? In whose favour is the DD drawn on? 

The court fee payable is Rs. 1000/-. 

The demand draft is to be drawn in favour of the “Pay and Accounts Officer, Ministry of Corporate Affairs”.   

Can this interim application be withdrawn? 

Yes with the leave of the court. However, it can so happen only before the hearing has commenced. 

You may also note that the tribunal is empowered to impose costs if it deems fit. 

What is the role of a resolution professional in avoiding such transactions?

A resolution professional plays a more pivotal role in inter alia identifying and reporting fraudulent transactions to the NCLT by filing applications for relief against such transactions, conducting forensic audits and investigations and collaborating with creditors and stakeholders. 

Does the IBC provide for any action/penalty when MSMEs are fraudulently managed during the pre-packaged insolvency resolution process? 

Yes. As per section 67A, if the affairs of the corporate debtor are managed fraudulently by its officers on and after the pre-packaged insolvency commencement date, the NCLT, on an application by the resolution professional may pass an order imposing a fine of at least Rs. 1 lakh but which may extend upto 1 crore on the officer in default.